Physical Gold Shortage Worst In Over A Decade: GOFO Most Negative Since 2001

Courtesy of The Hedge:

The last time there was an systemic physical gold shortage was in July 2013. It is then that, for the first time in 5 years, the 1-month Gold forward offered rate, or GOFO, went negative. We said:

Today, something happened that has not happened since the Lehman collapse: the 1 Month Gold Forward Offered (GOFO) rate turned negative, from 0.015% to -0.065%, for the first time in nearly 5 years, or technically since just after the Lehman bankruptcy precipitated AIG bailout in November 2011. And if one looks at the 3 Month GOFO, which also turned shockingly negative overnight from 0.05% to -0.03%, one has to go back all the way to the 1999 Washington Agreement on gold, to find the last time that particular GOFO rate was negative.


Fast forward to today, when as noted over the past week there has been a massive shortage of precious metals – most notably silver which as of this moment is indefinitely unavailable at the US Mint – as a result of the tumble in the paper price, and following 8 days of sliding and negative 1 month GOFO rates, today the physical metal shortage surged, as can be seen by not only the first negative 6 month GOFO rate since last summer’s much publicized gold shortage when China was gobbling up every piece of shiny yellow rock available for sale, but a 1 month GOFO of -0.1850%: the most negative it has been since 2001! Continue reading

Backwardation, negative GOFO and the Gold Price

A great beginners guide from Jan Skoyles on how the gold market works….

Confused by talk of gold backwardation, the gold lease rate, GOFO and what it all means for gold prices? We provide a beginner’s guide…

The term ‘backwardation’ has suddenly popped up in the mainstream financial media and is being touted as the signal that the price of gold is on its way back up.

What does backwardation even mean?

It means that the spot price rose above the nearest future contract.

Last Friday Reuters reported that ‘Gold went into backwardation in comparison to the three-month futures contract in early January,’


Well it doesn’t stop there, it’s no longer about the nearest future contract but this is likely to stretch out to longer-dated maturities. As Reuters explained this may be ‘cause for alarm’.

This dislocation between the spot and the futures price suggests that physical delivery is vastly outweighing supply.

As Reuters reports this has increased concerns that ‘in the market the change may not be a momentary blip and participants may have become overleveraged.’

If it happened in January why are they only just reporting it now?

This has been going on even longer than that, in April Professor Antal Fekete warned that ‘gold futures markets may have been flirting with backwardation for a year or so.’

When ‘officialdom’ realised this, he writes, then they ‘were forced to act.’ Hence why, on the 12th and 15th April, the gold price was taken down. Bernanke was concerned about a permanent state of gold backwardation.

However, the mainstream are only just picking up on this because GOFO is negative. The appearance of a negative GOFO rate confirms what backwardation has suggested for some time – that there is a severe physical shortage.

What is GOFO?

In its simplest terms the Gold Offered Forward Rate is a daily LBMA published rate used as the cost of leasing gold, when you use the gold as collateral in order to borrow dollars, it is the rate used for gold/US dollar swap transactions.

Many gold bugs associate negative GOFO with backwardation, when the spot price fetches a higher price than the nearest futures contract. Sandeep Jaitly writes ‘it seems there is unparalleled demand to exchange dollars for physical bullion- so much so that the availability of bullion to settle bullion obligations – whatever their nature is dwindling.’

For the gold bugs, this is when there is a shortage of physical gold, this physical gold is superior to paper gold in the futures markets.

According to Iza Kaminska, ‘objective’ gold analysts merely see the backwardation of gold and the negative GOFO are more likely to be a factor of changing money market interest rates or inflation rates.

Why are they concerned about backwardation?

Because it means individuals want to get their hands on physical gold now, which it turns out isn’t so easy to arrange. Therefore, ‘officialdom’ need to scare out any physical they can in order to meet demand elsewhere.

They hope that by pushing down the gold price as far as they possibly can, gold will appear unattractive.

Of course, the opposite has happened. In China, for one example they still cannot get enough gold through the exchanges and out for delivery quick enough.

The acceleration in backwardation alongside prolonged soaring gold borrowing costs suggests that the disconnect between paper and physical gold is about to get even greater.

Physical gold shortage?

As our very own Ned Naylor Leyland reported earlier last week, this widening of the backwardation ‘indicates that the physical market has tightened up substantially.’

