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

Bernanke-Dimon-Fed-TunnelThe 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.
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.
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.

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From Truth in 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.

 

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Comments

  1. LMAO Well all the gurus are coming out of the woodwork now, seeing that the spot went up a little. Lol Keep Stacking, I always have been. Bye the way when Silver gets to $35.00,  call me.

    • Marchas45. Let me know when Silver goes back to $50 before the May Day massacre. When you regain the previous high of $50 for those who previously invested at this level. Ever time it drops it is a loss. For those of us who purchased at $8. or lower we still have a marginal invested upswing. However, just seeing the constant manipulation and utter incompetence and corrupted SEC & CTFC is just another way of just turning their heads and looking the other way. 

    • @NetRanger808 $35 well $35.50 was the last resistance point and when it breaks that, then watch out. Lol

  2. Truth in Gold is early out of the gates claiming a bottom. Wish I could find some of their stuff from 2 years ago. Any bets they were saying the same thing back then- right before they led many of us to the slaughter house. Baah.

    • Must get tiring blaming others for your own financial choices.
       
      Good news? You have plenty of crybabies and other whiners here to post with.

  3. Arabian Money has just posted another gem from Sinclair stating that “now we are back thru $1275, we have bottomed out and are on our way back up. New folks reading/This guy called a bottom months ago at $1600 right before gold tanked to 1200. I’m debating about going all in and short GLD right now based on this dude’s recent calls.

  4. Don’t be quick to dismiss the importance of this folks.  GOFO going negative is further proof that the physical market has been unbelievably tight all throughout this manufactured crisis, with at least 2 ounces of physical scooped-up by Asia for every ounce liberated from Western vaults (COMEX, LBMA, ETFs, etc.).  What has been happening is that we’ve seen physical inventories in the West being drained over the course of many months, and GOFO going negative is the evolutionary culmination of that process.  The desire to have physical, in hand, NOW, has reached the point where there’s just not enough available to meet that demand. As I’ve said all along, there are limits to the cartel’s power.  While capital controls, taxation, confiscation and other nasty tools remain in the Western central bank and governments’ bag of tricks, as far as price discovery on paper markets are concern, physical demand is finally bitch-slapping the paper traders at the heart of their system.
     
    Negative GOFO is the latest evidence that we have indeed hit bottom.  I talked about other signs in this article and its comment section earlier this week.   I’m in 100% agreement with Dave from Denver on this.
     

    • “What has been happening is that we’ve seen physical inventories in the West being drained over the course of many months, and GOFO going negative is the evolutionary culmination of that process.”
       
      Had me worried there for a bit, FW.  I went to my safe, opened it, and… my physical inventory is ALL there!  HA!  ;-)
       
      “As I’ve said all along, there are limits to the cartel’s power.”
       
      We all certainly hope that is the case, for if it is not, then the game is not merely afoot, it is over.
       

    • Cartel has unlimited paper backed by the US government, not a good recipe…

  5. Is it just me, or does the title of this piece not really coincide with the message? Just sayin.

  6. Eric  you likely know that Dave from Denver is one of the sharpest minds out there commenting on precious metals–not from a predicting prices—but explaining the fundamentals so that novices and professionals alike can understand. He used to comment regularly on Silver Doctors.  His posts were always worth a read.  The GOFO situations smells of desperation. When an entity that is used to make money on trades must pay hard earned funds to get themselves out of a bind, that means the world they live in  is turning upside down. That could bode well for gold prices for some time into the future.  The supplies of this metal can become the driving force in the prices, not the shorting or lies that we see daily on the various markets and blog sites.
    This is the first time I’ve heard of GOFO but when we start talking about someone paying for something they used to be paid for it reminds me of Tom Sawyer.   ‘Hey people, I’ll let you paint my fence but you have to pay me for the priviledge.’  It take some seriously delusional thinking or some extreme situations to get someone to pay the task master for the priviledge of working for him.   

    • Hah ha — now that’s a great analogy.  That Bonsai7 guy should create a cartoon with the fence painting theme.  Stick China in a reclining chair (as Tom Sawyer), with a stack of cash and gold in her lap, while Uncle Ben paints a fence.  Maybe put Germany right next to China in another chair, because part of what started all this cartel crap last October was the freak-out over not being able to meet the repatriation demand coming from a not so insignificant global power. 
       
      I don’t recall Dave posting over here.  Must have been just before I started coming over.  But I’ve been reading his stuff for many years.  I don’t recall if I first found his stuff on his blog or if it was something he wrote and was published with Bill Murphy’s MIDAS/Le Metropole Cafe newsletter (both he and I have been members and occasional contributers to Bill’s letter for a long time).  Dave is one of the good guys.
       

  7. Some thoughts on my part:
     
    It is refreshing to see any sort of rally. I feel like a battered wife. I wake up every morning expecting to get the sh1t beaten out of me and when I don’t I am nervously happy.
     
