They can expand leverage [gold hypothecation, leasing, futures, forwards, derivatives] freely given the craven silence of the regulators and professional courtesy amongst the looting class. But they cannot create more physical bullion, and therein lies their limits. – “Jesse” of Jesse’s Cafe Americain
The following commentary is just in case anyone was wondering about the existence of “backwardation” on the LBMA, which indicates that the immediate and near-term supply of gold (or silver) is extremely tight. Backwardation occurs when the spot price of gold is above the future or forward price of gold. It means entities that need or want gold immediately are willing to pay more now for gold rather than buy a futures contract or LBMA forward at a lower price and wait for a delivery promised at a future date.
Conversely, it means that current holders of gold are unwilling or less willing to sell their gold now and buy a future/forward at a lower price. They are unwilling to risk the possibility that they may not receive their gold at that future date.
In its essence, backwardation means that investors prefer physical gold over cash. It also reflects a distrust of the ability of a seller of futures/forwards to deliver gold at the pre-specified date.
But the GOFO rate is an even better indicator of backwardation and scarcity of immediate supply of gold. GOFO is probably the “purest” form of measuring the degree to which shortages exist because, unlike leasing, futures and forwards, the entity borrowing the gold from the lender has to put up full cash collateral. It tells you that immediately available gold is not around and it reflects the fact the borrower is willing to not only pay interest on the gold borrowed (like leasing) BUT is willing to collateralize the valued of the loan 100% with cash.
GOFO transactions still occur and GOFO rates are available even though the LBMA intentionally stopped publishing the GOFO rates in January this year. The following data was hypothecated from a Commerzbank daily report on the London bullion market:
You’ll note that the GOFO rates are negative out to three months. This tells us there are shortages and expected shortages of available gold out to three months. The higher rate for 1 week relative to 3 months measures the relative tightness of the market but it also tells us the market is pricing in the probability that gold “might” become more readily available in 3 months. Take care of the problem now and worry about the future in the future.
You’ll also note that from September 22 to September 23 the GOFO curve became more negative. This indicates that the market is growing even tighter. Please note: did not say that wholesale gold is not available in London. But the GOFO rate tells us that the market is not only willing to pay a price to get its hands on gold now – the negative GOFO rate – but the market is also willing to collateralize that gold loan with cash. The negative GOFO rate, in other words, reflects slight hints of desperation.
I would suggest that today’s $23 move up in the price of gold on Comex options expiry day – an event on which gold is usually slammed hard in the paper market – is a direct reflection of the growing scarcity of immediately available “wholesale” gold bars which can be purchased on the global market.