As we have written in the past, much of the gold market is highly leveraged, Naylor-Leyland explains that ‘what we are seeing now is that the absolutely inevitable ‘run’ on the 100:1 leveraged banking system is truly underway.’

Is it bad news that GOFO is negative?

When it is negative it means you will receive more interest when you lease your gold than your dollars, i.e. there is more interest to borrow gold and use dollars as collateral. Gold is perceived as having more value as something to hold, than dollars do.

Early this month, the GOFO rate was negative for up to three months, as you will have read repeatedly, the last time this happened was in November 2008.

What does it mean for gold if it’s negative?

Primarily it means that gold leased out today is worth more than the gold delivered at the end of the three months.

As we explained above, the negative GOFO rate means someone wants to get their hands on gold. The further ahead the negative GOFO rate reaches the larger the shortage of gold in the delivery that needs to be made.

There is speculation that the elevated high levels of demand we’re seeing in Asia has emptied the London Market.

Many also see the negative GOFO rate as a sign that the bottom of gold will soon be a thing of the past, with soaring gold prices to come

Not for those who own physical gold

Negative GOFO and gold futures in backwardation is finally evidence that there is a distinct flight into physical gold.

According to SocGen, the biggest gold backwardation since the start of the millennium prompted a ‘corrective rally’ but the general sentiment on gold is bearish as there is no physical gold supply shortage to worry about.

SocGen’s Robin Bhar attributes the cause of backwardation to a possible range of factors from an overcommitted bullion bank to miners’ hedging strategies.

I think we can safely say that GOFO and long term backwardation suggest there may be an error in their analysis.

What does this mean for the gold price?

The November 2008 negative GOFO rate happened around the same time a bottom in gold came to an end. What proceeded was a doubling of the gold price and it reaching nearly $2,000.

Once again we see negative GOFO just as gold returns from a price collapse. This time it has remained negative for longer, suggesting that the problem with deliverable bullion is this time even greater.

What will this mean going forward?

Given the negative GOFO rate shows stress on the London market when it comes to deliverable bullion, and warehouse stocks in the COMEX futures markets continue to decline, we suspect what lays ahead is a perfect storm for the gold price.

We believe it shows there is a distinct lack of confidence in the paper money system. No longer to investors want to hold paper promises (whether for gold or currencies) instead they prefer to hold real, physical gold and silver.

So, rather than worry about a gold price that is yet to return to $1,920, instead see this as a warning signal that the relationship between spot and future price, physical and paper is growing tired. Hold onto physical gold and ignore the price until it matters.

JPM Eligible Gold Plummets By 66% In One Day To Just Over 1 Tonne

I’ve been blogging about the JPM COMEX vault for a while now as it’s at the epicentre of the Gold fraud. Last night it was reported in the Hedge that they have 1 tonne of eligible gold left in the vault, leaving a lot of empty space and millions of paper contracts backed by nothing. It’s feet up and popcorn time I thinks, could this be the beginning of the end for physical delivery on contracts or will there be more fraud a twist in the tale. I believe they will go the same way as ABM AMRON and Rabobank. They will settle contracts in cash but if the fund is meant to be backed by gold and there is no gold, then the fund has no intrinsic value and the market value of said fund will drop to zero. End game scenario anyone?

For over a month, JPMorgan managed to mysteriously avoid matching up the gold held in its (world’s largest) vault with the Comex delivery notice update. However, as of today, that particular can will be kicked no more. Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today’s move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm’s entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM’s possession.


Needless to say, today’s massive move which increasingly puts JPM’s gold holdings in the danger zone vis-a-vis future delivery notices which just refuse to stop, has pushed total JPM vault gold to a new all time low of just 436k ounces, or a little under 14k tonnes with just 12 tonnes, or 390k ounces, of Registered gold left and rapidly draining. And to think that two years ago around this time JPM had over 3 million ounces of gold in its possession.


Finally, those who believe there is a connection between the ongoing run on JPM’s vault gold, the suppressed price of the metal, the redemption of Bundesbank gold, and the fact that 3M GOFO has now been negative for 10 straight days or the longest period in history it has been below zero, and indicating an unprecedented gold collateral shortage, you are correct.

Finally, putting it all in context, this is what 1 ton of gold looks like in the real world courtesy of Demonocracy: