This week saw a very important upward price breakout, reversing several key moving averages for the precious metals. This week’s recap also includes detailed discussion of the importance of key inventory supply indicators and negative GOFO rates.
Negative GOFO rates are all about an all-time-low LIBOR, combined with a mildly increasing Gold Lease Rate.  A GLR over 0.40% is nothing historic; therefore the “historic” negative GOFO rates are all about LIBOR’s historic lows along with some mild moves in the GLR.  I’m not saying a supply shortage does not exist.  All I’m saying is, negative GOFO rates aren’t “smoking gun” evidence of this with LIBOR at 0.39%.
Half the GOFO story is about historically low LIBOR rates, and the other half is about an increase in the Gold Lease Rate.  The next question is, what made the GLR rise? 

Perhaps its an impending default at the LBMA?

Submitted by Adam Taggart, Peak Prosperity:

Submitted by Gold finished Friday up $25.50 on above average volume to 1396.40, with silver up $1.01 to 24.05 on heavy volume.  The gold/silver ratio dropped to 58.08, a level last seen in April prior to the gold crash.  A poor new new home sales report was the catalyst for the week’s big move; bad news in housing means (presumably) a lower chance of tapering at the next Fed meeting.  PM prices closed the week at or near their highs, which is a good sign.

Over the week gold is up $21.30 [+1.55%] while silver is up $0.86 [+3.71%].

The dollar this week was largely neutral again, up 0.06 [0.07%] to 81.41.  The dollar remains in a medium term downtrend, although momentum appears to be slowing as the dollar seemed to find some support at 80.75.  While this week the buck was not a factor for PM, moves down in the buck are generally supportive of PM prices, while moves up will provide headwinds.

The gold/silver ratio has descended from its peak at 67 on July 28th to its current level of 58 in only a month.  It is right at the 200 day MA for the ratio.  A falling GSR is a bullish sign.

Mining shares were up on the rally in PM Friday; GDX +2.62%, and GDXJ +5.43%, with the juniors outperforming.   Volume was heavy in GDX, but the price action was a bit lackluster.  While gold has clearly broken out setting a new cycle high, GDX has not done so.  For the most part, miners have traded sideways this week – with GDX up only +1.17%, and GDXJ +4.93% overall this week.  As of now, the miners have not confirmed the breakout in PM, which I interpret as a bit bearish.

Here are the two charts: you can see that gold had a breakout, while GDX did not.

Physical Supply Indicators

* Gold premiums in Shanghai dropped $3.88, closing the week at a premium of $4.39.

* The GLD ETF gained +4.81 tons of gold this week.

* The COMEX lost -0.90 tons of registered gold this week, the losses coming largely on Friday.

* LBMA GOFO and Gold Lease Rates were virtually unchanged.

* Premium/Discount to NAV: Based on 16:00 EST Friday prices, gold 1396.30 and silver 23.99, CEF 16.33 -2.25%, PHYS 11.65 -0.08%, PSLV 9.64 +2.89%.  Compared with last week, Sprott’s fund premiums dropped somewhat, while CEF’s discount improved.

The physical ETF premiums are more or less even, Shanghai premiums are disappearing, and GLD ETF has put in two straight weeks of increasing gold holdings.  COMEX registered gold is still dropping, however, so I’ll label the supply situation as mixed.  Overall, rising prices appear to continue helping the gold physical supply situation, but let’s call the supply situation mildly gold-price positive.

I have an explanation for negative GOFO rates later on in the report.

Futures Positioning

The COT report for gold shows the Producer category reduced both long and short exposures this week, with long exposures dropping more than the shorts, netting out to a drop of 5,000 contracts or about 5%.  Managed money more than made up for this by dropping shorts and increasing longs by a net of 10,000 contracts, a big move.  Smart money is taking some profits and managed money are both covering shorts and increasing long exposure.  Positioning is still bullish.

