Yesterday’s Gold Forward Offered Rate…it’s Hindenburg moment?

Yesterday there was a historic inversion in the Gold Forward Offered Rate, where the 1 and 3 Month GOFO rate slide into negative territory for the first time since 2008 and 1999 respectively. Using the latest LBMA rate update today, the gold backwardation is accelerating and the 6 Month GOFO has also joined hit negative territory.


What could be causing this:

  • An ETF-induced repricing of paper and physical gold
  • Ongoing deliverable concerns and/or shortages involving one (JPM) or more Comex gold members.
  • Liquidations in the paper gold market
  • A shortage of physical gold for a non-bullion bank market participant
  • A major fund unwinding a futures pair trade involving at least one gold leasing leg
  • An ongoing bullion bank failure with or without an associated allocated gold bank “run”
  • All of the above

What is apparent is that something very abnormal is a foot and repeated only a few times in the last 20 years. With reports of mass fraud within the gold bullion market common and well documented, issues concerning the gold fractional reserve lending market maybe coming to surface.

Today, the golden backwardation story goes is documented in the FT:

The lack of liquidity in the leasing market has pushed gold forward rates, known as “gofo”, into negative territory, meaning that gold for future delivery is trading at a discount to physical market prices – a rare situation that has occurred only a few times in the past 20 years. The last time forwards were negative was in November 2008, when a scramble for physical gold spurred a sharp price rally.

Traders said that investors were alert for the possibility that the current tightness could trigger a squeeze among hedge funds with short positions in gold, potentially driving prices higher. “It has piqued people’s interest”, said one senior precious metals banker. Gold was trading at $1,248.50 a troy ounce on Tuesday, up 5.8 per cent from a three-year low at the end last month.
Bottom line, whatever is causing the dramatic collapse in liquidity and/or collateral, it is certainly not letting up.

Are the disconnects between physical and paper markets beginning to bare themselves to the public or are these just systemic problems in our financial markets playing out again and again and again?

There has been 120,000 ounces of gold withdrawn from the Comex yesterday, and another almost 100,000 taken off today, pushing the total down to 7.2 million oz. At this rate, the Comex gets into real trouble by the end of the summer. At the Shanghai Futures Exchange, it looks as if nearly 50% of their silver stocks have been removed since the big take-down in the price of silver in April.

History always provides us with the answer with time rhyming along the ages. The majority will refuse to learn from the past, looking only to always live in the now, ignoring lessons learnt with a belief that things will be different this time around.


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