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

Tyler Durden's picture

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!

Said otherwise, the physical shortage is the worst it has been in over a decade, even as the price of paper gold continues to drop!

And for those for whom the topic of GOFO inversion is new, here is how we described the situation last time:

* * *

What is GOFO (Gold Forward Offered Rates)?

GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.

Who provides the rates?

The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Société Générale and UBS AG.

When are the rates quoted?

The means are set at 11 am London time. These are the rates shown on the LBMA website.  To show derived gold lease rates, the GOFO means are subtracted from the corresponding values of the LIBOR (London Interbank Offered Rates) US dollar means.  These rates are also available on the LBMA website.

How are the GOFO means established?

At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.

What are some uses for GOFO means in the market?

They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps.

* * *

Unpleasant similarities with Libor and most other fixed (literally and metaphorically) rates aside, what is known is that under normal market conditions, GOFO is always positive, or in other words gold serves as a money-equivalent collateral for a pseudo-secured loan against paper fiat (USD in this case) hence the low interest rate.

Sometimes, however, normality inverts and the rate goes negative and as such serves as a useful indicator of gold market dislocations. Thus, while disagreements exists, one can safely say that what GOFO is, is simply a blended indicator of liquidity, counterparty or collateral (physical availability) stress in the gold market. Since it is next to impossible to isolate just which component is causing the indicated disturbance, it is prudent to be on watch for all three.

The best known example of a complete collapse in the GOFO rate, is the September 1999 Washington Agreement on Gold, which in brief, was an imposed "cap" on gold sales (mostly European in the afteramth of Gordon Brown's idiotic sale of UK's gold) to the tune of 400 tons per year. The tangent of the Washington Agreement is quite interesting in its own right. Recall the words of Milling-Stanley from the 12th Nikkei Gold Conference:

"Central bank independence is enshrined in law in many countries, and central bankers tend to be independent thinkers. It is worth asking why such a large group of them decided to associate themselves with this highly unusual agreement...At the same time, through our close contacts with central banks, the Council has been aware that some of the biggest holders have for some time been concerned about the impact on the gold price—and thus on the value of their gold reserves—of unfounded rumours, and about the use of official gold for speculative purposes.


"Several of the central bankers involved had said repeatedly they had no intention of selling any of their gold, but they had been saying that as individuals—and no-one had taken any notice. I think that is what Mr. Duisenberg meant when he said they were making this statement to clarify their intentions."

Of course, this happened in a time long ago, when the primacy of Fractional reserve banking was sacrosanct, when the first Greenspan credit bubble (dot com) was yet to appear, and when barbarous relics were indeed a thing of the past, only to be proven oh so contemporary following not one, not two, but three subsequent cheap-credit bubbles which have vastly undermined the religious faith in fiath and central banking, sending the price of gold to all time highs as recently as 2011.

Another subsequent negative GOFO episode occurred in early 2001, which coincided with what has been rumored to be a speculative attack and reversal of the futures market. However, while pushing 1 month rates negative, 3 month rates remained well positive.

Indeed, the only other time when both 1M and 3M GOFOs were both negative or almost so (3M touched on 0.05%) was in the aftermath of the AIG bailout following the Lehman collapse in November 2008.

Fast forward to today, when all GOFOs, from 1M all the way to 6M just went negative.

And while both Antal Fekete and Sandeep Jaitly, traditionally two of the most vocal pundits in the arena of gold backwardation and temporal and collateral gold market arbritrage, are likely come up with their own interpretations of what may be causing this historic inversion, the reality is that one can't know for sure until after the fact. It 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 is once again afoot at the nexus of the gold fractional reserve lending market. 

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papaswamp's picture

Waiting for the price whiplash bitchez.

jeff montanye's picture

"since just after the Lehman bankruptcy precipitated AIG bailout in November 2011."

that should be "2008".

it was wrong in the original post and it is still wrong.  how does this happen?  who edits this stuff?

mkkby's picture

The negative gofo has nothing to do with phys shortages.  It means collateral is tight, and gold is being plegded for that purpose. 

Don't be surprised if there is some sort bank or fund failure in the near future.  Somebody big is scrambling for unencumbered collateral.

Winston Churchill's picture

Look east then.

The paper gold price could/will go to nothing as their true value becomes evident.

It will start mid December, I just can't quite get a handle on how long it will take,

maybe months, maybe overnight.

Chief Kessler's picture

Would you rather eat Ayn Rand's dusty muffin or Jannet Yelen's yeasty muffin? Perhaps a little of both?

centerline's picture

Good thing it is still early.  I just might recover from this disturbing post before lunch rolls around.

Winston Churchill's picture

Jam and clotted cream slathered ?

