We've all been waiting for years for the connection between paper and physical prices to break. With this latest, Spec algo-induced selloff, are we finally getting close? Some signals are there, not the least of which are the GOFO rates, which have fallen to their most negative levels in over 15 years.
Longtime readers know that we've been all over this GOFO story since rates first turned negative in July of 2013. After having been negative for just 7 days out of the previous 24.5 years, London Gold Forward Offered rates (GOFO) moved sharply negative following the unprecedented drop in price to $1180 in late June of 2013. Rates then remained negative for the next eight weeks before beginning a period of oscillation between positive and negative.
Over the past 16 months, the one-month GOFO rate had been as low as -0.12167% on 8/22/13 and as high as +0.1520% on 9/17/14. Then, earlier today, the one-month rate was posted at -0.1850%. Again, this is the lowest of the entire period that began last summer and the lowest reported one-month rate since the two-day spike down in GOFO that occurred near the announcement of The Washington Agreement on gold in late September of 1999. Additionally, GOFO rates are now negative out to six months. This has only occurred on 14 days since this period began in July of 2013, the last being in early May of this year.
As you might expect, ZeroHedge has printed an excellent summary of the situation and you can find it here: http://www.zerohedge.com/news/2014-11-06/physical-gold-shortage-worst-over-decade-gofo-rate-tumbles-most-negative-2001
So, what does this mean, if anything?
What is undeniable, based upon the definition of forward offered rates, is that there is currently a shortage of readily-leasable London gold bars. Negative GOFO indicates that supply is so tight that, instead of a "normal" situation where gold is used as collateral to borrow dollars, dollars are being used as collateral to borrow gold. Our pal, DenverDave, explained this in English better than anyone else when he wrote this back in July of 2013: http://truthingold.blogspot.com/2013/07/gofo-explained-and-why-its-now-very.html The important paragraphs are reprinted below:
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.
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.
In Dave's column from 16 months ago, he incorrectly presumed (as did I) that this was a sure signal that the correction within the bull market was over. With hindsight, we clearly can see that it was not. That's not the point. What IS the point is that he was fundamentally correct. A GOFO regime that had flipped negative for the first time in years and then remained there roughly 50% of the time going forward IS A SIGNAL of incredible physical tightness.
"So Turd, you dumbass, how come gold keeps going down?"
This gets back to THE IMPORTANCE of the current time. Price did recover last year. It also recovered on several occasions earlier this year. However, each time price threatened to break out and resume it's UP trend, it was savagely beaten back lower by a Bullion Bank Cartel determined to depress sentiment and western physical demand. Since June, the Spec algos have taken the bit and have driven price down over $200 by electronically pegging paper gold to the falling Japanese yen.
And now look at what has happened. London is currently so devoid of readily-leasable 400-oz bars that the GOFO rate is negative out to six months. Gold must now be dislodged and made available at these prices or the connection between physical and paper price...already frayed from years of abuse...will finally break. This is NOT to say that the break is imminent or certain at this price level. However, it is undeniably clear that the current drop, fueled by momo-chasing specs that are programmed to tightly follow the yen, has put incredible strain on the physical settlement system.
THIS IS WHAT WE'VE ALL BEEN WAITING FOR!
So watch this all very closely in the days ahead. As I've mentioned repeatedly over the past few days, if and when you see the current, direct correlation between the yen and gold break, you'll know that The Banks have finally had enough and they've begun to squeeze The Specs. The price at which that happens will be your new AND FINAL bottom. Could that happen today? Yes. Could it be tomorrow following an extreme algo over-reaction to the BLSBS? Yes. The point is that all signals indicate that this moment is coming. Soon.
I know it's painful to watch but these are extraordinarily interesting and important days. Rest assured knowing that you've already protected yourself from financial calamity and that your personal stack of physical precious metal has never been more valuable.