Wednesday, July 10, 2013

GOFO Explained And Why It's Now Very Bullish For Gold

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.


  1. Interesting interview on system.

    Bill discusses the two simple solutions to fix the economy of every nation.

  2. Dave, I have an off-the-topic question. A lot of people, including Jim Sinclair, seem to worry about OTC derivatives. They think that if rates went up, banks would suffer billions of losses and demand bail-ins. But how do they know which side of the trade banks are on? For example, in the case of a plain vanilla interest rate swap, banks can pay fixed and receive floating. If that's the case, when rates went up, banks would make billions of profits. Rising rates would be good for banks.

    1. Doesn't matter which side - it's about counterparty risk. Banks might have an off-setting position on the other side of a derivatives position. If the off-setting position goes bad and the bank is counting on the derivatives position to offset the loss, but the counterparty to the derivative defaults, the bank is fucked.

      But the notional amount of derivatives is many many many many multiples of the underlying asset being "derived." A small blow-up in one part of the universe (think: Cyprus) can cause a magnified shock-wave.

      That's why they're printing so much money to keep Greece, Italy, Spain etc from going insovlent. Look at the damage Cyprus caused. Italy is several times the size of Cyprus...

  3. Oh, Dave, you seem to be a bit hypocritical. On one hand, you have mentioned before that you don't believe anything reported by the banks, on the other hand, you choose to believe those GOFO rates which are reported by banks.

    1. GOFO rates are set by the market. If someone is paying for a gold/$ swap when they should be getting paid, I don't think the wrong rates would be listed.

      Hypocritical? Where's your fucking blog so we can see your writing, analysis and views?

    2. Finally a bitch slap worth watching!

  4. Good video but will never happen. Those in power will collapse the system before we even get enough manpower to stop them. We can keep voting new people in congress over-and-over-again but it'll never be enough (plus it'll take decades to get the right people in - we don't have the time!). Anyone running for President has already been contaminated by the system. And they will still be running the show afterwards as they love power - even if it's a slum-ville.

    Nevada News:

    Felony arrests on or after July 1 of next year include a cheek-swab upon booking — currently, DNA is only collected after a felony conviction. If the arrest is deemed legitimate, the DNA would be cross-referenced with DNA from other crime scenes to see if the person arrested was involved. If probable cause is not established, the DNA is destroyed before any cross-referencing occurs.

    [How will Nevada define "legitimate arrest"? Will this take the place of "probable cause"? Do you really think they will destroy the DNA if you're innocence? If the federal government can violate your rights, should we even trust our state officials as well?]

    Nevada became the fifth state to provide a way for immigrants to legally drive and obtain insurance when Republican Gov. Brian Sandoval signed SB303 into law. The cards will not be available until January, but about $740,000 will be appropriated for the program on July 1. Applicants will need to verify their identity and residence in this state to obtain a card, and the cards must be renewed annually.

    [The illegals around me don't have ID. They go around the corner to a mexican store to cash their checks for $2. A lot of them don't have car insurance and they aren't going to even with this bill. Why put out the extra money?]

  5. We're going down, hold on to your hat (and gold)!
    2008 started in the summer when everyone is rubbing the sand between their toes, seems like we have the same scenario except it is getting worse!
    Thanks Dave, you have a fantastic blog!

  6. Hi Dave:

    Could you comment on what gold and silver lease rates are telling us here and now? I don't know anyone who has a clue, but whenever I see them turn negative, one knows they're going to SLASH US (GOLD AND SILVER).

    Right now they are positive.

    Awesome BLOG.

    Thank you.

    Mark W

    1. Thanks for the feedback - appreciate it. Lease rates are positive.

      GOFO swaps are NOT leasing transactions - here's the difference:

      A GOFO transaction is a direct gold for U.S. dollar swap. The holder of the gold uses the gold for collateral to secure to short term use of dollars, the dollar holder holds the gold as collateral. The GOFO is the interest rate paid to borrow dollars secured by gold or borrow gold secured by dollars.

      A lease transaction is one in which the lessee leases the gold from the lessor and takes the gold and sells it into the market to get dollars. Most of the Central Bank lease transactions have unlimited duration terms built in to them. But it's a two-step process to get dollars using gold. A GOFO transaction is a one-step swap with a very short duration.

      I do believe that the entities borrowing the gold right now in the GOFO swap are using the gold to satisfy delivery requirements, but it also means that they likely have secured a short term source of gold in order to unwind the transaction. Note that in the last 6 days nearly 28 tonnes of gold have drained from GLD and it is also common knowledge that the Comex gold being drained from Comex warehouses is being melted and refined into 400 oz. bars. I'm sure some of the gold from both of those sources will be available to unwind the GOFO swaps.

    2. Many Thanks, D-in-D.