This (the price correction in gold) is good news. Gold is doing what it should do. And it is giving us another good opportunity to buy a life vest before the boat sinks. – Bill Bonner, LINK
Something curious and very rare has occurred in the “bowels” of the gold market. The Gold Forward rate (GOFO) has gone negative. This has occurred only four times in the last 14 years. Each time a negative GOFO has been connected to significant bottom in the gold market: in 1999 a secular transition from a 20-year bear market into a yet-undetermined in length bull market; in 2000 + 2001 it correlated with a move that lead to the 1st cyclical bull market high of $1020 in 2006; in 2008 it correlated with the price correction from the 2006 high and marked the climb to the all-time record cyclical high of $1900 in 2011; and now.
A negative GOFO rate means that gold in hand today is worth more than U.S. dollars in hand. Think about that the next time someone tries to explain to you why gold has no value. This is a sophisticated transaction being executed by sophisticated banks. They are not in the business of leaving money on the table for others. If they are willing to pay money to get their hands on gold, it means they are placing a higher value on gold than on dollars. That’s just the law of the time value of money in action.
The severity and degree of manipulation that has been required to “help” along the current 2-yr price correction in the metals sector is testament to the degree of desperation the Fed and the Government are feeling in order to try and support the dollar’s use as the global reserve currency. Like all good things, that is coming to an end. The negative GOFO rate being observed right now is in unprecedented territory. The previous three observations were one and two-day affairs. Today is the third day in a row we are observing a negative GOFO. That this is occurring is also testament to the degree of manipulation that underlies the market right now.
Why? You can read what the GOFO is and my analysis of what it means here: Why The GOFO Is Very Bullish For Gold
In short, the GOFO is the interest rate that is used in a gold-for-dollars swap transaction. Someone who is long gold and needs dollars for short term use can use his gold as collateral and get a much lower interest rate in borrowing the dollars. But when the GOFO is negative, it means that someone with dollars needs the short term use of gold and is willing to pay the owner of the gold a rate of interest plus use dollars for collateral.
What it really means is that the massive shortage of good to deliver 400 oz. bars we’ve been hearing about in Europe, Asia and the Middle East is true. It tells us that not only is delivery situation for 400 oz bars extraordinarily – maybe historically – tight, BUT the western Central Banks are having problems finding enough gold to alleviate the situation. Also, this is the second day in a row GOFO is negative out to 6 months and the 1 month negative rate has become more negative 3 days in a row.
Just like the previous three times, I am confident that the current GOFO means the bottom of the 2-yr correction in gold and silver is over and that there is a very high probability that the next cyclical move higher will see new records for both the price of gold and silver.