Historic backwardation in the gold bullion market

eplosive gold rallyGoing all the way back to 1989, there’s only been two other instances when the GOFO was negative.  It first occurred in the last two days of September 1999.  It lasted only two days.  The second time was November 20, 21 and 24, 2008.  The backwardation lasted for three days.
When the GOFO went negative last summer, it began in early July and lasted for nearly 3 months.  It went positive for a month then negative again for over two weeks (November).  It also spent half of December negative.  Since the beginning of 2014, the GOFO has been negative for 34 of the 81 days that the LBMA has been open.

At some point the amount pressure building up – think of it as being the equivalent of trying to stuff a beach ball into a test tube – is going to result in a massive upside explosion in the price of gold.


By PM Fund Manager Dave Kranzler, Investment Research Dynamics:

“Central Banks stand ready to lease gold in increasing quantities should the price rise.”  – Alan Greenspan, “The regulation of OTC derivatives,”  Before the Committee on Banking and Financial Services, U.S. House of Representatives, July 24, 1998

James Turk did an interview with Greg Hunter of USAwatchdog.com in which he asserted that the current backwardation in the London gold bullion bar market is historically unprecedented.   In response to this, my friend and colleague “Jesse” of Jesse’s Cafe Americain asked me if this was indeed the case.

(For those who want a detailed explanation on what the GOFO is, please see this article I wrote last August:  What Is GOFO And Why It’s Now Bullish For Gold).

My first comment in response to Jesse was:  “First let’s define the “backwardation” to which he (Turk) refers.  The paper market, the Comex gold futures, is not in backwardation.   He’s referring to the LBMA negative GOFO, which is backwardation in the sense that someone is willing to pay money to borrow physical gold bars AND collateralize that loan with dollars.  This implies that physical gold in hand is worth more than the promise to deliver physical gold in the near future, which is backwardation.

 

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In terms of the relative scale of historicity that can be applied to this current period of backwardation, I knew that between now and last July the amount of time the GOFO rates have been negative was unprecedented since 1999.  But I went digging around for the historical data to define “historically unprecedented.”

It turns out that, going all the way back to 1989 (I can’t find any data prior to 1989, which is probably because gold leasing didn’t really go into full swing until then), there’s only been two other instances when the GOFO was negative.  It first occurred in the last two days of September 1999.  It lasted only two days.  The second time was November 20, 21 and 24, 2008.  The backwardation lasted for three days.

When the GOFO went negative last summer, it began in early July and lasted for nearly 3 months.  It went positive for a month then negative again for over two weeks (November).  It also spent half of December negative.  Since the beginning of 2014, the GOFO has been negative for 34 of the 81 days that the LBMA has been open.

Turk’s commentary (as always) in the interview linked at the top is well worth reading.  The implication of the long stretch of time in which the GOFO has been negative since last July is that,  despite being covered up by the extreme degree of price manipulation in the gold market using paper Comex futures, there is a severe strain on the ability of the bullion banks to deliver physical gold bullion into the massive accumulation by buyers in the eastern hemisphere.  At some point the amount of pressure building up – think of it as being the equivalent of trying to stuff a beach ball into a test tube – is going to result in a massive upside explosion in the price of gold.

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