Goes great with the bottom of a shithouse door, on a mackerel trawler,or so I'm told.,

centerline's picture

Well.  Lunch is now officially scrubbed.

Tinky's picture

Chef Kessler is disappointed. Oh wait – it's Chief

MalteseFalcon's picture

Compared GOFO to the price of gold.  No correlation.  None.


I posted this comment earlier and it was erased.  Strange.

BigJim's picture

Hey! Poolshark posted a list of PM sellers to rebut the 'shortage' meme and started a whole thread, and the whole thing's vanished. WTF?

pFXTim's picture

mmm dusty yeasty's what's for breakfast...


1000yrdstare's picture

Damn Chief, A little of my breakfast came up with that comment...

balanced's picture

I think that Winston could be right. After all the physical price is set by sales of paper. There is already no correlation between the paper price and things like physical supply or demand. Why would we expect that to ever change? It seems more likely that the paper price set on the COMEX will continue to drop until premiums get so high (due to intelligent people refusing to sell real physical at these fictional prices) that some sort of split occurs, and the COMEX price becomes irrelevant. We may even go through a time when there is no clear price - until some new mechanism emerges as the true physical price indicator. In my opinion, that seems more likely that some magical return to an honest market (I use the word return in jest). I think the real question is - how low can the paper price go before it become irrelevant to the pricing of physical metals?

Squid-puppets a-go-go's picture

that split will come from the shanghai gold exchange. 

zerozulu's picture

Why anyone needs physical when paper is available and is plenty. You can make photocopies( xerox) of it if you like and keep you cold home warm in case you don't find any thing to burn.

thunderchief's picture

The market really needed this, when you think about it. The worst things the manipulators could do is keep gold and silver in a range bound trade and bore physical buyers out of the market.

I thought we were there with 20+ silver and 1400+ gold.

This will hopefully bring on mine shu

ZH Snob's picture

wow, the trolls are REALLY on this one.  being as PMs are their sworn enemy, and they can't very well attack pieces of metal scattered all over the world they instead attack its value in the minds of the peasants.

it reminds me of the futility of spam email: those of us who know better simply ignore it.

The9thDoctor's picture

I'm not a troll.  I disagree because I've been watching this PM mania unfold for the last six years, since its bottom $9 after the bailouts.

Silver should have been $150 an ounce minimum, by NOW, according to all of these metal bulls.  They added an extra zero to end of their forecasts.

Instead we get deflation and silver is down 70%.  How is that preserving wealth?  That's why they are talking about their mosin and spam cans, instead of talking about a new house they are building.

If one were to get a crappy "high yield" savings account at 0.9% they would have been better off than this rigged metals game.

As for "value in the minds of peasants" who do you plan on bartering your metals with?  The Rothschilds?  These guys operate in metric tonnes, they don't care about your silly one ouncers.  "Peasants" are who you are going to conduct business with.  These metalbugs cease to amaze me.

BTW, I'm not anti-metals, I am anti doom and gloom pessimism BS garbage.

constantine's picture

Well thanks for joining ZH two months ago so that you can share your intrepid observations of the PM market, Gloom, and Doom before it all happens... wait a minute.

All of the precious metals trolls out here were nowhere to be found when gold was going up but now they're all too cool for school and pontificating on the PM crash that was a 'sure thing' as long as they can share their diatribes with us after it all happened.  And for the record, the guys in the PM community didn't start telling everybody to buy gold or silver when it was at $1,900 and $49.  They started well before that.  

James_Cole's picture

All of the precious metals trolls out here were nowhere to be found when gold was going up but now they're all too cool for school and pontificating on the PM crash that was a 'sure thing' as long as they can share their diatribes with us after it all happened.  

Y'all gotta stop treating this like a team sport, it's not us vs. you. Being bearish on gold doesn't automatically mean someone has a hidden agenda. 

When something moves against expectation people go into denial and start coming up with excuses why. Doesn't matter if it's bonds, aapl, oil, whatever 

Gold + silver remain plentiful, I can buy phyz 1.4% over spot per kilo at local dealer. Any time the price takes a drop people pretend there's shortage, maybe at the LCS but not in reality. 

Squid-puppets a-go-go's picture

what is it about the mint running out of silver that fails to show you there are shortages. what is it about shanghai's holdings reducing 90% over the last year that makes you continue to beleive in abundance?

what is it about americas refusal to return germany's gold that makes you think the US govt beleives theres more than enough gold to go around

you got a wierd way of looking at the evidence, chum

Curiously_Crazy's picture

Not disagreeing with what you are saying in terms of fundamentals (or I'd be playing the paper game). But like James_cole I'm also able to buy silver and gold online (yes even eagles) and pick them up next day if I want. I'm in Australia. There is absolutely no shortage (here at least) at this stage, so why people automatically hit the down vote on the dude is beyond me. The world is a big place and downvoters on this issue don't understand that.

