A Historic Inversion: Gold GOFO Rates Turn Negative

TreasureHunter said:
I'm not celebrating, just exploring, trying to understand more about the phenomenon.

For now it seems like GOFO is down and gold is down...
I don't think there's enough appetite to change the trend.

Too bad that much of the news about this is still so vague...

I also found interesting to watch gold's movements compared to the CPI:
Click to expand...
These rates are set based upon various elements, for ex, looking at the rates themselves as to find a story behind them, already misses the most important element: the LIBOR rate.
It's not the GOFO rate that makes the story on its own, but the combination GOFO / LIBOR. Because LIBOR acts as a reference to which possible profits are measured against. So if they change the LIBOR, then ALL the GOFO rates get cranked up or down together, alike sailboats on the same wave. Comparing GOFO rates in an absolute instead of this relative fashion, already misses this key element.
So if you see a long term drop of GOFO rates on your chart, then it's just because LIBOR rate dropped.
http://www.fedprimerate.com/libor/libor_rates_history.htm
January of 2013 0.2051 0.3028 0.489 0.8155
February of 2013 0.2013 0.2905 0.4634 0.7619
March of 2013 0.2035 0.2819 0.4477 0.735
April of 2013 0.1997 0.2774 0.4364 0.7175
May of 2013 0.1966 0.2741 0.4214 0.6936
June of 2013 0.1932 0.2737 0.414 0.6839
July of 2013 0.1911 0.2676 0.4031 0.6838
And this drop already started here:
December of 2007 5.0172 4.9794 4.825 4.4227
So actually, there is nothing special specific to the gold market to it. Because the relative to LIBOR values matter, not their absolute values to zero.

At the moment (or until a few days ago, considering the price upspike haha), on a net basis (that is what matters for a market as a whole) there is only a small demand to lease gold, as reflected by the decade low futures market total net position. The money for nothing club needs others to follow their upspikes, and if they don't, they quickly get out again, as to avoid others selling after they bought and before they got again out. So in order to increase the demand for leasing gold, it first needs some news around, that concerns people holding whatever, and makes them think that swapping to gold should be considered. Then the 'appetite' to lease gold will again increase. The LBMA bullion dealers see some bigger number monsterboxes / bars / ounces gold sold, they decide for a higher gold price fixing, then they take some extra futures positions of 100 ounces, and the price of gold thus rises by the combination of sold monsterboxes/bars + a number 100 ounce futures positions.
The next day, they check again the bullion dealers sales figures, and if they see that the sales dropped due to the higher price, they fix the gold price lower, and quickly dump the futures positions they took the day before. If they see that the sales remained, they hold the futures positions, and if they see even more sales, they take more futures positions. All this as hedging against temporary buyers, those that buy to sell some months later. See, bullion banks / dealers don't like to sell something for $1000 to buy it back for $1300. Saying 'no' to the customers is not really an option so they hedge themselves along futures positions. They do ofcourse the same for the temporary buyers that try this along futures contracts themselves.
The 'appetite to lease gold' is thus related to the amount ounces by the temporary buyers. But the GOFO rates are in conjunction with LIBOR, alike all interest rates, it's not there absolute value that matters, but their values relative to eachother, that is what determines profit versus loss. Just a higher or lower number means nothing without a reference to judge.
 
bron suchecki said:
That chart shows a correlation between price going down and GOFO going down. Yet all the bugs are celebrating negative GOFO?

Consider that GOFO goes down when lease rate goes up (which it has been) and lease rate goes up when more people borrowing gold - to short it! Any wonder gold price goes down?
Click to expand...

...and lease rate goes up when more people borrowing gold

Or more probably people dont want to borrow and that increase lease rate.


Definition of 'Lease Rate'
The amount of money paid over a specified time period for the rental of an asset, such as real property or an automobile. The lease rate that the lender earns from allowing someone else to use his property compensates him for not being able to put that property to another use during the term of the lease.
Click to expand...
 
bron suchecki said:
CLZ said:
Or more probably people dont want to borrow and that increase lease rate.
Click to expand...

You meant more people dont want to LEND and that increase the lease rate?
Click to expand...

Yes (sorry typo), people dont want to lend, which is logical because gofo is negative.
 
CLZ said:
bron suchecki said:
CLZ said:
Or more probably people dont want to borrow and that increase lease rate.
Click to expand...

You meant more people dont want to LEND and that increase the lease rate?
Click to expand...

Yes (sorry typo), people dont want to lend, which is logical because gofo is negative.
Click to expand...
That last is again not true.
If you want to earn dollars by lending out your gold, but people don't want to borrow it from you, then you have to lower the cost of borrowing gold (the lease rate), as to make borrowing gold more attractive.
The case of negative lease rate thus even means that gold owners actually PAY people to borrow their gold. The cost of borrowing becomes a gain of borrowing haha.
Negative gold lease rates are like that you wanna borrow money from the bank and instead of you having to pay an intrest to the bank, the bank pays you an intrest.
Funny eh?

