IS NEGATIVE GOFO SIGNIFICANT? (Now With A Backwardation Chart Addendum)

S. Roche alerted STFU comments’ readers last Monday, 8 July (http://screwtapefiles.blogspot.com.au/2013/07/figured-it-out.html#more) that ‘GOFO negative out to 3 months, this has meant fireworks in the past!!’ and later that it had become negative through six months.  That first observation engendered a flurry of related comments, but why?.  What is the significance of that phenomenon?  Well, to begin with, it is rare, having only occurred thrice in recorded history before this, in 1999, 2001, and 2008, and then only very transiently.  In all three instances, the price of gold went higher, sharply but very briefly in 1999, and less steeply but more protractedly on the later two occasions..

So, the still burning questions are: ‘Will history repeat (or at least rhyme)?’  Or, ‘Is it different this time?’


For those who are not familiar with GOFO (Gold Offered Forward Rate) published by the LMBA on a daily basis (http://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards) and the related Gold Lease Rate (GLR) published with a week’s delay, a good place to begin is Bron’s 2008 critique (http://goldchat.blogspot.com.au/2008/10/misinterpretation-of-gold-lease-rates.html) of Brian Kelly’s SeekingAlpha article (http://seekingalpha.com/article/100677-misinterpretation-of-gold-lease-rates-and-why-gold-could-rise?).

For those desiring only a quick refresher, GOFO is related to GLR via LIBOR (London Interbank Offered Rate) according to the formula GOFO = LIBOR - GLR, so when GLR is greater than LIBOR, GOFO is negative, the corollary being that when GOFO is greater than LIBOR, GLR is negative.  Contra the na├»ve assumptions of the less well-informed commenters out there on the gold blogosphere, a negative GLR does not mean that folks will pay you to borrow their gold, just that it costs less to borrow than dollars.  According to Bron (above), GOFO is the “amount that can be earned from the gold carry trade”, which amounts to selling gold to buy dollars when the latter yields higher interest.  So, when the GLR is higher than LIBOR and GOFO is negative, it simply means that it costs more to borrow gold than dollars.

Negative GOFO rates do not necessarily mean that they are in backwardation over the time curve, nor does it necessarily mean that gold futures are in backwardation, as James Turk and some others seem to assume, as can be seen below.

S. Roche’s breaking news in an emailon 8 July (1M - 0.065% 2 & 3M Neg as well!) engendered a lively email exchange among a few of us down under here in the Land of Oz, which included informed comments and many of his usual excellent charts from Nick Laird (sharelynx.com), insights from industry-insider Bron (goldchat.blogspot.com.au), insightful observations from trader Roche, and a few questions and opinions from yours truly, Slow Loris Larry.

In at least approximate chronological order, here are the highlights of our email exchanges (condensed and/or slightly edited).  Links to various articles appearing on various sites that we discussed are included.  Roche posted this link to the first internet article on the subject on STFU comments on 9/12 (URL above in first paragraph) http://www.zerohedge.com/news/2013-07-08/historic-inversion-gold-gofo-rates-turn-negative-first-time-lehman

9/7 Our relevant email exchanges got going when Bron sent us the ZH URL above:
A surprisingly qualified post by ZH.  Usually they just go with whatever single explanation makes for the best headline.

Then Nick sent us his first graph::
Here's a chart I run on the GOFO's
They have been below zero back in May
                                                        All charts can be clicked to enlarge.
And Roche’s reply is:
I saw that on May 22nd and I think it is a typo because of May 21 and 23, they don't correspond to negative 1M on May 22. I have emailed the elves at the LBMA last night and I will let you know.
(Much later, on 15/7, he reports: May 22nd has been adjusted down twice on the LBMA website since I emailed them but is still showing negative.)

Nick, again:
Here's some better charts using the LBMA data
GOFO since 2005
And Lease Rates for the same time
                                                         All charts can be clicked to enlarge.

SLL then chimed in:
Let's see if I have this right: 
GLR (Gold Lease Rate) = LIBOR - GOFO (Gold Forward Rate)
Also GOFO = LIBOR - GLR,  so IF GOFO < 0, GLR > LIBOR, meaning that it costs more to borrow gold than dollars.
James Turk, blogging on KNW (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/11_Turk_-_We_Are_Witnessing_Historic_%26_Shocking_Events_In_Gold.html), says that the LMBA website is now showing gold in backwardation because of the negative GOFO.
Is that a necessary relationship?  Dear old  Prof. Fekete taught me that Backwardation is the situation in which the spot price is higher than futures prices (but to be meaningful it should extend out more than a month or so and be consistently proportional along the price curve), the cause being that arbitragers will no longer sell for present (or near) delivery and buy for later delivery because they won't accept the risk of not getting eventual delivery (as Turk also points out).
Turk goes on to say that SIFO (the Silver Forward Rate), which has not been reported for the last several months, was in Contango (futures prices being higher than spot prices) BUT no one could trade at those rates, implying that silver might have actually been in backwardation since around that time.
So, does this make the drawdown in gold from both the COMEX and GLD but not silver from the COMEX and SLV all the more mysterious?

And Nick replied:
Here's gold's current spread
 
                                              All charts can be clicked to enlarge     

You can also find GOFO rates here

Negative GOFO and Backwardation.  Note that Nick’s chart does show gold in backwardation, but for four months, only, with August being the deepest.  SLL

In a following message, Nick adds:.
I've long thought that since they butchered the Libor rates that the Gold Lease Rates shown officially were bunkum.
And that's been since 2008 when the US Gov't drove their rates down to zero....

Roche replies:
I agree with Nick and think GOFO stands alone, it is easier to understand that way too rather than cloud the issue with Lease Rates which don't apply to any transactions and are just shorthand for the cost difference between gold and USD.
Sorry to bang on about this but I am in the camp that GOFO is about collateral and collateral chains, at the moment being unwound. It is the only thing that makes sense and justifies the huge daily volume in gold trading. Gold serving as collateral in the financial system is one of its main functions and can drive markets at times, in a big way. Imao. 

Bron then clarifies ‘real GLRs’
“Lease Rates which don't apply to any transactions.”
Perth Mint does lease metal outright, so Lease Rate is real (and never negative) and there is a leasing (borrowing and lending) market just as there is a forward GOFO market. Which drives which is hard to say and probably changes over time.

Roche then asks:
Do you use the LBMA lease rate or your own OTC?

And Bron replies:
All lease rates are done OTC and depend on who you are (your credit rating). GOFO, LIBOR and GLR are idealised general/mean rates and don’t directly relate to what a counterparty will get.

On 10/7, Nick sent a link to Gold GOFO/Libor/Lease Rates
                                                         All charts can be clicked to enlarge
And Roche says:

On 11/7, SLL posed and then (sort of) answered a question:
I still have a basic question that hopefully has a simple answer:
Although the two phenomena are clearly linked to some degree, I am wondering if negative GOFO invariably also means backwardation in the futures/forwards exchanges/markets, and vice versa?
I think that the answer is 'not necessarily’, and that there could be one or the other alone without the necessity of the corresponding one also being evident.

Roche answered:
My understanding is that gold forwards are in backwardation.

Bron also answered:
GOFO is like a secured forward and as such is a similar financial instrument to a futures contract. Futures are "secured" by the requirement to deposit margin. That can result in different economics (profit) than a forward or gold swap. 

The "basis" is more just the revenue part of the transaction and does not take into account the funding/opportunity cost of the futures margin or other costs, so the basis percent may come down to be closer to GOFO.

NB:  ‘Basis’ refers to the price curve of futures/forwards prices versus the ‘spot price’ however that may be established.  If the basis is positive, a market is in contango.  If the basis is negative, a market is in backwardation.  SLL

Roche announces:

SLL responds:
Here are a couple of comments on Kaminska's post:
1) I think you have been right in saying that what is going on is related to financialisation of gold, as K implies (as I understand, or may misunderstand, what she is saying).
2) I had real difficulty understanding some of it, even after I followed all of the links and then reread the piece.  For instance, she says:
"To entice cash lending against gold, either lease rates had to go negative or the GOFO lending rate had to take the slack by turning negative."
Since GLR is a reciprocal of GOFO through their inverse relationship to LIBOR, negative GLR and negative GOFO are opposites.  So why/how do those two opposite situations have the SAME effect on willingness to lend against gold?

SLL then announces:

Bron also announces:

12/7 SLL informs the group of the following:
Steve Saville, another Aussie, who produces The Speculative Investor, wrote in his Interim Update 10 July 2013 on the subject, stating ‘This means that a small shift into backwardation in the current interest rate environment will be far less significant than a small shift into backwardation in an environment where the 3-month T-Bill has a more normal yield of, say, 3%-5%’.
So, Saville definitely thinks ‘this time is different’!

12/7  Roche responds to Saville’s conclusion:
That's the only proviso that I've got in mind. But, I don't think the short interest was as extreme last time so maybe it will balance out.
Bottom line, no one knows: last two times there was a pull back after the initial surge so I am trading with that in mind as well.
I am betting that history rhymes. Cheap money has only meant more leverage to get the same bang for the buck.

12/7 Nick presents a great chart and the final words to date to go with it:
Here's a long term view of all the Gold Rates.
                                                         All charts can be clicked to enlarge

With regards the GOFO rates - they have not inverted at all - their time/premium is still normal.  What they have done is gone into negative territory.
Interestingly enough one can see back in the 1990's where the GOFO did invert, i.e. longer term rates fell below short term rates.  To clarify my thinking on backwardation & contango:  With rates series there is an interest rate due (say Libor) for each & every day.  Thus a 3 month rate carries a lower fee (interest rate) than a 12 month rate.  Thus as you look out along the rates curve what you are seeing is the time premium. 
A normal rate curve - one which is in contango, shows the time price of the rate rising.  A rate curve in backwardation shows the situation whereby the rate curve inverts & you get the 12 month rate cheaper than the 3 month rate.
This disparity shows the time price premium of interest no longer exists due to demand structures which have inverted the curve.  So to show true backwardation the rate curve needs to invert - for the time/price rate to invert & thus show demand overtaking the rate structure.
As such with the current gold situation whereby the cash price is slightly above the active near month (August) & the next near active month (October) we are seeing slight backwardation in these near months.  December has not yet inverted.
I will soon build a chart to show the spread of the futures contracts & their contango/backwardation.

SSL concludes this post:  Won’t it be interesting to see what time will tell us?


ADDENDUM

Following are Nick Laird’s Sharelynx.com charts for Gold Futures Contract Spreads for Jul-19 and Jul-22.

                                            Click to enlarge charts.

                                                         
In a comment posted below dated Sun July 21, I reported that there was increased and prolonged backwardation on the July 19 chart (now shown at the top, above) in comparison with the one originally posted for July 8 (shown below), but I could not get the Jul-19 chart to display in that comment).


Nick has now updated that chart to July 22  (the middle one, above), and it shows that backwardation had then all but disappeared.

GOFO rates for July 23are still negative for the first three months in about the middle of the range since July 8.

The cost to access Nick's huge number of continually updated Sharelynx charts for a year is extremely modest.  If you have gained anything from those that I have posted here, you might consider subscribing.
Note, however, that charts that update on a daily basis are replaced, and that old ones are not normally accessable unless you have saved them locally..

SLL
 

78 comments:

Slow Loris Larry said...

So, Roche, what is GOFO doing today?

S Roche said...

15-Jul-13 1M -0.05500 2M -0.04000 3M -0.02333 6M 0.06167 12M 0.18500

Negative out to 3 months.

Beer Holiday said...

Great discussion.

BTW Ned Naylor-Leyland has been saying that gold has been in "permenant backwardation since Aug 12" Here

Does anyone know what he is on about. Does he measure it differently? IDK

S Roche said...

@BH

"Does he measure it differently?" Yes, I think Ned is in the Basis/Co-Basis camp with Sandeep Jaitly.

Unfortunately there is not much in Ned's article that I can agree with. 15 bankers met with Obama?

And here is Sandeep chiming in on GOFO:

http://www.maxkeiser.com/2013/07/sandeep-jaitly-on-negative-gold-forward-rates-gofo/

I find it incomprehensible.

S Roche said...

Re GOFO today:

1, 2 and 3 months are all more negative today than Friday, as well as increasing the record to 6 days of negative GOFO.

http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=2013

milamber said...

subbing comments

S Roche said...

and here is Jeff Nielsen adding his views:

http://www.bullionbullscanada.com/gold-commentary/26280-the-fraud-and-conspiracy-of-bullion-leasing

Which I include as an excellent example of this genre of precious metals commentary.

costata said...

S Roche,

Just out of interest, what is the difference between 'MRT' and MMT? Despite the claims from Cullen Roche I haven't found any significant difference between his perspective on MMT and the MMT camp overall.

Re: collateral chains

Do you see any reason why gold as a currency in FX pairs isn't a better explanation for the volume at the LBMA rather than gold as collateral?

Aside from the FX market or the oil/energy markets what other markets are large enough to demand the kind of volume that the LBMA churns out?

(Answering my own question in part - bonds - but surely bonds devolve to FX in the final analysis.)

Rather than looking at the LBMA as a gold collateral market it could be informative to think of it as a fractionally reserved banking system based on gold as the ultimate reserve currency and by extension the settlement currency between the clearing member banks. (With no central bank in this private banking system.)

It also might be worthwhile looking at the gold:oil ratio as a quasi currency pair in some of the TA you and your colleagues are discussing in order to ascertain if that provides any correlations which could explain any of the recent price fluctuations.

costata said...

S Roche,

One further observation about collateral chains. Ultimately for the international banking system the only 'assets' that I can identify which can support collateral chains are sovereign bonds with a zero risk weighting.

Any other asset they attempted to use in a chain leaves a legacy negative impact on their capital position unless there is someway to disguise the effect with some creative accounting.

Naturally I welcome your critique of my assertions.

S Roche said...

@Costata,

I am not an economist and couldn't begin to describe the difference between MRT and MMT, I pointed it out because I too failed to make the distinction in another conversation.

Frankly, I think all theories will at times be wrong so I do not put much store in them other than to be aware of what others think, to the extent that I can keep up.

I see gold as so many different markets that come together in London, from the traditional banks and thier customers hedging or taking directional positions, to the Chinese trading houses and merchants using gold and copper as collateral, Western pension funds insuring their portfolios (Structured Products), to Japanese bond traders off-setting positions by hedging with gold (here I am guessing, but what is the explanation for gold tracking JGB interest rate volatility?) to Italian banks pledging their gold for USD and then hedging their position...if gold's role in the shadow banking system as collateral, causing extreme pro-cyclical volatility both ways, (as well as traditional monetary role), and all the Mrs Watanabes (over 40% of Japanese equity volume!?) and every other 50+ yr old options trader in the Western world, let alone now the Chinese banks offering gold trading platforms...is all added together I think the London (paper to physical) trading volume is probably understated at 100:1, being used as collateral would increase that volume as positions on both sides of the original trade are hedged...and speculated upon.

In short, I don't know and in searching for knowledge for three years plus I think no one else does either. The market is so multi faceted that no one theory is sufficient. The oil gold ratio, yes, some traders focus on that, I am sure Saudi positions are part of the mix...I used to live in the Middle East, rather than a pillar of the gold market I would see them as a potential liability...what happens when they need to sell? Not yet, and they would use their gold as collateral before they did, no doubt.

As to what assets are used in the shadow banking system collateral chains...I think the answer is all assets are collateralised if they can be....the repo market is how modern finance operates.

I am not able to provide any insights, this is all conjecture on my part, but my understanding of collateral chains is where the same collateral is used multiple times by succeeding parties. Hence, unwinding them can be so savage. I only focused on their existence in the gold market as a likely explanation for such swift price movements.

Sry all a bit stream of consciousness, but am doing what I like to do at this time, scalping the pre AM Fix!

Beer Holiday said...

@SR,

Thanks for the explanation of NNL, and I have no idea what Sandeep is on about either.

costata said...

S Roche,

Thanks for your reply. I think if you put all of these different elements into a blender and press the button it makes for a confusing mix.

In the inter-bank market it's the Basel rules that dictate what can be part of a collateral chain. A lot of the activity you descibed above slots into different lines/categories of business that banks are involved in i.e. outside the inter-bank collateral based lending that produces these collateral chains. You can slot most of this into re-hypothecation of (dubious?) assets and the production of derivatives as opposed to lending. In other words fee-generators as opposed to debt instruments.

Good luck with your scalping. Long may it last.

A link from a recent tweet: http://dollarcollapse.com/interest-rates-2/variable-rate-world-part-3-this-horror-show-is-just-the-beginning/

Chris Whalen:

By pursuing QE too long, the FOMC has engineered a repeat of the periods of market losses and negative accrual that nearly crushed the banking industry in the 1970s and 1980s, only worse. And the G-4 central banks actually plan to keep short rates low through 2015.

The extraordinary gains taken by banks on older, higher coupon securities in 2012 and before during the period of QE will not be available to support earnings in future thanks to QE. Or to put it another way, the period of “recovery” for bank earnings is nearing an end.

S Roche said...

Gold showing a lot of strength in London trading, where, according to GOFO, (still neg 3 mths and tighter still today), the tightness exists.

S Roche said...

@Costata

That "confusing mix", and I have only identified part of it, has a name: "opaqueness".

S Roche said...

icymi Paulson on gold:

"People who bought gold in anticipation of inflation have lost patience. That has caused the price to fall. But the rationale for owning gold has not gone away. The consequences of printing money over time will be inflation. I know many people aren’t concerned because the latest inflation headlines are under 2%. But the rationale is valid. In the trend, we are in a pause period."


http://blogs.barrons.com/focusonfunds/2013/07/17/paulson-golds-rationale-still-strong-demand-will-return-positive-on-housing/?mod=BOL_hpp_highlight_bottom

S Roche said...

It's not what you (don't) know that counts:

http://www.pinnaclesports.com/online-betting-articles/07-2013/green-lumber-fallacy.aspx

In relation to trading.

Slow Loris Larry said...

Just in case someone else missed this comment on GMJ's 'Figured it out' post from last Sunday, when I was busy concocting my post on GOFO, I am copying SL's comment here. Indeed, an excellent article on the subject.

Blogger SugarLover said...

Gofo views here. Interesting, complex.

http://www.biiwii.com/guest/guest441.htm

Sun Jul 14, 05:46:00 PM GMT+1

Slow Loris Larry said...

So, Roche, how did GOFO end the week?

S Roche said...

Negative out to 3 months all week.

Bron made a brief and insightful commen on Goldchat, icymi:

http://www.blogger.com/comment.g?blogID=6089228851855763774&postID=7750653582257551289

Wednesday's defense of $1300 by the bears ($1300.63 down to $1270.120) was met the next day with the tightest 1M GOFO all week -0.08167%, that sell off may have been related to options expiry today.

Since GOFO went negative on July 8, (the sell off on July 5 seemed to be aimed at testing $1200 but was bought (sic) to a stand-still at $1208.12) the spot gold price has risen to $1295.94 today.

The overall bearish sentiment has given way to outright gloating at the demolition of the fear trade:

http://pragcap.com/the-fear-trade-has-been-demolished?utm_source=dlvr.it&utm_medium=twitter

Monday will be interesting.

costata said...

SLL,

Thanks for the link to that post by Bullion Baron where he provided a link to a transcript of JP Morgan's testimony to the Congressional committee enquiring into the so-called "money trust". Much appreciated.

Cheers

Slow Loris Larry said...

@ costata:

I think you may have me confused with S. Roche, and Screwtape Files with Bron's Gold Chat.

On July 5, Roche posted a link to http://www.bullionbaron.com/2012/11/jp-morgan-on-gold-and-credit-what-did.html @ http://www.blogger.com/comment.g?blogID=6089228851855763774&postID=7750653582257551289

costata said...

SLL,

Thank you for the correction.

Slow Loris Larry said...

Nick Laird has just sent me an update of his Gold Futures Contracts Spreads chart. It shows increased backwardation, both in terms of magnitude and duration.

August still has the most, about double what it was last week, but the backwardation now extends out as far as February!

Has anyone ever seen it like this before?

http://www.sharelynx.com/gold/CMESpread01.php

So, futures spreads are in even greater backwardation, GOFO has been negative for two straight weeks and the rates are even lower now than last week.

Also, GOFO rates themselves have become inverted, but only near term and only very slightly, just for August and September, as of now.

Still, all this seems very unprecedented!

Robert LeRoy Parker said...

Hey Larry you got a non paywall link?

Slow Loris Larry said...

@RLP

Unfortunately, no. I tried to include the chart itself in the comment (with Nick's permission), which was in an .rtf file I copied and pasted, but apparently images cannot be included in Blogger comments. It looks rather like the chart in the post itself, but with the differences described in the comment.

Nick's subscription rates are not very pricey, especially considering all the information one can access on his sites.

Slow Loris Larry said...

I have now added an addendum on backwardation to the post that resulted in this chain of comments.

I commented above that Nick Laird's chart of Gold futures Contracts Spreads for Jul-19 showed increased and extended backwardation.

His chart for Jul-22, included in the addendum, shows that the backwardation has almost completely disappeared following the gold price action on Monday.

SLL

Slow Loris Larry said...

jsmineset.com for July 23rd 2013 has a post that has the following definitions:

GOFO = Gold forward rates, the difference between cash gold and future gold.

Backwardation = Negative GOFO

Negative GOFO = When the nearby future gold price exceeds the spot future gold price.

All three are patently incorrect!

Anyone who has been following this post should be able to easily identify the errors, but let me point them out.

GOFO does NOT measure gold prices, it indicates the relative interest costs of borrowing US dollars versus borrowing gold for set periods: GOFO = LIBOR - GLR (Gold Lease Rates). Positive GOFO simply indicates that it is more expensive to borrow dollars than to borrow gold.

Backwardation is NOT the same as negative GOFO. Backwardation occurs when the price per ounce for a COMEX futures contract is less than the reported 'spot price' of gold, and especially when that difference extends over a number of future months, which cost proportionally less as the time increases. As the addendum to this post clearly demonstrates, negative GOFO can exist without actual backwardation in gold futures prices or inversion of GOFO rates, which is a different matter entirely.

Negative GOFO simply indicates that it is more expensive to borrow gold than to borrow dollars. The jsmineset definition of Negative GOFO would serve as a simple definition of contango in gold futures prices, which is the normal situation, so it is ass-backwards as a definition of backwardation in futures prices.

One would not have thought that the dear old 'Santa' of gold could possibly get all of such definitions so confused and horribly WRONG.

Slow Loris Larry said...

Nick Laird's Jul-22 Gold Futures Contracts Spread chart in the addendum to this post shows no readily discernable backwardation, yet GOFO remains negative for the first three months.

Slow Loris Larry said...

On 25-7-13, Nick's graph of Jul-24 Gold Futures Contracts Spread (http://sharelynx.com/gold/CMESpread01.php) shows that minor backwardation has reappeared out to February 2014.

GOFO is still negative for the first three months, unchanged for 1 & 2, but slightly less for 3.

Despite Bron's humorous comparison of gold's present minor backwardation with crude oil's complete backwardation, the situation with GOFO and mild gold futures' backwardation out six active months is quite anomalous.

Slow Loris Larry said...

Forgot to add that silver, on the other hand, is more significantly backwardated out to early 2014.

SIFO (Silver Forward Offered Rate) is no longer published by the LMBA.

victorthecleaner said...


FYI some comments on negative GOFO on FOFOA's blog

Victor

Slow Loris Larry said...

Also some very informative comments, including lengthy ones by Dan Norcini himself, on when and how to measure and interpret gold backwardation, following Dan's post on Wednesday July 24 on 'Housing Figure Trips up Gold' (http://www.traderdannorcini.blogspot.com).

Warren James said...

Bron also has a followup to his own article on backwardation, also references Dan Norcini's. There seems to be some general blogosphere disagreement over the terminology but Bron spells it out well here:

http://goldchat.blogspot.com.au/2013/07/norcini-gold-is-not-in-backwardation.html

I personally struggle with these concepts, so I'm only commenting here to link to the article as a set for reference. Rgds,

S Roche said...

Bron's article is a great assessment with a wealth of links for those interested, and yes as Warren indicates, your brain will hurt.

Price action in the last minutes of gold trading for this week has finally seen some muscle memory kick in of the explosive open last Sunday night.

S Roche said...

O/T but interesting...

Martin Armstrong from February 2013 on Gold, What Now?

http://armstrongeconomics.com/2013/02/25/gold-what-now-2/

Created a big fuss at the time, any apologies?

Bron Suchecki said...

VtC: "I conclude that what we are seeing is most likely not the risk premium on the gold loan, but rather an effect caused by the interest rates. It seems that for those (giants) who deal in both gold and dollars OTC, the short-term dollar interest rates up to 3 or even 6 months have turned negative."

This is a point Izzy at FT Alphaville has made and I think there is merit in it.

S Roche said...

Negative GOFO has coincided with great volatility in the past.

Here are some very back of the envelope price parameters to consider after negative GOFO incidents followed established gold price lows in the past:

In 1999 gold rose 34% before a 25% retracement, which would give us now $1581 to blow out the bears and then $1,186 to shake out the bulls (almost 2 years later);

In 2001 gold rose 17.6% before a 11.4% retracement, which would give us now $1387 to allow the bears to reload and then $1,228 before the bulls reassert themselves;

In 2008 gold rose 21.9% before a 10.8% retracement, which would give us now $1439 to take out all the recent bears and then $1,283 to shake out the momentum trading crowd;

In the past negative GOFO was a short, sharp event (3 days at most) and the interest rate differential was much wider.

So, this current incident is lasting much longer but I expect the volatility will be similar as the event polarises the bulls and bears.

Take your pick.

Slow Loris Larry said...

If you have not seen it yet, you might want to check out the latest Keiser Report, where he interviews Alasdair Macleod. Posted on jessescrossroadscafe.blogspot.com, 27 July 2013.

I am not fond of Max, at all, but Alasdair is another matter entirely, and he has discovered some really important news, if it can be verified, to wit: 1400 tones of gold, owned by other central banks, has been leased out by the Bank of England since the end of February, presumably in order to cover the demand engendered by the fall in price since April.

SLL

Slow Loris Larry said...

Alasdair's explanation for how the Bank of England could lease out far more gold than England claims to own mat well also explain why Germany is willing to wait seven years for the return of a mere 300 tons of gold from the NY Fed.

SLL

victorthecleaner said...


SLL,

Macleod has no clue about the gold market whatsoever. Here is what I commented at FOFOA's place.

Even if someone wanted to sell 1300 tons of gold in order to suppress the price, why would you sell physical gold if you can sell paper gold instead?

Why would anyone waste more than 10% of their reserves in order to prop up a currency (US$) whose eventual failure has been baked into the cake for 30 years?

Finally, assuming Macleod's observation is correct (still unconfirmed as of today) and indeed 1300 tons of gold have left the BoE's vaults, the question you ought to ask is not "What has the BoE done with this gold?" but rather "What have the owners of this gold instructed the BoE to do?" Perhaps this gold was simply moved elsewhere? (Zurich, Riyadh, Beijing, whatever...) Recall that the BoE owns only about 310 tonnes. All the other gold in their vaults is owned by other people (central banks, international organizations, wealthy Arabs, Asians).

Ah, and why would the BoE never (absolutely never!) steal other countries' gold? Because Britain has to import about 5% of their GDP worth of goods, including energy. If they cheat the producer countries, they face anything up to and including plain starvation.

Btw does anyone have the balls to withdraw their gold from London? Take a look at Figure 11 of my article on gold leasing and on Section 7, Germany:

In 1997, the Bundesbank converted a net amount of about 790 tonnes from `paper gold´ to `physical gold´ by allocating the 200 tonnes of unallocated, closing 740 tonnes of swaps, and only leaving 150 tonnes leased out.

and

These Bundesbank publications also confirm that they relocated about 930 tonnes from London to Frankfurt between 1999 and 2001. They did not report this fact for another ten years.

Victor

S Roche said...

I don't always write to the Bank of England, but when I do this is the response I get:

Dear Mr (Roche)

Thank you for your email. The Bank of England holds gold for the UK government, other central banks around the world, and members of the London Bullion Market Association. The Bank itself only owns a small amount of gold (including two standard size bars and two Roman bars on display in the Bank’s Museum). Decisions on the sale of gold are therefore for others, not the Bank of England. The Bank’s 2013 Annual Report states that the Bank acted as custodian for the equivalent of £210bn of gold as at 28 February 2013. In order to derive a figure for the number of bars held would require the use of a price for gold, which can vary dramatically from one day to the next. The Bank’s App states that the Bank holds over [in bold] 400,000 bars.
I hope you find this information useful.

Kind regards

(signed)

Public Information & Enquiries Group
Bank of England|Threadneedle St|London EC2R 8AH
enquiries@bankofengland.co.uk

Warren James said...

I'm with Roche on this one - the 'over 400,000 bars' was just a round figure supplied for mass public consumption carefully weighed by legalese with enough ambiguity to be approximately correct at all times ... rather than being an official statement about inventories.

There is some evidence that the 360-degree tour photo was taken earlier than December 2012, which may potentially reverse their conclusions about leasing. This is a bit beyond the ability to discuss in the comments section and there's actually an article in the pipeline on this.

Kid Dynamite said...

SLL -

did you notice that in that same Keiser interview, Alistair confused GOFO and the gold lease rate, and trumpeted the same nonsense "comex deliveries haven't settled yet" meme that I just debunked?

I think it's safe to add him to the charlatan list... he's a pumper, which is especially sad, because he's not the head of marketing/sales for GoldMoney, he's the head of research...

Slow Loris Larry said...

Bron reports that he has received the following email from a 'higher up' at the Bank of England:

Dear Ms Suchecki,

You are correct. The number of bars mentioned in the app cannot be used to infer a change in the amount of custodial gold held by the Bank of England as the figure is deliberately non-specific. The Bank will not be offering any further comment on this matter.

Regards,

Chris Shadforth

Head of Division, Public and Internal Communications Division
Bank of England | Threadneedle Street | London EC2R 8AH | +44 (0)20 7601 5272
chris.shadforth@bankofengland.co.uk

PS. Bron also wants to let all of you know that he has not had a sex change!

victorthecleaner said...


The BoE must have had quite a number of enquiries yesterday and today (S Roche, L Schall, GATA, Bron, ...). Seems they are responding to all of them...

Victor

Slow Loris Larry said...

Alasdair is not backing off on his claim that 1308 tonnes (100K bars) of gold has gone out of the BoE vaults:

http://www.goldmoney.com/en-gb/news-and-analysis/news-and-analysis-archive/untangling-gold-at-the-bank-of-england.aspx?

Here is his reasoning:

"Is the difference of 100,000 bars a mistake? The wording suggests not. The Bank appears to have thought that if it said in the virtual tour, “over 400,000 bars in custody” it would be sufficiently vague to be without meaning; but it is so much less than the figure in the Annual Report dated only four months earlier that it is unlikely to be a mistake. We must therefore conclude that they meant what they said, and that some 1,300 tonnes has left the vault since 1 March."

Are you satisfied with it?

SLL

S Roche said...

Alasdair prefers to take at face value the wording of an app designed for tourists rather the the specific advice of the Bank of England on this matter:

"The number of bars mentioned in the app cannot be used to infer a change in the amount of custodial gold"

Btw, Alasdair has predicted hyper-inflation in the United States commencing in February of 2014.

As an analyst and researcher, Alasdair is in a league of his own.

Slow Loris Larry said...

Nick Laird's http://www.sharelynx.com/gold/CMESpread01.php Gold Futures Contracts Spread chart for Aug-01 2013 shows no negative basis or backwardation in any months.

However, Kieth Weiner's http://monetary-metals.com/ reports on August 1 that:

"The December gold future went into backwardation today, July 31. Below, we show the dates when previous gold contracts went into backwardation. As you can see, it is creeping farther and farther out. This is a picture of gold availability to the market drying up.

Is this 'What a difference a day makes?'

S Roche said...

A poster at another site asked me to post this link on GOFO, which points out that the interest rate differential this time are miniscule:

https://www.kitcomm.com/showpost.php?s=48cefefcf7fe1b15cab820b4b34b726a&p=2053503&postcount=29502

There must be something to this as negative GOFO is persisting for so long...but, every dip is being bought since GOFO went negative (so far!)...

Slow Loris Larry said...

Nick's Sharelynx Gold Spreads chart for Aug-02 2013 shows only minor (c$2) negative basis between the cash price and the August Future's price, and almost insignificant backwardation from August out to December.

The silver basis has now ended its prolonged negativity, and there is no backwardation at all.

Slow Loris Larry said...

As of August 2, GOFO rates are still negative for the first three months, but only slightly particularly for the third month @ < .02.

So, if LIBOR were marginally higher and the Gold Lease Rate stayed the same, or if the GLR declined slightly and LIBOR stayed the same, the GOFO negativity would disappear.

The longer the negative GOFO persists without an apparent change in the direction of the price of gold, the less significant it becomes, in my opinion anyway.

Slow Loris Larry said...

GOFO rates for 07 August are even more negative for the first three months than they have ever been since 08 July (apart from the 1st month on 10 July, only).

Gene Arensberg has an interesting post on Aug 7 titled 'COMEX Gold Backwardation Continues' (http://www.gotgoldreport.com/2013/08/comex-gold-backwardation-continues-.html#more).

Indeed it does, as shown also at http://www.barchart.com/commodityfutures/Gold_Futures/GC, where the Basis (cash versus the latest August settled price) is positive (Contango) but the next three months are in comparative Backwardation to August, but only October and December are Backwardated to the 'Cash' price.

Much more interesting is Arensburg's chart comparing the GLD/SLV ratio to the GLD price. Since the end of July, both have been falling, whereas they usually move inversely. Gene remarks that 'When the gold/silver ratio is falling it usually means that money, wealth, resources are moving out of other stuff and back into gold and silver', whereas the falling price of gold usually signals the opposite.

Gene's lengthy response to a comment on the post is also quite informative regarding Backwardation and the persisting negative GOFO. He concludes: 'SOMETHING HAS CHANGED. Something is causing stress to the gold clearing and futures markets.'

victorthecleaner said...

