Plunging GOFO Rates

23
Mon, Apr 14, 2014 - 1:29pm

As expected, London gold forward rates are plunging again during the New York Comex delivery month. In the recent past, this signal of tight physical supplies has correlated with higher prices. So, are we on the verge of another rally?

Longtime readers will recall that we first identified this phenomenon back in October of last year so you can start today by reviewing this: https://www.tfmetalsreport.com/blog/5155/gofo-yourself

We wrote about GOFO again in December: https://www.tfmetalsreport.com/blog/5311/yah-wellgofo-yourself

And the pattern really began to assert itself in February and March of this year. Please be sure to review this link before continuing: https://www.tfmetalsreport.com/blog/5530/negative-gofo-and-rising-gold-p...

The most recent post on this subject is here: https://www.tfmetalsreport.com/blog/5627/more-gofo-mofo

Again, the most simple way to describe negative GOFO is this: Gold in the hand is more valuable than dollars. Stated another way, current holders of physical gold prefer to hang onto it rather than exchange it for dollars. This desire to hold gold closely means that readily-leasable gold is scarce and, without a constant supply of leasable gold, the bullion banks have great difficulty in "raiding" price.

This can be seen on the chart below. Since negative GOFO became the new normal in July of last year, the is a clear correlation between negative GOFO and rising prices. There is also a clear pattern of positive GOFO and falling prices. (Click the chart to expand it. Green rectangles are periods of negative GOFO. Red rectangles are periods of positive GOFO.)

And why is negative GOFO the "new normal". I contend that Asian physical demand through the counter-intuitive paper price smash that was orchestrated in 2013 has greatly depleted the supply of leasable, Western central bank gold. The anecdotal evidence of "empty vaults" provided in the links below is revealed as accurate by the GOFO rates, which were only negative for seven days from 1/1/89 - 7/5/13 but have been negative for 107 of the 194 days since, or 55% of the time.

https://www.bloomberg.com/video/what-s-happening-to-all-the-gold-d33u1c2...

https://www.ingoldwetrust.ch/alex-stanczyk-physical-supply-never-been-ti...

Also note that periods of negative GOFO align with the Comex delivery months of August, October, December, February and now April. Can this be simple coincidence? I don't think so and this allowed us to accurately predict a return to negative GOFO this month.

As a price predictor and trading tool, all of this is proving quite helpful. Gold closed at $1290 on April 2. The next day in London, the one-month GOFO rate flipped to negative and it has moved deeper into negative territory since. In fact, the two-month and three-month rates have also plummeted and the six-month rate is nearly negative today as well. Not surprisingly given recent history, price has rallied in the days since, to a high earlier today over $1330. Clearly, if GOFO rates continue to decline or, at a minimum, stay negative, there is no reason not to expect a further rally in price.

In The Vault, we'll certainly watch this now-proven indicator very closely in the days ahead. If you'd like to follow along, the rates are updated daily and can be found here: https://www.lbma.org.uk/pricing-and-statistics

TF

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