The next question then is: why are gold owners so 'desperate' to lend out their property that they wanna pay others to borrow it?
 
CLZ said:
bron suchecki said:
CLZ said:
Or more probably people dont want to borrow and that increase lease rate.
Click to expand...

You meant more people dont want to LEND and that increase the lease rate?
Click to expand...

Yes (sorry typo), people dont want to lend, which is logical because gofo is negative.
Click to expand...

So lets continue....

From your blog 2010:
Degrees of distrust
My last blog was ultimately about trust and that maybe the basis is telling us that there is still trust in the system. After writing it I remembered the presentation I made to the 2009 Gold Standard Institute seminar in Canberra. Below is the conclusion from that presentation, where I proposed four phases, or degrees of distrust:

1st Phase

We start to see increasing investment in gold reflected by increasing balances in COMEX or ETFs or GoldMoney etc, but the majority of people still hold fiat and stocks/shares. In respect of gold, people have no problem with storing their metal in "the system".

2nd Phase

We start to see occassional backwardation which comes and goes and it usually only between cash and shorter futures/maturities - 1 to 2 months. This backwardation is arbitraged away by longs who still have belief in the system(s) so are willing to take the risk to make a profit. Gold is still held in the system but growth in reported balances is slowing.

3rd Phase

We see more backwardation periods, prolonged and now not just shorter maturities but maybe 3 month going to small backwardation. It demonstrates less interest by longs to take the risk. Possibly start to see reported balances of ETFs and less reputable custodians starting to stablise even though gold price still rising, which would puzzle ignorant commentators. A physical squeeze is developing.

4th Phase

Now backwardation persists, it is a permanent state in shorter maturities, increasing to longer maturities. Reported ETF balances are declining. A clear signal not all is well. Gold is being pulled and stored outside the system. The strong hands are in the majority, the squeeze is really on.
Click to expand...

http://goldchat.blogspot.com.au/2010/07/degrees-of-distrust.html

If we go through phase4:
-Backwardion persist from 1 to 6 months and it has been permanent for over month now.
-GOLD ETF GLD balance is declining
-And Gold is being pulled and stored oustide the system - COMEX is very low

So we can say that we are at least close the 4th Phase.

Logical question could be now that what is Phase 5?
 
"The case of negative lease rate thus even means that gold owners actually PAY people to borrow their gold. The cost of borrowing becomes a gain of borrowing haha. Negative gold lease rates are like that you wanna borrow money from the bank and instead of you having to pay an intrest to the bank, the bank pays you an intrest."

GOFO is not the lease rate http://goldchat.blogspot.com/2008/10/misinterpretation-of-gold-lease-rates.html or just search on "GOFO" on my blog.
 
CLZ - I am doing a detailed intra day analysis of futures trading for an upcoming post that shows the market is arbitraging away any backwardation that appears. Indeed there are periods during the day when contango exists. So I think we are still in phase 2.

The calls of backwardation are based on single end of day snapshots or averages over the day, both which hide the nature of the market. GOFO is also suspect because it is a snapshot and also is not a market negotiated (deals done on it) rate.

Also, the backwardation/GOFO being reported is so small most of the time in which case there is no profit to be had.
 
bron suchecki said:
"The case of negative lease rate thus even means that gold owners actually PAY people to borrow their gold. The cost of borrowing becomes a gain of borrowing haha. Negative gold lease rates are like that you wanna borrow money from the bank and instead of you having to pay an intrest to the bank, the bank pays you an intrest."

GOFO is not the lease rate http://goldchat.blogspot.com/2008/10/misinterpretation-of-gold-lease-rates.html or just search on "GOFO" on my blog.
Click to expand...
I wasn't talking about GOFO in this post. I talked about lease rates.
I know that GOFO is not the lease rate. This topic talks about GOFO, but as I said earlier, GOFO on its own is a nothingsayer because its the relative to LIBOR that matters, which is the lease rate, I focus on the lease rate (which thus combines GOFO and LIBOR), which is what directly matters for the gold market.
See this text from a couple posts ago:
"These rates are set based upon various elements, for ex, looking at the rates themselves as to find a story behind them, already misses the most important element: the LIBOR rate.
It's not the GOFO rate that makes the story on its own, but the combination GOFO / LIBOR. Because LIBOR acts as a reference to which possible profits are measured against."
 