Some of us are just pointing out it's bloody easy to get in our neck of the woods (Note: we are *not* saying this will continue, merely that's it's the case at the current time)



Edit to add: he even stated the 1.x% over spot was for 1kg. so he wasn't talking about ya 1 oz's or fractionals. Seems reasonable to me.

Squid-puppets a-go-go's picture

yer, look, I too am in australia - but the ease with which we purchase is a function of being the worlds 2nd biggest gold producer (not sure where we are in silver). Ours is not a representative buying experience of most of the gold purchasing world

BigJim's picture

 what is it about the mint running out of silver that fails to show you there are shortages.

Just because the mint ran out of silver doesn't mean there's an overall shortage of the stuff - it just means the mint failed to anticipate how many coins it would sell.

what is it about shanghai's holdings reducing 90% over the last year that makes you continue to beleive in abundance?

Do we know Shanghai's holdings are representative of how much silver is available in the world? How?

I'm a believer in metals (medium-long term) but I've been hearing this 'supply is running out' bullshit ever since I took an interest in the subject, 6 - 7 years ago. A lot of people have lost a lot of money because of the PM shills' breathless claims. OK, no one can predict where any price will go, but you wouldn't have known that listening to these fuckers.

Over at King World News - the Mecca of PM assclowns - they're running the following stories:

Worried About Gold / Silver Smash - This Is Truly Terrifying Today King World News is featuring a piece by a man whose recently released masterpiece has been praised around the world, and also recognized as some of the most unique work in the gold market. Below... This Will Trigger Collapse & Shockwaves In Global Markets

Today a 42-year market veteran spoke with King World News about the remarkable event that is going to trigger collapse and send shockwaves in global markets. Below is what Egon von Greyerz, who is... Panic Gold & Silver Selling Surprises Largest Dealer In U.S.

Today the man who owns the largest gold and silver dealer in the United States told King World News he was surprised by the amount of panic selling in gold and silver taking place at these levels.... Wild Trading In Global Markets Reveals Dangerous Trend

As global stock markets continue their wild ride, a troubling trend is now emerging! Pierre Lassonde’s Shocking Comments On Gold & Silver Plunge

On the heels of another plunge in the gold and silver markets, today legendary Pierre Lassonde stunned King World News when he openly discussed manipulation of the gold market. Lassonde also spoke... Shocking Facts About Today’s Smash In Gold & Silver

Today one of the top people in Hong Kong spoke with King World News regarding shocking facts about today’s smash in gold and silver. Hedge fund manager William Kaye, who 25 years ago worked for... Stunning Interview From Market Legend On Gold, Oil & Stocks

Today a legendary trader and investor, who recently called the bottom in the U.S. stock market with remarkable precision, gave King World News a stunning interview about what surprise action to expect... We’re Close To One Of The Most Dramatic Reversals In History

Today an acclaimed money manager told King World News that we are very close to seeing one of the most dramatic reversals in any market in history. Stephen Leeb also spoke about China, Russia, and the... 60-Year Market Veteran’s Predictions On Gold, Silver & Stocks

Today a 60-year market veteran sent King World News three absolutely incredible charts as we head into the end of 2014, and he also discussed his predictions for the major markets, including stocks,... Richard Russell Warns We Will See Violent Action Ahead

Today the Godfather of newsletter writers, 90-year old Richard Russell, warned that we will see violent action ahead. The 60-year market veteran also covered the Great Recession, the Bank of Japan,... As Gold & Silver Rout Continues, Physical Demand Is Stunning

With crude oil tumbling over $2 a barrel and the gold and silver rout continuing, today James Turk spoke with King World News about the ongoing smash in gold and silver and what is happening in the... Silver Is One Of The Greatest Opportunities In World History

Today a man who has been involved in the financial markets for 50 years told King World News that the silver market represents one of the greatest opportunities in history for investors. John Embry,...

with the usual suspects - Andrew Maguire, Eric Sprott, Egon von Greyerz. Richard Russel, all saying the same shit they were 6 years ago. I swear to God they are the most shameless hucksters. I don't recall ever reading an apology from any of these people for getting their calls so wrong.

I'll bet we're all here in 10 years saying the same shit, with gold languishing at $800 and silver bouncing around $9. We'll be sipping our $38.99 lattes and reading how the Fed are concerned about sub 2% inflation and how QE47 has been a smashing success and wincing every time we hear gunfire as the 'our' militarised police suppress the food riots.

