Saturday, July 20, 2013

The Negativity Of GOFO Rates And Factors That Will Spark The Next Big Move In Gold

With gold sentiment quite negative and shorts at extreme levels, upside price risks cannot be ignored especially amid evidence of consistent physical demand. Historical seasonal patterns suggest that this is likely to strengthen later in the quarter, which in turn could prompt a short-term squeeze. - UBS, London Metals Group
The physical market is starting to overwhelm the paper market. The premiums reflect scarcity and greater awareness of the fractional nature of the paper market.  This awareness is debasing the trust in paper currencies.  Possession of physical gold (and silver) is now being valued more highly than possession of paper dollars.  This is reflected in the premiums being paid all over the world for 400 oz. gold bullion bars.  Wealthy entities, Central Banks and sovereigns are will to pay a lot more in paper currency for an ounce of gold than is being reflected by the "spot" price of physical gold (as set by the paper market).  The 10-day run of a negative GOFO rate is also direct and unmitigated proof that market values physical possession of gold more than U.S. dollars (GOFO = the cost of doing a gold/$ swap - a negative GOFO means that dollar holders who need gold are willing to pay a gold-holder for short term use of that gold).

Here's my latest analysis of this situation, published by Seeking Alpha:  LINK  I review several factors that will trigger the next move up in gold, which could be a monster move.

One of GATA's main platform themes going back to like 1998 is that eventually the paper market would be revealed as the fraud that it is and the physical market would completely blow through the price levels set by the paper market and the shorts would be forced to cover.

Old-time commodities traders refer to this is a "commercial signal failure."  We are starting to see that and the negativity of the GOFO is evidence of it.


  1. The Triumph of Hope Over Experience, QE Edition

    With stock prices reaching new record highs and home prices continuing to rise, many believe the wealth effect is steering the U.S. economy onto a clear recovery track. In this vein, Fed Chairman Bernanke testified to Congress this week that “housing has contributed significantly to recent gains in economic growth.” However, reality contradicts this hopeful view, with retail sales coming in below expectations and housing starts deteriorating.

    (just long as the homeowner stays in their under-water place, it seems like there is more of a willingness to help them. If they leave the place, they still owe the debt plus interest. I wonder if the banks will start prosecuting hard on these people or on anyone else who leaves their home as it would give rise to the fact that the housing boom is really a bust. just a thought.....)

  2. HI Dave:

    Thank you for your consistent reporting of the
    fact below the surface that the MSM don't know are there and don't care. There will be a lot of " No one saw this coming" comments out there. But you do see the failure of the fiat dollar coming. Again, the big question is when? This month? August?
    Will they be able to keep this BS going until the 2014 Mid-term elections? Many of us out there have seen this problem brewing for over 10 years. But they keep the system propped up. So, I ask again, when do you see the lid blown off the pot?

  3. Exploration Insights' geologist Brent Cook says a major gold miner will go broke soon.

    "The underlining fundamentals are that we are not finding and developing and putting enough mines into production to replace the Copper, the Zinc, the Gold that we're actually producing."

    One of the comments:

    "Seven of our [Australia] largest gold mines have been sold to China in the last two years. Now our three largest gold miners are laying off staff because of our high wages and the decreasing ore grades."

    Looks like China is buying the cow, not just the milk.

  4. Dave, I saw you said "Detroit is a catalyst to undermine trust in paper currencies and debt. I really think the Cyprus bail-in event and the Bundesbank gold repatriation triggered the beginning. It will turn into an avalanche of demand for physical and selling of paper dollars."
    However, the TPTB implemented the "April Massacre" to deal with the Cyprus and Bundesbank thing. Do you think they will try it one more time to crash PM prices further?

    1. I don't they fully fixed the Bundebank problem. Also, a big part of the smash was to shake loose gold from the ETFs to make delivery demands into Asia and to help the banks reduce their net short exposure to physical. It's a BIG BIG problem and they made it worse by taking the price down this far. Most of us believe that they didn't anticipate triggering physical demand like this.

      They can try to take it lower again, but it will make the physical problem even worse.

