The Golden Backwardation Rabbit Hole Gets Deeper: Subzero GOFO Slide Accelerates

Tyler Durden's picture

Yesterday we described the historic inversion in the Gold Forward Offered Rate, where the 1 and 3 Month GOFO rates sliding into negative territory for the first time since 2008 and 1999 respectively. Today, using the latest LBMA rate update, we observe that the gold backwardation is accelerating, and now the 6 Month GOFO has also joined the complex into sub-zero territory.

This is how we summarized the disturbing observation in the chart above, which as we said yesterday may be one of many things:

  • 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

The answer for now is unknown. What is known is that something very abnormal, and even historic, is afoot at the nexus of the gold fractional reserve lending market.

Today, the golden backwardation story goes mainstream, with the FT catching up:

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.

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Bay of Pigs's picture

"A shortage of physical gold for a non-bullion bank market participant"

My money is on that one, even though "all of the above" could be accurate.

ghengis86's picture

Agreed. There's plenty of dollars out there thanks to Crtl P

Oh, fuck you Bernanke!

Concentrated power has always been the enemy of liberty.'s picture

There's plenty of gold, it's just not in the places that it should be.

LawsofPhysics's picture

Just the same, mind if we see that gold as well as the quality of all that other "collateral"?

Divided States of America's picture

Its obviously that short term yields are rising because either there is a lack of WORTHY collateral out there OR that the quality of the collateral out there STINKS. The Fed has reached the breaking point in this experiment and they have lost all control of everything.

nope-1004's picture

Losing control, not lost yet.  But the air reeks of desperation, for sure.

 

cifo's picture

I especially liked this remark: “It has piqued people’s interest”.

I hope it's true.

Scarlett's picture

I so eagerly await for the "From conspiracy theory to conspiracy fact" on this one...  cmon....  blow up already!

Pladizow's picture

"Bottom line, whatever is causing the dramatic collapse in liquidity and/or collateral, it is certainly not letting up."

LOOK EAST!!!!

DoChenRollingBearing's picture

This whole negative GOFO is worth monitoring without doubt, but it reflects futures and price of paper gold.  A sustained negative GOFO would be of more concern.

TruthInSunshine's picture

The world's most interesting man says:

 

"I don't buy always buy precious metals, but when I do, I insist that I receive...you know...the actual fukkin' genuine thing I'm paying good fiat for."

Herd Redirection Committee's picture

Look, you have to pay more for gold delivered today, than you do for gold delivered in 1 month.

What does that tell you?  You are paying a premium!  Meaning, you are worried there will be no delivery in 1 month?  

0z's picture

Perhaps the US' fear instillation is waning.

The market is considering that DC might lose control of one or more of their important colonies (Read Japan, southern Europe).

In which case, a wolrd medium-of-exchange monopoly starts to crack harder.

The market will never care how much physical gold there is or isn't in the Warlords' vaults,

as long as it believes they have the firepower to go get whatever amount of metal they might need whenever they so desire.

It's all about the Violence, folks.

P.S: US-based citizens' so-called personnal gold really isnt considered "their possession" by the marketplace. If they want it, they WILL come get it!

ghengis86's picture

Okay...who is that little pussy fuck that went through and neg reports everybody?

That you Ben? Kevin? Choomy-chalk?

Man up you limp dicked cunt!

Pinto Currency's picture

 

Negative GOFO at the LBMA indicates a physical problem.

Perhaps the Brits realize that Carney actually is batshit crazy and thinks he can achieve "escape velocity" by printing money.

Extraordinary physical demand for gold worldwide can only lead to further price decline.

 

laomei's picture

For every buyer there's a seller. Look who's doing the selling. It's the big banks that are dropping it like a hot potato.  Why the lower price on gold a month later?  Because they are shorting the hell out of it, it will go lower, and in the meantime they are selling for a higher price than it will be in a month, discount or not.  This isn't a "bargain", not by any standard.

 

Here's the sign to watch for, the big banks stocking up on more gold.  Till that happens it's just going to be essentially flat, or it's going to continue falling.  The paper makes it too easy to suppress.

fourchan's picture

its just a transfer of gold confiscated from americans decades ago to china by the roth system.

saveandsound's picture

@TruthInSunshine:

so who is the "world's most interesting man"?

