More GOFO, MOFO
Pressure on gold will soon ease. As expected, GOFO rates have again turned negative now that April Comex deliveries have begun in earnest.
This post is simply to serve as a reminder. Once again, I ask you to re-read this post from about a month ago:
Note the conclusion, conveniently copied and pasted below:
And here is where I think we are onto something. Let me explain...no, there is too much...let me sum up:
- Extraordinary global demand (China, German gold repatriation, etc) has made the supply of readily-available and deliverable gold extremely tight.
- Central Banks are no longer willing to lease gold into the market every single day OR
- The CBs do still lease every day BUT, during Comex delivery months, the extra physical demand is just enough to tip the scales out of balance and drive GOFO negative.
- Negative GOFO indicates a shortage of London Good Delivery Bars for leasing and delivery.
- A shortage of bars precludes the BBs from heavily shorting and driving price lower.
- This leaves us with this conclusion for traders and stackers everywhere:
Buy when GOFO is negative. Be cautious, sell or hold off on new purchases, when GOFO is positive.
Could it be as simple as that? Yes! It may very well be, at least for now. Rest assured, I'll be following this trend very closely in the weeks and months ahead.
Back then, Pining took the chart I posted and added some color to it. Here's a reprint:
And, as you can see, this isn't very complicated at all. Price generally rises when GOFO is negative and it falls when GOFO is positive, for the reasons laid out above.
Today, as expected, the one-month GOFO rates have again turned negative. Note that, as recently as Monday, rates were firmly positive. Why the sudden plunge? Can there be an explanation other than April Comex delivery? Note that the green-shaded areas in the chart above all align with Comex delivery months!
And here is an updated chart. Maybe Pining can break open his pack of electronic Crayolas and color this one in, too?
Again, it is extraordinarily important that you understand what this means:
- First and foremost, physical gold in London is in extremely short supply. The anecdotal stories of "empty vaults" will likely be proven and accepted as truth by sometime later in 2014.
- The fact that negative GOFO only occurred for 7 days out of 6,000 before July 8, 2013 is a proof of this.
- Negative GOFO is now the norm as this condition has occurred on approximately 60% of all market days in the time since.
- Negative GOFO simply means that there is no readily-leasable gold laying around for the Bullion Banks to use in raiding price. Yes, they can still issue shorts which they will hope to cover at a later date. However, their ability to summarily dump naked short paper to raid price and paint charts is severely curtailed.
- Therefore, prices generally rise during periods of negative GOFO.
NEGATIVE GOFO IS NOT A MAGIC ELIXIR WHICH CAUSES NOTHING BUT UPTICKS. While rates are negative, there will still be down days for gold. Look closely at the charts above for evidence of this. However, in general, the ever-present manipulative ability of the banks is compromised while rates are negative. Therefore, expect the area around $1280 to hold as support and, as long as rates stay negative, set your sights upon $1320 as a key short-term goal.
GOFOrth and prosper.