Moving Average Trends [20 EMA, 50 MA, 200 MA]

Gold: short term UP, medium term NEUTRAL, long term DOWN

Silver: short term UP, medium term UP, long term DOWN

Gold this week moved from medium-term down to neutral, and silver moved from medium-term neutral to up.  Things continue to look good for PM from the trend perspective; even if PM were to track sideways, the moving averages would continue to move up.

GOFO, LIBOR, and Gold Lease Rates

Negative GOFO rates have been considered by some to be the harbinger of an imminent default at the LBMA.  In some sense, the question to be asked is, how on earth could Gold Tomorrow be worth less than Gold Today except as an indication of a potential default in the offing.  But is an impending default the only reasonable explanation?

Looking at history, I’ve concluded that negative GOFO rates are not a sign of a coming gold-supply-apocalypse, but rather an artifact of an increasing Gold Lease Rate (GLR) combined with a very low LIBOR rate.    Viewing charts of GOFO without understanding LIBOR’s movements are potentially deceiving.  Since GOFO = LIBOR – GLR, as LIBOR moves closer and closer to zero, GOFO = -GLR.  And, the 6 Month LIBOR is at its all time low of 0.39% – it has never been lower than this in the history of the timeseries.  This simple math means, if the GLR moves above LIBOR [and historically the GLR was often > 1% from 1990 - 2002], GOFO goes negative.  If LIBOR had been 0.39% during the 1990s, GOFO would have been negative for all of that time.

My conclusion: negative GOFO rates are all about an all-time-low LIBOR, combined with a mildly increasing Gold Lease Rate.  A GLR over 0.40% is nothing historic; therefore the “historic” negative GOFO rates are all about LIBOR’s historic lows along with some mild moves in the GLR.

I’m not saying a supply shortage does not exist.  All I’m saying is, negative GOFO rates aren’t “smoking gun” evidence of this with LIBOR at 0.39%.

Why Did Gold Lease Rates Increase?

So half the story is about historically low LIBOR rates, and the other half is about an increase in the Gold Lease Rate.  The next question is, what made the GLR rise?  Perhaps its an impending default at the LBMA?

This article describes gold leasing and its associated mechanisms.  One excerpt I found possibly explanatory is the following section:

3) Gold mining companies can upset the gold swap market and create conditions that make it lucrative for banks to engage in gold “leases” and other transactions as a result of mining company hedging activities that create an artificial short supply of futures and forward contracts, thus depressing the Gold Forward Offered rate.

Translated, that means when mining companies in aggregate start to hedge more, they dump a bunch of short futures contracts onto the market further out in time than the front month contract, depressing the price of “gold tomorrow” vs “gold today” – exactly what we are seeing right now in negative GOFO.  I believe that mining company hedging is causing GLR to slowly rise.

How does this work mechanically?  One futures contract instance exists for each month in the future.  You can’t have a futures contract without an expiration date: December 2013 Gold is the current front month.  So presumably, a mining company that wants to lock in gold prices (and thus assure themselves of a profit) would sell a number of contracts at different dates further into the future than the current month.

buff sale(2)

Imagine a company completely hedging a 1 million ounce annual production: it would have to sell 833 (100-oz) contracts for each future month; 833 Jan 2014, 833 Feb 2014, 833 March 2014, approximating the expected production rate of the mine.  This additional “supply” of futures contracts would depress future prices relative to current prices.  If enough companies did this, “gold tomorrow” would eventually end up being worth less than “gold today” especially with the absurdly low LIBOR rate.  Perhaps a month ago, Dan Norcini at talked often about miners increasing their hedging as a result of the gold crash, using evidence he found in the gold COT reports at the time.

From a business perspective, this sort of activity makes sense.  If you ran a gold mining company, perhaps you too would find it worthwhile to lock in a slightly lower price that guarantees you a profit, rather than gambling your job and your company’s life on an uncertain future price of gold which might well end up with you and your friends on the street if the price of gold were to tumble further.  Hedging is all about risk reduction, and that’s not a surprising reaction after a 30% downside move.

There may be other things going on besides mining company hedging, but I believe it is a reasonable explanation for the mild increase in the GLR.

Note: If you’re reading this and are not yet a member of Peak Prosperity’s Gold & Silver Group, please consider joining it now. It’s where our active community of precious metals enthusiasts have focused discussions on the developments most likely to impact gold & silver. Simply go here and click the “Join Today” button.

    • I disagree with his analysis because…
      1. Libor. Libor has been low forever. It hasn’t recently capitulated and is therefore not responsible for the recent rise in negative gofo rates.
      2. Gold lease rate. There is no great recent increase in miner hedging. As Jeff Neilsen points out, current prices are extremely close to the price of production. For these last six weeks of regative gofo rates -now the 6 month gofo rate us negative as well-, gold has been at $1300 to $1350. By selling forward production, miners are locking in a loss, not a profit as the author wrongly claims. 
      Gofo is indeed indicative of supply constraints and is supported by accompanying indicators of Comex backwardation, falling Gld Comex, and JPM inventories, ect. Ect. ect. Perhaps with his misinformation Mr. Taggart is applying for John Nadlers old Toyko Rose position.

  1. Please forgive my ignorance on the subject of hedging, but on a large enough scale, doesn’t that become a “zero sum” game?  Meaning, on a LARGE scale, cannot they actually impede the value of their own product significantly, whereas had they not hedged, gold/silver would climb on long investor momentum? So then enough hedging creates a huge headwind for growth and inhibits it if done on a LARGE enough scale? Self defeating, no?  Unlike betting against your own horse to hedge losses, where such a hedge doesn’t actually hamper the payout ratio of your own stallion. (Should it win)

    • Maybe that’s just it, Shamus.  It doesn’t happen on a large enough scale to cause this problem.  Perhaps hedging is more like an insurance policy that one buys at a cost of x so that a 10x or more position has some insurance against a large loss.  Futures contracts, such as put and call options, might be used in this way and carry some leverage to accomplish the task.

  2. Looking for some advice on 401k for my mother. She just retired w/ 170 grand in her 401k …..should she take that money in one lump sum and purchase some gold bullion with the money ? I thought it would be good idea to purchase around 10 oz. of gold. Would appreciate any suggestions ! You all are a great resource to have. Thanks

    • I’d look at buying about the same $Fiat$ figure in Silver and Gold, if it were me. 
      I’d also look at current living expenses, and possible other income, and leave 
      a part of this money in CASH. Readily Available CASH, but cash nonetheless. 
      Be ready to roll cash into PMs. Other stacking items would be good, too. 
      Food for one. 
      I would go all in with PMs, but I am still working too. 
      I’m sure others will weigh in soon! 

    • If I were in her shoes, I’d go about $150K for stacking, and 
      $20K cash. But still gotta figure taxes, so less PM’s I guess. 
      Some 401K’s have a chacking account attachment, making it 
      easy to access funds! That would be fine in the short run, 
      if we make it past the current rocky spots. 