RockyRacoon's picture

Understatement of the week (year?):

“It has piqued people’s interest”.

That translates into:  Many traders are scared shitless.

Alexandre Stavisky's picture

I wonder how they are going to teach finance/economics in the future.  With every distortion caused by money unpinned from any constraint.  In my youth, there was only the communisim, socialism, mixed economy, market economy, free market economy dynamic.  Can't put the genie back in the bottle.  How to snow over another generation of youth once having seen the open racketeering collusion of state/money?

Gold has always and will always be the "go to" elemental backstop.  All think that the constructs of CBs are the ultimate backstop.  By what?  Coerced assumption upon all the acquired skills and labours and reserves of the "liberated" serfs.  But all the CBs of the world are in a fierce, if camouflaged, strategic withdrawal due to the press of superior foe:  USURY.

The growth paradigm which presumes upon the exploitation of resources, labour, entrepreneurial ability, saving/consumptive habits of the commons has been tapped out; even more, it has been pushed far beyond its carrying capacity.

Now is the time of the printing press, where weaning mankind from coin or the defining and constraining baseline of economy toward paper proxy is pushing its legitimacy by full abuse of confidence and promise-making.  Truth be known, the global inhabitants are shaking in their hovels, even the pirates are shaking in their purloined palaces.  This long-time-in-the-making and long-time-in-the-playing out of a strategic withdrawal by the nations of the world is a wonder of wonders.  Moving from country to country, like farmer from sown to fallow fields, the reserve currency holders have experienced their inevitable rise, pinnacle, and declines.  But, the USA wunderkind is unlike any other by uncounted factors of dimensions.

Field commanders keep sharp eyes upon all their units.  The greater coalition being a composite of all lesser groups.  Tyranny of military command is a necessity in face of death.  Tyranny hates nothing more than mutiny.  But mutiny happens in the peaceable spaces wherein a lesser organization organizes and sweeps out a greater to prosper THEIR self-defined need.  No one dare call retreat in the face of all superior force on the battlefield, mutiny.  It is ROUT!  And the currency wars are nearing a final chapter of the endgame!

Strategic withdrawal which is too slow in the face of fortified opposition,  who are fearless-due-to-conquest bloodlust, become a killing field.  Wise combatants who have seen many conflicts and sense that dense push in the fog of war, make hasty but structured retreat.

When that retreat is savaged by a better positioned, stronger foe, what is left?

ROUT!  Run for what little lives you have left.  No training, no fine assembly, no organizations among men remain.  So overwhelming has become the physics or dynamic action of the field that all higher order mental/physical constructions are abandoned.  EVERYMAN FOR HIMSELF.

The only remedy for disorderly retreat or full rout?  Superb Commander!  Rallying point.  Organic man falling back upon training.  And a rallying point of such soundness as to hold the mercurial confidence of newly defeated, nearly killed cowards.

Financial and monetary strategic withdrawal shows its symptoms everywhere.  DO NOT BE THE RANK-AND-FILE WHO FALL TO THE ATTACKING VANGUARD FOOLISHLY BELIEVING IN YOUR BETTER BATTLEFIELD MANAGEMENT.

When the full army begin to rout (as is evidenced everywhere globally), they will not rally to paper currencies mocking dead presidents or heralding (like Montefiore of Judea) sneaky conquest.  They rally, IF THEY RALLY, only upon the greatest rock, the most defensible rock, the utimately rallying spot where all renewals draw strength.

GOLD! Geld! Kin! OKane! Oro! Gulden! even Sterling!  The rest will be pitched with the dead, rotten, decaying, offal and execrement of the financial field of folly! To the worms.

exartizo's picture

how poetic and graphic. :)

well written!

Scarlett's picture

They'll teach like today:  mostly about WW3.0 and the previous collapse period being mostly a sidenote.

terryfuckwit's picture

in civils and land survey we are rigorously tought about the risk of dangerously cumulative errors from using over elastic tape measures. even euro standard steel bands can be verified against vanadium bands which have superior lower expansion coefficients to heat. Yet every day i read so called phd fuckwit economists procrastinating about data based on the ultimate stretch armstrong bastardized fiat dollar unit of account...History will so mock these retards

Oh regional Indian's picture

Yeah, look here. The Indian govt. is fighting tooth and nail to keep gold OUT of it's hungry buyers hands.