  5. Dave,
    they make the rules and have spent time and money building 'their' enforcement in local and state ,and federal the last few EO's read ,everything in this country belongs to the they declaration.....gonna be a tough one to realize any 'gains' at this end...Semper Fi

    1. That is one reason that I watch things really closely for any hints of confiscation and will be ready to get out of PM's and into something like some farmland on short notice if possible or to sell portions as the price rises toward this end. Yeah the EO's and the way things are playing out make any investment fraught with risk (except maybe farmland, but they could even appropriate that), but PMs seem like the way to go at this point if you can't do farmland. I often wonder when it does come time to take profits how PM dealers and the such will handle people looking to sell large amounts of PMs if prices really rise like silver over $100 and gold up near $5000 - hopefully there will be enough buying and demand from people desperate to get out of dollars for such sales to go through. I could imagine there being a bottleneck of sorts at even higher prices and the threat of confiscation if things really break down, so having a plan to exit PMs on the rise I think is important. It will be a nicer thing to think about in contrast to these price smashes.

    2. Mike,

      I do not think we need to worry about a lack of buyers at the top. Historically this has never been a problem, the mass of people "buys high" and "sells low". This has been true for every bubble ever. I think the main problem you will have is not selling at the top, but keeping it long enough to realize 80% or so of the gains that are coming. Let's see what happens, but I think at or near the top there will be millions of buyers (that is what creates the bubble top) and once all the buyers are gone then the market will adjust to reality. As JS says, when it looks like a moonshot get ready to sell, when it looks like a fish on get ready to buy...


    3. Another aspect of this topic of confiscation is to do so through raising taxes on gains. All forms of gov’t are going to be desperate for money as things continue to deteriorate and I could see a hefty tax increase enacted on PMs. Thought about this after reading:

      A person might say that I’ll just sell PMs under the table and not report the sale, etc, but with the rise of the police state and Orwellian tracking, etc I don’t think that is going to be a safe option to consider. Just look at what the IRS is up to:

      But I would advocate making smart purchases of PMs in smaller increments and done in person in cash at a dealer/cash for gold place that just lets you buy what you want without any identifying paperwork, etc if you can find such a place. Eventually I think that are going to tighten the screws on this and so much more though as the collapse picks up steam.

  6. High frequency trader fined more than $3m by regulators

    Financial regulators in the UK and US have fined a high frequency trader and his firm more than $3m (£1.95m) for manipulating oil and gas markets.

    Between 6 September 2011 and 18 October 2011, US-based Mr Coscia used algorithmic programmes that he developed to create false orders for oil and gas on trading exchanges in the US and UK. He is estimated to have made about $1.4m during the period.

    Tracey McDermott, the FCA's director of enforcement and financial crime, said: "Mr Coscia was cheating the market and other participants.

    "High frequency trading and the use of algorithms are an important and commonplace part of the markets nowadays but in this case these techniques were deliberately designed to abuse the market, undermining its integrity.

    "This is unacceptable, which is why we have taken tough action to punish Coscia and deprive him of any benefit he acquired."

  7. Censoring Howard Zinn: Former Indiana Gov. Tried to Remove "A People’s History" From State Schools

    should we tell the people we don't have it???

  8. QBAMCO On Gold And Inflation: "Don't Fight The Fed... Front Run It"

    Our sense of sustainable value in today's global markets is tied directly to the general perception of future inflation. The overwhelming majority of investment capital is positioned for low inflation today and tomorrow. This implies and explains the current dominance of levered revenue models sponsored by levered investors borrowing from levered creditors. Were expectations of rising inflation to come to the fore, we believe un-levered assets and businesses that do not rely on ever-more public leveraging would perform far, far better than currently levered assets owned by levered investors selling goods and services to businesses and consumers that fund their purchases through credit.

    Since very few investors expect rising inflation anytime soon, the return skew is overwhelmingly positive in its favor. Both deep value and gamma are buried in the changing popular perception of future inflation, and the best part about this is that rising price inflation expectations are precisely what all central banks around the world will soon be forced to promote.

    Don't fight the Fed — front-run it.