    • @KMA

      The first thing I would ask is your Mom’s age.  If she is over age 59.5, she can take regular distributions from her 401k (assuming that her plan allows partial distributions), without the additional 10% early withdrawal penalty tax.  If this is pre-tax money, which 401Ks tend to be, then she will owe taxes on the money as it is withdrawn.  If her state of residence has an income tax, they will want a piece of this as well.  If she is under age 59.5, she can set up what is called a Substantially Equal Payment Plan or SEPP that will allow her a fixed amount access this money without paying the early withdrawal penalty tax.  There are also a few other exceptions to the penalty tax and they should be investigated as well.
      Withdrawing this money in one lump sum could result in her paying the max tax rate for the year in which it is withdrawn.  I believe that is currently 39.6% but it would be worth checking to be sure.  A near 40% (near 50% in state with income tax) is quite a tax bite.  Some effort should be made to see if there is any way to reduce this that fits her financial situation.  Retirement money is precious stuff and hard to replace if lost, so considerable care in needed in this plan.  Hiring a fee-only financial adviser to work up a plan for your Mom would probably cost $500 or so and would be money well spent.
      It would also be good for your Mom to check with her HR person or department to see what options her plan allows.  This is vital info and is in the plan’s Summary Plan Document or SPD.  The law requires that her employer provide her with this info if she requests it. They can charge a small fee, usually $10-15 for copying but most do not.  This document needs to be read carefully by either you or her to see what options her 401K plan allows.  Knowing that info, you can make better decisions.
      An alternative plan would be to do what I am doing with my IRA and that is to make substantial withdrawals over time such that the money is removed from the plan at a steady rate that does not result in a huge tax bite.  I am over age 59.5, so all of my withdrawals are “normal” insofar as the tax coding goes on the form 1099 from my IRA custodian.  The amount taken is just enough to keep me in the 25% tax bracket.
      While there are many possibilities that come to mind, so much depends on your Mom’s financial position, other assets, age, health, expenses, needs, wants, bills, etc. that it is not possible to give the kind of specific advice she needs at this time in her life.  It is vital to know the IRS rules and regs as they pertain to 401K plans and perhaps to IRAs as well, if she wants to roll this money over into an IRA.  This is not a taxable event if done directly between her 401K plan custodian and her new IRA custodian.  If she withdraws the 401K plan money in her name, 20% will be withheld for taxes.  She will get this money back in a year or so but its removal from the 401K plan complicates the tax picture, so just do a direct transfer with no withholding. Don’t assume anything.  Get the facts and KNOW what you are doing before you do it.  Making a mistake with this can be VERY costly as well as frustrating and time consuming.
      If you decide and she agrees that buying some bullion would be good, then it will need to be held securely in some way to protect it from theft.  A home safe is a good storage container, particularly if it has some fire resistance and is bolted securely to a concrete wall and / or floor.  Disguising it in some way is also good.  Additional layers of security are also good, such as a monitored home alarm system, a noisy dog, motion sensors, and video cameras.  Part of this can also be stored in a safety deposit box but only if you have a small local bank or CU and not merely a branch of a large national bank.  Bankers are known to have sticky fingers, so go small with the bank or CU and only put part of her stash there.  The combo that works best for you will likely contain some of these and perhaps other security elements as well.
      Best of luck with this.  I manage money for my Mom, Step-Dad, and wife, so know what a responsibility it is.

    • 4 OZ  that was a very funny video. Now I can see why Akhbar the Dead terrorist blew himself up. 
      I tried replacing the word F*** with silver and you know what. It just didn’t sound the same. 
      What The Silver? 
      I’ve been Silvered.
      This is a Silvering great deal.
      She’s Silvering great. (Well, maybe in this case but with due respect)
      Replace the F in F*** and more than half the letters in the alphabet will make a rhyme.
      Nothing rhymes with silver. 
      Does that mean silver is more precious than f***?  
      Expiring minds want to know.  ha ha

  3. The Israel Corporation saw its value plummet by 99.88% in a matter of minutes around noon on Sunday, bringing the TA-25 index down by 2.5% and triggering an automatic fail safe that shut down trading for a short time.

    Typing error sends Tel Aviv Stock Exchange plummeting
    Israel Corporation shares fall 99.98 percent before mistake is detected; trading briefly halted

  4. @KMA, few of us are investment advisors but many would agree not to leave all of her funds in a bank.  Having retired, I assume she is over 59 1/2 years old; therefore no early withdrawal penalties will apply.  Taxes, naturally, will have to be paid.  Certainly she could roll her funds over into a self-directed IRA.  AGXllK & the Doc have experience here and you will find info to that effect in previous submissions.  Obviously, any debt load, mortgage, if any, her monthly revenue stream, and her health must be taken into consideration.  With some research and consultation I am confident you will set her up nicely.  PM’s?  Without a doubt, dependent upon her situation.  Best of luck,

  5. Adam,

    In the event you read this, please know I mean it strictly as constructive criticism.