Who is pulling the strings..... note gold, dollar and oil are up together, of a sudden.....

 something wicked this way comes...

AssFire's picture

Had to up vote you for not posting a link to your blog!

Tinky's picture

Funny! But the Bradbury reference was worth something too.

AllThatGlitters's picture

Mondern Version:  

"Beware my friend. shit winds are a comin."

http://www.youtube.com/watch?v=q4iDurCE3Yk&feature=related

Manthong's picture

good observation, ORI

maybe the spirit  of Gresham is alive

kareninca's picture

He's from India.  He's probably actually read SHAKESPEARE:

The phrase "something wicked this way comes" originates in Act IV scene 1, line 45 of William Shakespeare's play Macbeth. The speaker is the second witch, whose full line is, "By the pricking of my thumbs, something wicked this way comes." (Wikipedia)

Ray Bradbury, good grief.

Manthong's picture

And thus I clothe my naked villany, … And seem a saint, when most I play the devil.” (King Richard III)

stacking12321's picture

what blog?

post a link, please!

gtb's picture

I, for one, appreciate your attempt at humor. 

stacking12321's picture

kind of you to say so.

it's a thankless job, being a contrarian.

 

DosZap's picture

Yeah, look here. The Indian govt. is fighting tooth and nail to keep gold OUT of it's hungry buyers hands.

 

Oh Regional, and just how is that NOT working out?, lol.If Joe 6 Pack in India cannot afford Au,they are piling into Ag.So the Goobermint, is still screwed as far as propping up the currency value.

Catch 22.

fiddler_on_the_roof's picture

No, Indians are not piling into Silver. They are going into smuggling route, they are familiar with. smugglers supply jewellers.No Govt can fix this.

Silver imports are dropping in India. You just made a statement -"If Joe 6 Pack in India cannot afford Au,they are piling into Ag" without any data.

 When Gold price goes down, Indian just buy more of it or if Govt restricts, they just smuggle it.

Even "Oh regional Indian" does not know what he is talking about.

 

If paper price crashes when GOFO is negative, Gold bugs will vomit their Gold. I hope I will have the nerves to hold tight as FOFOA says.

tmosley's picture

Dropping from WHAT? They imported the entire world's silver production a couple of months ago, all on the books and public-like.

SRSRocco had a good write up on it, and he isn't the only one: http://srsroccoreport.com/huge-indian-silver-imports-on-pace-for-new-rec...

So now why don't you provide your source for your claim of dramatically falling silver imports?

merizobeach's picture

That's fascinating.  At 2400 tonnes from Jan - May, India has imported 20% of the world's silver production so far this year.

DeadFred's picture

Gold bugs do not vomit up their gold, they have it pried from their cold, dead hands.

fonzannoon's picture

I can't think of any other reason DS. The only think I thought they had control over was short term yields. Apparently not.

Harbanger's picture

These central planners in charge are not as smart as most people think, we read too much into their actions.  Who are they really? They were raised as "priveleged" over-awarded spoiled bastards that are going to cry uncle when their plans backfire.  Their recent trade agreement plans  to create a false king dollar is going to smack them in the face when they realize they have no power over the global markets. 

RockyRacoon's picture

Here's a tidbit for those who will have to buy/sell their precious metals at some time in the future.  The current legal situation on taxation.  At least until the rules are changed that is.

http://www.coinweek.com/news/industry-insider-irs-reporting-rules-for-cash-transactions-and-precious-metals/

IRS Reporting Rules for Cash Transactions and Precious Metals
DoChenRollingBearing's picture

+ a really big one!

Thanks, Rocky!

Herd Redirection Committee's picture

"No deaths have been directly attributed to the radiation released by the accident, but it has displaced tens of thousands of people and left large areas of land uninhabitable, possibly for decades."

Well isn't that nice. /s

Its Only Rock N Roll's picture

Indeed they have.  Since we do not have true price discovery in markets the realization of such and lack of liquidity will continue cause major dislocations in the markets.  Equities will have their day of reckoning. 

Harbanger's picture

The sole purpose of an unmanipulated market is price discovery.  That's when we discover the BS they're selling ain't worth the paper it's printed on.