    ...macroeconomics has been reduced by world-improving monetary authorities to the study of gibberish. The folly ("I'm tapering, just kidding, I'm tapering, just kidding") would be funny if it were not so real and contemporary and meaningful.

    The entire spectacle is manifest in the public capital markets where almost no new capital is being formed, or (and here's the weird part), where little sustainable wealth is being created and transferred. Our time is defined by economic releases suggesting little and unreserved electronic credits hop-scotching back and forth in search of financial return. Bernanke or Draghi, Ackman or Icahn, place your bets. (Hey, I love this guy cause I make money betting against him!) Where's the value proposition?

  9. The Great Derivatives Scam

    As Michael Sivy points out, even a small move either way in the value of the huge notional amount of derivatives would wipe-out even well-capitalized banks. The size of the market necessarily implies huge problems and risks.

    First, I contend that much of the so-called "money printing" of the Federal Reserve is dedicated to to derivatives trading with nearly zero resulting credit expansion at the megabanks. Second, much of the trading is the direct result of accounting fraud--specifically the accounting rules allow both counterparties to the same trade to recognize gains and this allows the megabanks to pump up their earnings accordingly. Third, a huge percentage of the trading occurs only because the megabanks can sell their too big to fail status to counterparties which in turn encourages more risk throughout the economy. Fourth, derivatives trading is heavily subsidized by depositors who now stand behind derivatives counterparties if a megabank fails. Thus, the next financial crisis will demonstrate that derivatives still pose a lethal risk to the global economy.

  10. Japan's temples, universities, hospitals haunted by yen bets

    (Reuters) - Ryusho Soeda, 66, has taken on a job for which his career as a Buddhist priest never prepared him: forensic accounting.

    Soeda's temple is the 1,200-year-old Koyasan, a World Heritage site deep in the mountains of western Japan and long prized as a haven for quiet contemplation. But in recent months monks here have been debating a very worldly question: How did a complex bet on the yen go so horribly wrong?

    Soeda, who was picked to head Koyasan in June after his predecessor was forced out, has promised a full accounting of the temple's losses, which at one point last year threatened to wipe out half of its endowment.

    "My duty is to find out exactly what has happened and to publish it. Just like Greece published its window-dressing only after they had a new government, the truth will not come to the light unless you change the power," Soeda told Reuters.

    The financial crisis at Koyasan is an example of an overhang of losses that cash-rich Japanese religious groups, schools, small firms and wealthy individuals are facing - and in some cases fighting in court - because of financial derivatives tied to the yen.

    Fujita Health University, which runs one of Japan's biggest hospitals, lost $240 million on currency derivatives. Nanzan University in Nagoya said this year it had lost over $230 million. Both schools took their losses from derivatives that were sold to them in the unsupervised, over-the-counter market. In many other cases, the losses have been driven by a product called a "power-reverse dual currency bond," a derivative marketed heavily to non-profit investors in Japan.

  11. What is taking so long for an organized and well respected institution to establish a physical gold and silver market !?
    Let's just call it the Physex for sake of identification.

    There should be nothing standing in the way of the Physex. To hell with paper !!
    Instantly phys. G&S would skyrocket and for the right reasons.

    Nothing would be clouding it's true identity as is the case today.
    TRUE gold and silver prices would surface and continue to find levels respectable to that of how the world treats it and respects it, the sign of real money.

    The mines would once again be able to function at full capacity thanks to Physex.

    Then perhaps the likes of LBJ would spin in their grave !

  12. COMEX Default May Lead To Over $3,500/oz

    Sinclair, the successful gold and silver investor and a former adviser to the Hunt Brothers in their liquidation of silver from 1981 to 1984, said in a posting on his blog that was emailed out to subscribers that:

    “The cause of today’s spectacular rise in the gold price is the reality that with Friday continues large drops in the Comex warehouse gold inventory. No cogent argument can be formed against the reality that because of the continued fall in gold inventory that within in 90 days or sooner the Comex must change its delivery mechanism.”