    You have a context oversight in your comment about the mining shares. While the chart of GDX generically shows it has yet to break-out and confirm gold’s move, you need to put that into context. For starters, by definition, the equities will display leading indicator smart money positioning in advance of a turn in bullion. Even with GDX vis-a-vis gold, we have seen this. The “local bottom” for both can be defined for the near-term as August sixth. That’s a GDX close of $24.03, with a gain of $6.11 by the close of August 23rd. That’s a 25.43% move.

    Using GLD as a proxy for gold simply because the quotes are easy to fetch, we have an August 6th close of $123.97, for a gain of $10.93 by August 23rd, or 8.82%. The gold equities returned 3 times as much over the same period. That’s confirmation of a different form, and well worth calling as confirmation. Period. End of story. The only reason why the chart hasn’t confirmed yet is simply the “artifact” that gold equities had the snot kicked out of them far more massively than gold itself on the way down and the GDX has needed even more time to repair itself. The price move by itself, not the chart, clearly shows confirmation of the bullion’s move and the hard money that smart investors have been dumping into GDX didn’t need a chart signal to tell them “GO.”

    The majors in GDX are also dealing with huge problems right now. Barrick is a basket case, for example. The lean and mean mid-sized producers and near-term producing Jr.s that make up the bulk of GDXJ is where the smartest of the smart money has flowed, and that’s why the signals coming out of GDXJ already shows confirmation. Going forward, it would be wise to follow GDXJ as a leading indicator, not GDX.

  6. KMA  It might be more trouble and cost than its worth to do a Self Directed IRA.  It is a very narrow channel that one needs to understand well. But it ‘might’ be worthwhile to buy into a bullion IRA with Lee Bellingham’s system.  He would be my choice and can found through Independent Living, his publication.  If your mom doesnt hold it she doesn’t own it but it might be worth a shot.  Now, if her tax bracket is low and she can shelter the taxes from the IRA distribution, she may be able to extract the IRA funds forever, removing them from harm’s way and sequester them nicely in phyzz   Since prices for gold and silver are relatively low, with reasonably certain price increases in the next 5-10,  a good time horizon for a retiree with other outside income, she would likely make up for the tax cost in a short time
    Ol’FordTruck did this some years ago and took his IRA out in 3 tranches.  Since the end of the year is looming, you might want to have her take some this year towards the end of the year, then some early in 2014, thus removing 2/3 in less than 6 months, hopefully before the worst of the bankster problems come home to roost. This spreads 2 tax years of withdrawal over 6 months. The remaining 1/3 could to take in early 2015.  That might be the last tranche and that one could  pay the taxes for 2014 and 2015. 
    She would be taking about $55-60,000 each time and reinvesting in PMs now, first of January 2014 gets 67% out of Dodge and into safe haven. If your mom puts the last part into PMs right after the second tranche is taken, then it will be reasoanbly safe. Maybe she can buy Sprotts PSLV or his gold fund. Every thing I have heard about Sprotts funds and ETF are that they do actually contain precious metals.  Unless our entire system of stocks and bonds goes toes up in less than a year, mom could have safe haven for 18 months.  I understand that Strott allows for distributions of shares to be redeemed in that precious metal of the fund. 

    • Independent Living is a decent newsletter.  It is published by Lee Bellinger.  :-)
      Her extraction rate should be accurately determined by a financial adviser based on all of her financial conditions.  I agree that using the end of one year and the beginning of the next very neatly raises the amount that can be removed within the months mentioned while pushing 1/2 of the distributed money into each of 2 separate tax years.  That will likely be a positive step but some calcs will need to be run to know what amount is optimal.
      Of course, if one is deeply concerned that getting her money into her hands as quickly as possible is a valid option for her, then that will be her choice.  Just make sure that she understands ALL of the ramifications of her choices.

Leave a Reply