It is just that you said "The case of negative lease rate thus..." As GOFO has been negative and lease rates have been positive recently I thought you were confusing the two. BTW lease rates are never negative - I've never seen any BB oferring to pay us to borrow gold. When LIBOR is this low small changes in the forwards or lease markets can result in funny figures if they are just plugged into a formula.
 
bron suchecki said:
CLZ - I am doing a detailed intra day analysis of futures trading for an upcoming post that shows the market is arbitraging away any backwardation that appears. Indeed there are periods during the day when contango exists. So I think we are still in phase 2.

The calls of backwardation are based on single end of day snapshots or averages over the day, both which hide the nature of the market. GOFO is also suspect because it is a snapshot and also is not a market negotiated (deals done on it) rate.

Also, the backwardation/GOFO being reported is so small most of the time in which case there is no profit to be had.
Click to expand...

Great - cant wait.

btw. you probably didnt noticed that I have a question for you in the Silver IS The new Gold -thread:
http://forums.silverstackers.com/topic-43362-silver-is-the-new-gold.html
 
Gold backwardation in the wider context
...Backwardation in gold is being accompanied by backwardation in silver. This is not just a coincidence (nor mentioned by those who concentrate on gold backwardation in isolation); the two metals are the monetary metals par excellence. Backwardation doesn't signify a demand for State credit, such as dollars, over the metals themselves, but completely the opposite. Both gold and silver have an audience who are willing to hold them indefinitely over the ravages of State credit. That futures are at a discount to spot is an insufficient reason for this audience to replace their physical holdings with futures, never mind that the discount is getting wider.
Click to expand...

http://feketeresearch.com/upload/Gold-Backwardation-in-the-Wider-Context.pdf
 
GOFO has been negative for a historically unprecedented 30 days in a row now. How long can it remain negative?
 
bron suchecki said:
It is just that you said "The case of negative lease rate thus..." As GOFO has been negative and lease rates have been positive recently I thought you were confusing the two. BTW lease rates are never negative - I've never seen any BB oferring to pay us to borrow gold. When LIBOR is this low small changes in the forwards or lease markets can result in funny figures if they are just plugged into a formula.
Click to expand...
Why not just reading what I say?

Assuming that you mean bullion bank with 'BB', I didn't say that bullion banks pay you, as a speculator for a short positions sell action for ex; to borrow gold from them. I don't know the fee (carry cost and whatever other cost they may add) they ask, and on which basis they determine it.
I said that lease rates can be negative, and that does happen, look at http://www.lbma.org.uk/pages/index.cfm?page_id=55&show=2013
There you see that the 1-2-3 months lease rates (column LIBOR MINUS GOFO) have been negative from start 2013 till 13-14 february 2013 when they became positive with the 3 months rate first.
Lease rates apply to the trade/swap between bullion banks and gold owners alike central banks.
The case of a negative lease rate means that the central bank is paying the bullion bank to lease its own (central banks) gold.

For ex pick bullion bank JP Morgan and another bank that owns gold, for ex the Federal Reserve.
JP Morgan wants to lease a 400 oz gold bar for 1 month as to offer it for futures market positions of its customers.
1 month LIBOR is 1% / GOFO is 2%. So it's a case of a negative lease rate, since LIBOR minus GOFO is -1%
The Fed and JP Morgan do the swap. The Fed gets $500,000) from JP Morgan, and JP Morgan has now a 400 oz gold bar.
When the 1 month lease term has passed, the Fed 'earned' on the dollar market LIBOR interests of 1% on JP Morgans $500,000 so it has now $505,000.
Since GOFO was 2%, the Fed now PAYS bullion bank JP Morgan $510,000 for returning the 400 oz gold bar.
So, the Fed suffers on this gold<>dollar swap with JP Morgan a net loss of $5000, which is -1% (and here we have the lease rate) of the original $500,000.
JP Morgan thus borrows gold from the Fed, and 'earnt' $5000 on it.

This was, as far as I understand it, what the GOFO/LIBOR/lease rate actually means.
 
bron suchecki said:
The formula you mention is correct, it is that the rates for GOFO and LIBOR are not directly comparable in calculating the lease rate, see http://goldchat.blogspot.com.au/2010/07/understanding-negative-lease-rates.html These differences in how GOFO and LIBOR are calculated normally don't matter, but when rates are so close to zero, it becomes significant.
Click to expand...
You can call LIBOR / GOFO rates as inaccurate you want, these rates / figures are used when performing the swaps.
The LIBOR scandal was about changing LIBOR to another value than banks financial market data gave reason to, for a long term. Yet, LIBOR rate was used during that long term. The subject of the discussion is not whether or not interest rates reflect real market conditions, that is since the existence of central planning / govt interference a rigged story. The dicussion is about what relevance a negative GOFO rate has for the gold market.