    Sinclair, said that the COMEX would have to move to cash settlement as they do not have nearly enough gold bullion to make deliveries and warned that owners of futures may be forced to accept payment in the form of the SPDR GLD ETF. This which would make them unsecured creditors of the bullion banks who are the custodians and sub custodians of the SPDR GLD.

    He said that this could lead to the GLD ETF being “destroyed” and said that “it is a truism in gold that which is convertible into gold will in fact be converted over time.”


    “In America, the criminally insane rule and the rest of us, or the vast majority of the rest of us, either do not care, do not know, or are distracted and properly brainwashed into acquiescence.” – Kurt Nimmo

    I have to admit to being baffled by the aptitude of the Wall Street and K Street financial elite to keep their Ponzi scheme growing. I consider myself to be a rational, sane human being who understands math and bases his assessments upon facts and a sensible appraisal of the relevant information obtained from trustworthy sources. Of course, finding trustworthy sources is difficult when you live in a corrupt, crony-capitalist, fascist state, controlled by banking, corporate and military interests who retain absolute control over the mainstream media and governmental propaganda agencies. Those seeking truth must pursue it through the alternative media and seeking out unbiased critical thinkers who relentlessly abide by what the facts expose. This is no time for wishful thinking, delusions and fantasies. In the end, the facts are all that matter. As Heinlein noted decades ago, the future is uncertain so facts are essential in navigating a course that doesn’t lead you to ruin upon the shoals of ignorance.

  14. In the second half, Max talks to Sandeep Jaitly of, about gold backwardation,

  15. Dave, these negative GOFO rates are now into day 12 and look to continue for some time further. This screams physical shortage. Are there any other valid reasons we should consider? Can a paper raid fix the situation for the cartel? Is anyone dumb enough to use physical as collateral with JPM even with negative GOFO rates? If so, they should watch that South Park's gone! The Morgue: where other people's money goes to die.

  16. Palast: Did Fabulous Fabrice Really Cause the Financial Crisis

    "...In August 2007, hot-shot hedge fund manager John Paulson walked into Goldman Sachs with a brilliant plan to cash in on the US housing crisis.

    He paid Goldman to announce that Paulson would invest a big hunk of his fund's wealth, $200 million, in securities tied to the US mortgage market’s recovery. A few lucky investors would be allowed to give Goldman their billions to bet with Paulson that Americans would not default on their home mortgages.

    It was a con. Secretly, Paulson would bet against the mortgage market, hoping it would collapse – making sure it would collapse. All he needed was Goldman to line up the suckers to put up billions to be his "partners".

    It was Goldman’s and Paulson's financial version of Mel Brooks' The Producers, in which a couple of corrupt theatre producers schemed to suck investors into a deliberate flop...

    What did the Feds do to Paulson? He received... a special tax break.

  17. Hi Dave. I have never posted before, but read your work and have respect for it. Question: I follow many, many sites, for as much information as I can find, in my efforts to seek truth and clarity. There seems to be a lot of confusion, and now bickering amongst many of the bloggers, regarding two current items. Which leads to my question finally. Is gold in backwardation or not, and has JP Morgan settled their June contracts or not? Nick Laird says NO backwardation, everyone else says yes. Harvey Organ has been screaming for weeks that JP Morgan has yet to settle it's June deliveries, and outside of Turd and Bill Holter, nobody else is even talking about it, other than some folks in the comments sections of said blogs saying it's inaccurate. With the exception of that idiot "Kid Dynamite" whom I disregard completely. (I disregard anyone that claims there is no manipulation in the PM market place) Can you please give your take on these two items, I would be enormously grateful.

    1. Thanks for the feedback. You are perceptive in discerning that Kid Dynamite is an idiot.

      Nick Laird puts together some nice looking charts that are sometimes helpful, but mostly a different "flavor" of the same that is available in many places. He is someone whom I have always regarded as being analytically "light." I don't know how much time he has to do real research and thinking about the subject matter of precious metals, given how much time he must spend churning out pretty charts. In fact, I've never seen anything from him print other than his charts.