    Turd pointed out an interesting pattern whereby metals for the last 8 months have been smashed during delivery months, and then left more alone during non delivery months.
     
    Events seem to redefine desperation. This endless naked manipulation, inventories plummeting, physical sales, backwardation, now this gofo stuff. I can’t say what will be the straw that breaks the camel’s back, but even more dire, the mining sector is set to be gutted worse than it has already been. We know there is little to no hedging, prices have plummeted, and now with oil shooting up again, costs are going to only go up. These satanists in office / banksters will finally go a bridge too far in trying to keep their illusion alive, and I can’t fukking wait.

  8. This weeks Ted Butler article was nice and informative.  I wanted to emphasize one point that stuck with me:
    Can you lease a car and then sell it or use it as collateral?
    Can you lease an apartment and then sell it or use it as collateral?
    Can you lease a bar of gold and then sell it or use it as collateral?
     
    Cheers

    • In order, we have… no, no, and yes… but ONLY if you are a bankster.  Such crimes as selling things which we do not own is illegal for the rest of us.

    • You can execute similar trades in the grain mtks as well, not frequently done, and usually for slightly different reasons as what is happening with the GOFO, but possible.
       
      Definitely smells of an oopsie, but here’s a thought experiment… if the forward curve is really negative on cash contracts at LBMA… I could sell phyz today, borrow the gold and pay $ to do so, and simultaneously buy gold for future delivery at a cheaper price than what I sold today.  So as long as my cost of borrowing is smaller than the spread between what I sold/bought then I am making money.   I don’t watch these mkts closely enough to know *if* you can make money doing this, but my guess would be ‘yes.’
       
      I’m less bulled up by the GOFO rate than I am by the inverse in the prices.  This is not showing in the comex mkt yet, but I think we need to keep watching gold stocks, while total stocks are way up from 10 years ago, registered stocks have taken a huge hit.  If those keep shrinking the mkt will need to pay enough to encourage more registrations of eligible gold, or new deposits of registered gold.

  9. I’m left curious as to whether or not these GOFO declines coincide with extensive backwardation. It would be an interesting chart see how their incidence align against each other.

  10. Eric  That Tom Sawyer idea was something I used when I was working my business 24/7 for 20 years as a commercial loan broker. I like Mark Twain’s way of getting things done. Since I couldn’t hit the high notes or curve ball I had to figure out somethink a DA like me could do and make a boat load of simoleons.  Little did we know that the ultimate repository was going to be precious metals.  Anyways, being a former banker the pursuit of the long green was all comsuming for a few decaces. 
    Running a loan volume in my business of about $250,000,000 a year with mostly me, my wife, a processor and the occasional agent, we cranked it but needed allies. 
    I figure this little system out after working for Simon Legree, my former boss as the bank.
    His motto was ‘The floggings will continue until moral improves” 
    I, being of a kinder mein, decided the carrot and stick didn’t work that well. 
    But how to get all my banker buddies to do my work, ala Sawyer?   I made sure they were younger than me, hungrier than me and needed a paycheck. It worked pretty well.  (If Tim, my old banker homie (we worked for the same ogre)and the one who referred me to Silver Doctors has his ears on, you know what I mean)
     In the overall scheme of things, we all made tons of money but they ended up doing the heavy lifting.  I only had to work 14 hours a day.
    I don’t mind hard work so long as someone is doing it.  My name is not Manuel Labore    LOL 
    Dave from Denver was a regular about 24 months ago.  I think he went on to bigger and better things. He is a regular on Harvey Organ’s site where he hits a few home runs out of the park. 
    I am glad we have someone of your experience on the site, Eric.   It helps balance out the ranty stuff, like my weirdness. 

    • No AG, without guys like you and Eric here, I wouldn’t even bother to check this place out let alone post anything.
       
      Peace and Aloha. Heading back to Maui in a few weeks, and will be out of the loop for awhile. :)  

  11. Thanks BOP
      Maui   Hmmmmm   I am so jeolous.
    We’ll miss the demigod’s personal island this year.  But next year we’ll be there  Cheers

  12. You are correct Bay that I did depend on other people to know what they were talking about 2 years ago. Most people do in financial matters. The difference is now, I am going to continue to provide alternative points of view and remind people(in particular new readers) that the self proclaimed experts were ALL wrong 2 years ago and could be wrong now. Problem is not in the general interest stories-Problem arises when the soothsayers don’t end every post with these words” Folks. I have been consistently wrong over the last couple years and for that I am sorry- I really let my readership down. But, I really believe this time around I am correct. Wouldn’t that be something!

  13. @Bay_of_Pigs, maybe after you get to Hawaii you can construct a laptop out of coconut shells & palm fronds, in order to keep us posted in the going-ons in Maui.  I can’t help but wonder if – just like everything else – the premiums on Silver are higher than they are on the Mainland.

  14. The Fed is soon to go tits up!

  15. GO TO kwn blog

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