About rates close to zero, isn't that a non-statement?
A zero hit or underceeding (negative) may have a psychological impact (alike bank depositors that would have to pay instead of earn intrest on their own money), but mathematically and economically, it doesn't.
A zero, and a negative value, is just a value like any other.
It's all relative, not relative to zero, but to other interest rates.
It doesn't matter whether two specific interest rates are 10% versus 20%, or 0.1% versus 0.2%.
It's the %difference between the rate pair members that matters, not the percentage values itself.
This topics statement is that golds forward offered rate turned negative.

User wrcmad claimed in post 8 that negative GOFO rates indicate some are desperate to get their hands on 'physical' gold, that there is 'fear', that there is a 'high demand for physical gold in the bullion banking system' and more of that BS (just using the same word).
What does a negative GOFO rate actually mean?
Some decades ago, 1989
http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=1989
LIBOR was 9% and GOFO 7%
Since then, LIBOR, and later also EURIBOR, gradually dropped, we all know, because it's the next-to-fundamental reason for all other intrest rates to drop too (the fundamental reason is the central banks inflation policy as to control their theft from the producing part of the population / bank savers)
Why? For the same dumb reason: what matters is NOT the absolute (relative to zero) intrest rate (LIBOR, GOFO, whatever), but the relative BETWEEN the interest rates.
What happened with LIBOR levels: the 1 month rate dropped from 9% in 1989 to 0.20% in 2013. That's a mathematical 45:1 reduction. That IMPLIES that the differences between LIBOR and other rates, should also see such a 45:1 reduction.
Let's see:
In 1989 the GOFO 1 month rate fluctuated around 7% http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=1989
In 2013 the GOFO 1 month rate fluctuates around 0.15% http://www.lbma.org.uk/pages/index.cfm?page_id=55&title=gold_forwards&show=2013
I didn't calculate an average, I just picked the min and the max and then the middle.
7/0.15 is a 46.6:1 reduction.
This is very similar to the LIBOR 45:1 reduction.
And this proves that the negative GOFO rate has everything to do with the drop of LIBOR throughout the decades to close to zero, causing the deviations (intrest rates differences) to sometimes become negative, purely for mathematical reasons. If you bring a reference rate (LIBOR) so close to zero, then the related interest rates subreference part of their fluctuations around the reference, move into the absolute (relative to zero) negative region.
And this makes clear that a GOFO rate zero underceeding rates has nothing to do with current gold supply/demand and hence why what wrcmad claimed is 'BS'.
And that is why I talked about lease rates, because those are a relative - the lease rate is LIBOR - GOFO, so whether or not LIBOR is 100% or 0.25% or -100%, doesn't matter.
And this makes quite clear how silly it is to focus on a mathematical negative GOFO rate, imagine LIBOR would become -10% then all GOFO rates would become permanently negative. OMG "bullion banking system is permanently desperate to get their hands on physical gold".
From a gold market perspective - more specifically - from its gold-borrowing futures market side, it's not the negative-going of a GOFO rate that is relevant, but the bias of the GOFO rate value relative to the LIBOR offset/reference. Known as lease rate.
 
House said:
GOFO has been negative for a historically unprecedented 30 days in a row now. How long can it remain negative?
Click to expand...
As long as the central planners hold LIBOR and EURIBOR close to the mathematical zero. :)
 
CLZ said:
Gold backwardation in the wider context
...Backwardation in gold is being accompanied by backwardation in silver. This is not just a coincidence (nor mentioned by those who concentrate on gold backwardation in isolation); the two metals are the monetary metals par excellence. Backwardation doesn't signify a demand for State credit, such as dollars, over the metals themselves, but completely the opposite. Both gold and silver have an audience who are willing to hold them indefinitely over the ravages of State credit. That futures are at a discount to spot is an insufficient reason for this audience to replace their physical holdings with futures, never mind that the discount is getting wider.
Click to expand...

http://feketeresearch.com/upload/Gold-Backwardation-in-the-Wider-Context.pdf
Click to expand...


...In both cases the two-tier market, Fekete avers, has been initiated by governments trying to conceal the fact that the Central Banks had been running out of the physical gold to meet their commitments. In 1971 the initiative was an embarrassing failure forcing the U.S. government effectively to default on its gold obligations. In the latest, Fekete reckons that the current two-tier initiative faces a similar defeat. Central banks will just not be able to recover their leased gold in what he sees as a futile exercise to pump some liquidity into the gold futures markets.

Leased gold is supposed to be returned at the end of the lease period, thus enabling it to be kept in the official reserve figures. But, in reality, the return of the great majority of leased gold at least within any reasonable period of time, if not in perpetuity is just not possible....
Click to expand...
http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=202353&sn=Detail
 
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