Thank God for the manipulation. Could be collateral stress? We get to buy at lower prices. I just wish they manipulated the price of food, clothing and shelter lower as well. – Comment from a reader
There’s no question about it – the Fed and the Government’s taxpayer-funded Exchange Stabilization Fund have all of the markets under “lock-down” control right now. The real economic data plus the geopolitical risk becomes worse by the day. And yet, just when it looks like the stock market is going to drop off a cliff, out of nowhere the S&P 500 futures take off straight up as if launched from an anti-aircraft missile launcher. Similarly, every time the precious metals start to make a serious move higher, HFT-driven mini-flash crashes start to occur repetitively during the least active periods of overnight trading and always after the Shanghai Gold Exchange closes. The engineered flash crashes serve the purpose of triggering an avalanche of selling from large hedge fund “black box” computer programs.
But the oppressive and illegal manipulation of the gold market is starting to show unintended consequences again. At the beginning of April the LBMA (London) gold forward rate (GOFO) turned negative again. It’s been getting more negative every day this month. The GOFO is the interest paid on dollar/gold swap transaction. Ordinarily, it involves a party who pays interest to borrow dollars, using gold as collateral. But when there’s a shortage of physical bullion, it means that one party needs to borrow gold and will pay interest plus put up dollars for collateral. It means that, at the current moment in time, it is perceived to be riskier to hold dollars than to hold gold.
Because there is a shortage of physical gold, the lender of the gold is being given the market value of the gold in dollars as collateral plus a rate of interest to compensate him for the risk that he might not get his gold back. Think about that for a moment.
I just published an article on Seeking Alpha which discusses the GOFO and two other significant factors which suggest the possibility of big move coming for gold something this spring/summer. You can read it it here: GOFO, India and China.
With respect to the frequency of a negative GOFO: From January 1, 1989 – July 7, 2013, there were only seven days in which a negative GOFO was observed. But since 7/7/2103, GOFO has been negative more than 55% of the time. In other words, the market for physical gold that can be delivered into the custody of the buyer has never been tighter.