Gold Bullion Bar Backwardation Is Truly Historic

“Central Banks stand ready to lease gold in increasing quantities should the price rise.”  - Alan Greenspan, “The regulation of OTC derivatives,”  Before the Committee on Banking and Financial Services, U.S. House of Representatives, July 24, 1998

James Turk did an interview with Greg Hunter of USAwatchdog.com (interview link) in which he asserted that the current backwardation in the London gold bullion bar market is historically unprecedented.   In response to this, my friend and colleague “Jesse” of Jesse’s Cafe Americain asked me if this was indeed the case.

(For those who want a detailed explanation on what the GOFO is, please see this article I wrote last August:  What Is GOFO And Why It’s Now Bullish For Gold).

My first comment in response to Jesse was:  “First let’s define the “backwardation” to which he (Turk) refers.  The paper market, the Comex gold futures, is not in backwardation.   He’s referring to the LBMA negative GOFO, which is backwardation in the sense that someone is willing to pay money to borrow physical gold bars AND collateralize that loan with dollars.  This implies that physical gold in hand is worth more than the promise to deliver physical gold in the near future, which is backwardation.”

In terms of the relative scale of historicity that can be applied to this current period of backwardation, I knew that between now and last July the amount of time the GOFO rates have been negative was unprecedented since 1999.  But I went digging around for the historical data to define “historically unprecedented.”

It turns out that, going all the way back to 1989 (I can’t find any data prior to 1989, which is probably because gold leasing didn’t really go into full swing until then), there’s only been two other instances when the GOFO was negative.  It first occurred in the last two days of September 1999.  It lasted only two days.  The second time was November 20, 21 and 24, 2008.  The backwardation lasted for three days.

When the GOFO went negative last summer, it began in early July and lasted for nearly 3 months.  It went positive for a month then negative again for over two weeks (November).  It also spent half of December negative.  Since the beginning of 2014, the GOFO has been negative for 34 of the 81 days that the LBMA has been open.

Turk’s commentary (as always) in the interview linked at the top is well worth reading.  The implication of the long stretch of time in which the GOFO has been negative since last July is that,  despite being covered up by the extreme degree of price manipulation in the gold market using paper Comex futures, there is a severe strain on the ability of the bullion banks to deliver physical gold bullion into the massive accumulation by buyers in the eastern hemisphere.  At some point the amount of pressure building up – think of it as being the equivalent of trying to stuff a beach ball into a test tube – is going to result in a massive upside explosion in the price of gold.

 

10 thoughts on “Gold Bullion Bar Backwardation Is Truly Historic

    1. I’ve finished one report and submitted it to my web guy and I’m working on a second. As soon as I finish the 2nd one I’ll get on my web guy’s back to install the enhancement I need. Hopefully I’ll be able to start within 2 weeks.

      1. That will be interesting to see. GSV has news out this AM. Gold getting socked and not rocked this AM again for no good reason. Depressing to my portfolio and brain. Seems like despite statements by many gold and miners not going anywhere but down or flat except specific situations like PLG.

        1. This sector definitely requires the patience of Job. Unfortunately, the catalyst that overruns the manipulations and triggers a moon-shot in the metals and miners may well be the catalyst that makes life in this country unbearable.

    1. There’s a lot of misinformed views. Higher interest rates would be correlated with rising price of gold because it means inflation is finally being priced in to the yield. HOWEVER, I think if rates rise now, it means the Fed has lost control of the financial system and gold will go parabolic. The ONLY reason rates are as low as they are is because of the enormous degree of Fed intervention in the bond market.

  1. Dave, if GOFO is so bad, why isn’t gold going up and still bottoming? Physical demand seems doing very little to price of gold while future trading just simply creates havoc on gold.

  2. I might be wrong so please forgive my error in judgement on this-

    Back in the inflationary seventies, interest rates and gold were both going up, not at the same rate of increase (gold went up and down during that decade) but both ended up higher by the end of 1979.

    It took a poison pill of double digit interest rates to finally force inflation under control via Volcker’s FED leadership, but the cure nearly killed the patient i.e. a deep recession for the US Economy.

    I believe (and this is just my belief) that what happened next was:

    1. With interest rates so high, investors decided to park their money in CD’s rather than gold. They preferred getting money coming in rather than buying and then selling to get their profits.
    2. The government and FED realized that if they didn’t make the dollar look good and gold look bad, the public would lose faith in and abandon the former and flock to the latter, so gold had to be forced down.
    Anyway, that is how I believe things took place in the seventies up until 1980.

    If history is any guide, gold will still keep going up as interest rates go up just like in the seventies. The only thing that will derail gold’s rise today would be a repeat of Volcker’s actions, but the end result would be economic ruin for the dollar. Imagine what would happen if Treasuries had to pay 8%, it wouldn’t bode well for the budget to say the least.

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