Something has changed. It started around the end of 2012:

* the GLD Puke indicator stopped working
* GLD inventory started to decline and kept declining even during periods of rising London gold price
* the London gold price no longer increased during the last few days preceding a Eurosystem gold price snapshot at the end of a quarter
* on an end-of-quarter basis, gold in Euros started to decline
* the Bundesbank released a list of all gold transactions from which you can see that they used to have unallocated, swaps and gold on lease, but that they have their gold fully allocated as of today
* from this list, you can see that they allocated about 750 tonnes loco London in 1997, the year in which LBMA clearing volume was first made public, Big Trader and Another appeared at the Kitco and USA Gold forums, a year which had a number of sharp down-spikes in GOFO and in which ultimately some 2500 tonnes of gold left the UK
* from this list, you can also see that they moved about 950 tonnes from London to Frankfurt around 2001 without telling anyone for more than a decade - nevertheless towards the end of 2012, they just made a big fuss about relocating a comparably small quantity of 50 tonnes per year from New York to Frankfurt and kept dragging this into the press again and again
* the Europeans started talking of bail-ins and haircuts
* the Europeans started treating bank deposits as loans (which they are) and recognized that these are subject to credit risk and potential loss (Cyprus)
* when Mario Draghi was asked why he wouldn't do more for Spain given that inflation was well below target around 1.5% per year, he simply replied "I am sorry" and "You should be happy because with low inflation, you can buy more stuff"
* the Brent minus WTI crude oil spread disappeared
* European anti-trust authorities raided the offices of Platts and a couple of UK banks and started investigating manipulation of the oil price
* Lawrence Summers is being put into position for succeeding Ben, a move which everyone is scratching their heads about
* Jean-Claude Trichet gave a speech in which he mentions the phrase "exorbitant privilege" again and again and in which he repeated at least ten times that the dollar no longer enjoys any such exorbitant privilege - Euroean central bankers had not used this terminology for decades
* the gold price is slowly creeping below production costs (at least including capital expenditures)
* according to the US Treasury's TIC data on Major Foreign Holders of US Treasury debt, the rest of the world switched from accumulating US$ to the tune of $40bn to $50bn per month to selling US$ at a rate of $20bn to $30bn per month (changed in April 2012) - note that these data keep being revised in a rather obscure fashion though
* although the economy and employment were improving towards the end of 2012, the Fed started QE3 and upped their bond purchases from $45bn per month to $85bn per month

I claim that you have found the right point of view once you realize that these are all different symptoms of the same development, a huge tectonic shift in the global monetary system

Victor

Slow Loris Larry said...

If anyone who does not follow Victor's blog wants to know what he is alluding to in terms of 'a huge tectonic shift in the global monetary system', they can find it here: http://victorthecleaner.wordpress.com/2013/04/07/snippets/#more-1364

This is definitely worth the hour or so it takes to go through (not including the comments). and it may need to be done more than once to absorb it all satisfactorily.

Any discussion of it here on STF would probably best be pursued on the permanent Freegold Discussion space, where Warren might start a new Page 4 if it becomes voluminous.

SLL

Slow Loris Larry said...

If anyone would like VtC's Twitter Snippits compiled into a .txt file, email me at: slowlorislarry@fastmail.com.au

Your email addresses will be provided to VtC.

SLL

Slow Loris Larry said...

For Aug 8, GOFO is more negative in M1 & M2, but very slightly less in M3, while M6 is now very slightly negative.

The basis (August minus 'cash') is now negative by almost $3, but September through December are only slightly backwardated.

mortymer said...

To add message Thu Aug 08, 10:57:00 PM GMT+1

- Implementation of the Basel III capital and liquidity requirements, supporting the goal of increasing the resilience of banks and banking systems;
- Implementation of reforms to resolution regimes, supporting the goal of ending "too big to fail";
- Implementation of OTC derivatives reforms, supporting the goals of reducing systemic risks and creating continuous core markets.

This is from FSB. There is much more of course.
My take is things started to change already after the G20 Cannes summit of 2011.

S Roche said...

Back to gold as collateral, and the consequences of that: this is the scary China story of the week - about that rebound in iron ore imports and steel manufacturing? Not for end sales, but for collateral!

http://qz.com/113233/chinas-crazy-love-affair-with-steel-is-a-scary-example-of-how-its-finances-could-implode/

The Communications Bank officer's comment is a gem.

Slow Loris Larry said...

The GOFO rates for 9 Aug are down somewhat for M1-6, but still significantly greater than average since 8 Jul.

The Basis (front month minus cash) is now negative by around a dollar and a half, and Sep through Dec are in slight Backwardation to August, while Feb and Apr '14 are Backwardated to Cash.

A PIIG said...

@Victor

Where does Trichet make that speech where he uses the term "exorbitant privilege"?

victorthecleaner said...

A PIIG,

Where does Trichet make that speech where he uses the term "exorbitant privilege"?

http://www.youtube.com/watch?v=wJP2IWk4mW0

Victor

A PIIG said...

Thanks. An interesting speech. Though I can't agree with Trichet's reasoning on exorbitant privilege, which was the UK, France, Spain also enjoy long term deficits.


Slow Loris Larry said...

For Monday, 12 August:

GOFO is still negative through the sixth month out, but slightly less than Friday.

The Basis (August minus Cash) is negative by just on $2, and although September is not in Backwardation, October through February 14 are, for around a dollar or so.

Slow Loris Larry said...

The GOFO sixth month is no longer backwardated, but the first three months are little changed.

In terms of futures spreads, www.barchart.com/commodityfutures/Gold_Futures/GC has now replaced the second decimal place with 's' for all months, clouding the issue somewhat.

It would appear that the Basis (Aug minus Cash) is around zero and that Sep is in slight Contango, while only Oct and Dec are a bit Backwardated.

Slow Loris Larry said...

No significant change in GOFO.

The Basis (Aug - Cash) was negative by $2.5 or so five minutes ago, but it is less than a dollar now. The figures change momentarily.