Shaznardickleze the Doon's picture

You do realize gold and silver are a currency that is not fiat. The delusion is thinking you're better off trying to find a yield that is comperable to value in hand when black markets run the shit show.

constantine's picture

Teams? There aren't any teams? of course their are.  We know that governments around the world intentionally create confusion on topics important to them.  These kinds of posts popped up all over the internet during the PM crash.  Their is clearly a propaganda campaign against the ownership of PMs.  There's no doubt in my mind that there are bankers' minions creating confusion on a variety of financial topics and one of the favorite places to go is the comment sections of financial blogs.  So, yes, you're damn right there are teams.  

My PM holdings are slightly in the red for now but my stock holdings are doing very well and have me well into the black overall.  I don't own them (stocks) because I think that the economy is anything other than trash.  I own them because the financial elites NEED them to go up so that they can finance their astronomical deficits with capital gains tax revenue.  This of course amounts to the 'money fairy' hope for a positive outcome.  Hopefully, I'll be smart enough to get out before the entire system implodes on itself.  So there's no need to talk to me about 'denial' and 'excuses' but thank you for offering your wisdom.  I've been in investing for a while and this isn't the first trade to have gone the wrong way on me.  I have ZERO intention of selling any PMs as they serve a vital role that only they can manage... an asset with no counterparty risk and, in my opinion, if you've lived in the last few decades and don't see the need for that in a portfolio, it is you that's in denial.  See, the biggest problem between those arguing these topics is that it seems to me that the 'teams' have gone all-in on either PMs or stocks, etc.  There never seems to be a middle-ground guy who notes that one can own all of the above.  However, I can guarantee you that if everybody owned 10% in PMs, the price would go ballistic.  This is what they're trying to avoid.  The market is so small that they need everybody to own zero; a tough dilemma.   

Talking about shortages, there certainly aren't any now and my post had nothing to do with that fact.  However, with even a slight demand for the stuff, a few smallish entities could buy up the worlds' supply.  The market for PMs is tiny.  This is why the propaganda campaign against them is so intense... but I suppose now you'll go Martin Armstrong on me and try to suggest that governments don't care or worry about precious metals and that they're irrelevant, right?  Give me a break.  It's the potential for shortages that is the largest problem.

mygameon's picture

I hold some physical for the same reason I grow my own food. Because it is mine and I can. No further reasoning would be required.

Shaznardickleze the Doon's picture

Silver stacking peasents is what made this country great. All it takes is a stack of silver and a militia worthy fire arm. You're invited. Otherwise join the Rothschilds fiat regimes without a stack and a gun. Your choice. The latter sounds like a trap.

Silverhog's picture

and........   price continues to go down. Hum....... am I missing something? 

Cognitive Dissonance's picture

In a centrally planned world the worst the shortage is the lower the price becomes.

Of course actually purchasing at that low price is near impossible. Remember the long lines for cheap TP in the Soviet Union?

power steering's picture

There's no shortage. these minters are plays 3 card monte with yer haid Rufus!

Ghordius's picture

yes. The Vampire Squid Firmly Attached To The Face Of Humanity is telling you to sell. Obey The Squid. Meanwhile, Negative GOFO times are interesting times

Kirk2NCC1701's picture

If the Squid is trying to get "Folks" to sell and they do because they're getting hungry, I'd say it's time for Calamari. Just as an appetizer. And go from there.

JailBank's picture

This is a paper world now. My Farmville farm is worth so much more than my Grandma's actual farm. Can't wait to get home and get my hands in the the 1's and 0's makes me feel alive.

GOSPLAN HERO's picture

I'm seeing lots of gold and silver coin "out of stock" signs on PM dealer sites.

power steering's picture

What's "out of stock" are buyers. 

agstacks's picture

What's "out of stock" are buyers of the paper PMs. FIFY

Physical sales just hit record highs.

power steering's picture

Physical sales just hit record highs.

At FIVE years lows in price!!!


YA'll naid ta avey rage in Rufis

forwardho's picture

Whats out of stock are those willing to sell at these prices.

For every buyer there must be a seller.


power steering's picture

You went on spring break to gan pappy's cabin in the minney soda pines during Econ 101

lakecity55's picture

Some dealers may be sitting on their stash. Either way, you are looking into a potential fizz shortage.


esum's picture

no "shortage" of silver or gold... in fact there is and OVERSUPPLY ... hence the PRICE drop...

Jaspergers's picture

...what I'm hearing you say is that you didn't read the article but wanted to post something pm-bearish coz that's how you do. 

(unless I missed the sarc in which case +1...)


power steering's picture

What you're hearing is a man grounded in fact. but since you're aren't so grounded keep dreaming of $1800.