      The idea that there's no backwardation was given some visibility by Bron Suchecki, chief promoter of the Perth Mint. I sent an email to Bill Murphy with the request that he forward it to Ed Steer, who also only regurgitates what he reads and lacks any depth in his thought process:

      Sorry Ed, once again Bron - the interminable GLD apologist - has it 100% wrong. Backwardation exists when the market is willing to pay more for physical gold delivered immediately than gold delivered next month. That is backwardation. Ask any futures trader. Ask James Turk, etc.

      The negative GOFO rate means that the physical market in London is willing pay MORE for gold in hand today vs. gold re-delivered tomorrow or next month or in two months or in three months. That's just a mathematical fact of the time value of money.

      Regarding Bron's interminable and catastrophically flawed defense of GLD, of course he defends GLD: The Perth Mint is one of the bigger fractional bullion operators out there.

      Facts are facts.

    2. Dave, thank you for your detailed response. It coincides with my understanding of the situation as well. I asked for your clarification to regain my sanity. When I read some of these folks opinions, that so starkly contrast with my interpretations, it makes one begin to question his logic and abilities of comprehension. No doubt there are those that have that specific intent with their dis-info campaigns, while as you state, others simply lack a knowledge base to discuss certain areas and commence with the regurgitation for something to report.

      However, where I am having the most difficulty is with the issue of whether or not JP Morgan has settled their June contracts or not? With this question I have definite lack of a complete understanding of the mechanics and settling processes involved. Try as I might, the real answer eludes me. You didn't answer that portion of my question? I'm not sure if that was because in the appreciated efforts of typing your answer you forgot part two to my question, or if it was because it's a topic that could portend some kind of actionable legalities from the "Almighty JP Morgan", and as such is verboten? If that is the case, I completely understand. If not, can you please help to straighten me out on that situation? If Harvey Organ is correct, then August should present a grave and present danger. The last thing the current system needs, in it's already broken condition, would be for any major exchange to fail. Try as I might, the only solution I can see, IF what Harvey is saying is correct, that could rectify these enormous drawdowns, and subsequent unavailability of "metal to settle", would be a moonshot in price high enough to encourage some holders of size to spit up some inventory. Is my understanding of this even remotely close? I read somewhere, maybe Eric Sprott or Ted Butler (?), that the moonshot in silver in the first quarter of 2011, culminating with the May 1st Sunday evening massacre, was likely due to an impending failure and orchestrated to alleviate the situation. I was personally levered up heavily in silver at that time and took a personal ass kicking on that night/early morning, and was force liquidated long before I could meet any collateral call. It was that religious experience that smashed any doubt that I was still harboring about the manipulations taking place in these markets. I had about 5% of my portfolio in a levered up silver position, which rocketed to a 30% position, and then became almost a complete loss. Suffice to say, I do not trade these metals anymore, leverage or otherwise, and only hold physical. Anyway, I digress. An answer to JP Morgan's June contracts standing is what I seek if possible. Thanks again for your insight.


  18. U.S. a Lawless State-Paul Craig Roberts

    Former Assistant Treasury Secretary Paul Craig Roberts says, “The country is not being run by the President. It is being run by spy agencies and private interest groups, Wall Street and military security complex . . .

    hey run the country. The President is a puppet, a figurehead.” Dr. Roberts contends, “If you are a lawless state, which the United States is, it obeys no international law. It does not obey the Geneva Convention . . . It tortures people. It doesn’t obey the Constitution. It doesn’t obey anything. It does what it wants. . . . If you are a lawless state, you disguise yourself as a democracy.” Former President Jimmy Carter agrees. Just last week, Carter said, “The U.S. has no functioning democracy at this moment.” Why hasn’t the mainstream media picked up this astounding comment from a former Democratic President? Dr. Roberts says, “Five firms now own what used to be a large dispersed independent media. Nobody can open their mouth, they’d get fired. They have become a propaganda ministry for government and corporations.” Dr. Roberts goes on to say, “My prediction or expectation is by winter, the second downturn of the Great Recession will be in place. Unemployment will explode, more foreclosures are coming. It’s going to be worse than the Great Depression.” Join Greg Hunter as he goes One-on-One with economist Dr. Paul Craig Roberts.