Sep, Oct,and Feb are slightly backwardated to Aug, Jun much more so, but Aug '14 is $3 or so higher and in Contango.

Go figure!

Slow Loris Larry said...

Despite the very nice up day in the Au 'Spot' price, there was very little change in GOFO - only somewhat lower in M2 and M3.

However, the Basis (Aug - Cash) is minus more than $4 at this point in time, but Sept, Oct, and Dec are only slightly Backwardated to Aug.

Slow Loris Larry said...

End of the week figures for Aug 16 follow.

Negative GOFO increased marginally in M1, M2 & M3, and M6 became slightly negative again.

http://www.lbma.org.uk/pages/?page_id=55&title=gold_forwards&show=2013

The Basis (Aug minus Cash) is still negative by over $4. Sep, Oct, & Dec are Backwardated by $.50 (or a little more for the latter two months), but all further months are in Contango.

http://www.barchart.com/commodityfutures/Gold_Futures/GC

I doubt that I will continue to post these figures on a daily basis, as anyone can look them up at the URLs above.

S Roche said...

What was very interesting on Friday was the the price of gold rose signifcantly during the week and GOFO rates went more negative...

Slow Loris Larry said...

Monday, 19 August (Just for the weekly record)

Gold

GOFO: Same old, same old.

Basis: Positive

Backwardation: Minor in Sep, Oct, & Dec, only.

Silver

SIFO: N/A

Basis: Slightly Negative

Backwardation: None

(To be updated during the week only if something changes meaningfully)

Slow Loris Larry said...

Keith Weiner has just put up a most interesting post 'Don't Trade Last Week's Silver Story!' on his Monetary Metals blog: http://monetary-metals.com/dont-trade-last-weeks-silver-story/

As well as some clear definitions of 'basis' and 'cobasis' and what they signify, he shows what has recently happened in the silver futures market in terms of Backwardation.

victorthecleaner said...


It is a pity that Keith Weiner thinks that backwardation indicates a shortage of gold. That's rubbish because there are some 150000 tons available above ground. No harvest, no draught, and the stuff is pretty durable and doesn't get stale after a couple of days if you forget to refrigerate it.

The spot price is the result of supply and demand right now. If "demand is bigger than supply" (shortage?), then the price rises until the market clears, i.e. until supply and demand at that price are equal.

The term structure, i.e. the basis and cobasis, are determined by arbitrage between the spot and the futures market. The basis (up to the spread) equals:

Interest rate on an unsecured dollar loan plus risk premium on the dollar loan plus storage expenses for the gold minus risk premium on an unsecured gold loan.

Arbitrage works as long as
a) if there is a mispricing it is possible to buy gold now and store it for a while (and enough storage capacity available)
b) if there is the other mispricing it is possible to sell gold now and buy it back forward

Since there are at least 150000 tons available above ground, the only way the arbitrage can disappear is that the futures market gets illiquid. The spot market never is. All of these 150000 tons are for sale at some (perhaps obscenely high) price.

The second problem with Weiner is that he thinks that spot gold is physical gold. It isn't. Spot gold is largely unallocated gold. So term structure arbitrage should be perfect as it is paper vs. paper. No storage, no transportation involved. As easy as trading any currency pair.

So why can GOFO get negative? Well, just take a look at the no-arbitrage formula for the basis and think about which of these terms might make it negative.

No wonder the goldbugs are constantly losing money in the futures markets.

Victor

Jeanne d'Arc said...

@VtC: an outstanding comment. I wish I could have drafted that as clearly as you have just done. Bang on the money.

S Roche said...

I rather liked the comment too, but will refrain from making any complimentary remarks due to its generally dismissive and disdainful tone.

Slow Loris Larry said...

End of Trading 23 Aug 2012:

GOFO less negative, M1-3 average -c$0.093; M6 negative only c$0.01.

Basis (Cash minus Aug) positive c$15.

Backwardation in Sep (c$0.5) and Oct (c$0.1) only, so almost none.

Slow Loris Larry said...

Dave Fairfax's 'PM End of Week Market Comentary - 8/24/2013' posted @ http://www.peakprosperity.com/discussion/82709/pm-end-week-market-commentary-8242013, reminds us (or me, anyway) of Tom Szabo's 2007 article on 'Gold and Silver "Leasing" Examined': http://www.silveraxis.com/commentary/gold_silver_leasing.pdf

I would be most interested in informed opinions on what Tom ('silverax') had to say in his lengthy and most detailed analysis of he logic of Gold leasing, swaps, carry trades, etc, etc.

VtC? KD? Even FOFOA?

Kid Dynamite said...

hey SLL - I happened to randomly find myself on this post today, and I had something for you to ponder unrelated to the question you just posed:

I am surprised that I have heard nary a whisper of the fact that the tiny (50c) backwardation on the COMEX between the Aug, Oct and Dec contracts disappeared on Friday when gold spiked.... just something to think about.

note: I am talking about the Aug bid vs the offer on the other contracts (that's how one would take advantage of this "arbitrage" - sell the Aug, buy the outer months)... but the Aug volume was tiny, so i'm not saying that a big party stepped in to actually do the arbitrage: i'm saying that the arbitrage opportunity disappeared...

anyway...

Slow Loris Larry said...

@ kkowalik

There seems to be some conflict between your messages and my slowlorislarry@fastmail.com.au email client.

I tried to reply to your first message, but my screen went blank, and I could not see your message thereafter.

Same situation with the last one you just sent.

Please try to send a message from another email address, or try some thing else.

I am not ignoring you, I just cannot reply to your messages.

SLL

Slow Loris Larry said...

For the record, Friday 30 August 2013:

GOFO is negative in M1, only, to the tune of a mere -0.00667.

The Basis: COMEX futures minus cash) is all positive.

Backwardation: Miniscule for October and November versus September, only.

Looks like this episode is all but over.

SLL