COMEX backwardation and inverted GOFO rates should never ever happen in a normal world for any reason ever but they have. Why or how could this happen? First let me explain “what” has happened, later I will explain “why.”
GOFO rates had gone negative for 29 of the last 30 days before turning positive for the last two. GOFO stands for “gold forward” rates. In other words, when gold gets leased out there is interest paid by the borrower and received by the owner. When these rates go negative it means that there is more interest payable (higher rates) to the holder of gold than to the holder of dollars. You can look at this from several vantage points. First and most obvious is that gold “supply” may be tight, in other words there may be difficulty in sourcing gold. From another perspective, it can be viewed as too many are trying to exchange dollars into gold or that interest rates on dollars are too low (or could be too high for gold?).
The thing is this, you have always heard the saying, “but gold doesn’t pay any interest or dividends” which is true… unless you are willing to lend it out for interest. The easy way to understand this is that there are simply not enough lenders will to lend their gold out into the market place which is another way of saying that supply is tight. The risk to the borrower is that they might have to deliver higher priced gold while the risk to the lender is that they may never see their gold again.
OK, now let’s look at the COMEX and the futures market. Since you can lend gold out and receive interest for it, it then follows that “gold in hand” could (should) be worth more say six months down the line because it can be lent out and returned with an added 6 months interest attached to it. This is why “futures” prices are almost always above the spot price for gold and silver. This should ALWAYS be no matter what …because they are “money” that are not subject to droughts, floods or whatever that can affect the supply greatly. This is the case EXCEPT for couple of “mega sigma” events happening. In one instance, it is possible that traders become fearful that they will not get delivered their contracted gold in the future which would make “gold in hand” worth more to them than the promise of future gold. They may be fearful because they feel that the current supply is tight and are not sure that future supply will arrive or they may even be fearful that a system wide crash or default will occur before their contracted delivery which might leave them high and dry. The big point here is that “gold in hand” can never ever be worth more than gold in the future (IF you know for sure that it will be delivered) because you can earn interest on it.
I have gone back and forth with several theorists as to whether or not we have already seen backwardation or not. To their credit, we have not seen it yet in the out months but they are very flat. So “flat” that we are only talking .50 cents or less for 6 months out. But, here is where it gets interesting. I spoke with a Chicago floor trader this morning who told me that he has actually executed 3 separate “back warded” gold trades since last June. Normally for example you would buy a June contract and sell in August for a $1 credit, thus buying today and selling later at a $1 profit. On 3 separate occasions, this trader tells me that the spot month has gone to a premium over the future month in the delivery process. This past February it went as high as a $3.50 premium.
So how could this possibly be? How could gold have gone to any premium at all? How or why could it ever be worth more today than in the future? Does the old “bird in the hand versus two in the bush” come to mind here? The only way that the delivery month (for gold because it is money rather than a commodity) can trade at a premium is if it gets bid up in price or the future month sold down in price, one or the other and as simple as that. The delivery month will only get bid to a premium if enough buyers either question the available current supply to deliver or question the availability of future delivery. There can be no other reason than this, does or will the supply exist for delivery? Yes I know, it will be said that “short sellers” may have gotten spooked and bid the spot month to cover a position but why would you do this if supply was not a question and could “buy” your gold in a future month for less if you were 100% sure that you were going to get it?
Something is up folks, this anomaly should never happen in London, never happen in Chicago or anywhere else on the planet (I have read where this is also occurring in Shanghai) but it is. This to me is a clear sign that gold in large quantities is in fact quite tight. We have not seen backwardation yet in any big numbers but the fact that we should never ever see it in any fashion tells me that something is and has been happening with the supply … I also know for a fact that this is not something that can be “printed” away. Once we finally get “in your face” backwardation, this will be like a bell ringing that the game is over. No, not just the “COMEX game,” the whole game…the entire game of Western finance. Some will say that this is overly dramatic, it is not. The gold and silver price suppression game is at the very heart of the lie, once this is exposed…so will everything else that is hiding in the central bank shadows.
The following are a reference photo of Kathy’s daughter who took a “selfie” with poor lighting and the portrait that Kathy painted of it. This is only her 2nd human portrait to date on her way to the goal of becoming a “master portraitist.”
In sad news, RIP Arenal (Ari). Our “road dog” Ari who was prone to seizures which had been held at bay by medication seized for nearly 30 minutes straight and died on the way to the vet two days ago. They say that “all dogs go to heaven” which if true means that heaven is a little livelier place now as she was a hellion!
Rest in peace Ari.
Very sorry to hear about your dog. Your wife is a very talented painter!
thank you Farrell
Bill, If you know as much about gold and silver, as your wife knows about painting then we should be going in the right direction by following your advice.
Amazing isn’t she? And never painted anything ever before Sept. 2012 and hated art in school. Go figure.
Lovely girl, amazing portrait!
May the house of cards come crashing down soon!
First as a devoted dog lover (two under my feet!), my thoughts are with you in your sad loss. So much pleasure and always the end pain, but happy memories. Thanks also for your asides on the magnificent Princip. Heartwarming to see.
Looks like you may be punching above your weight with such an incredibly naturally talented wife too 🙂 Wow!
And thanks for the piece on all who think your crazy over PMs. Made the quiet ridicule of my friends and family easier to bear. I thought it might be just me!
And final thanks for your consistently outstanding work and insights. So supportive to this old UK silverbug in these troubled times, and greatly appreciated.
Very best wishes
Maurice Lea UK
thank you Maurice. And no you are not nuts, the world now judges sanity as the reverse unfortunately.
Condolences, Bill. A good dog earns its way into the family, becoming not just a pet but a trusted friend and partner. No, they are not human but they become dear to us all the same. My son lost his two dachshunds in the past 6 months and it was a very sad time for them and for us. They were great dogs and good friends too.
The picture painted above is superbly done. That is the work of a truly outstanding artist. It is so hard to get a human face so perfectly proportioned that it is virtually identical to a photograph. I am in awe of this work… and I do not impress easily. Excellent job on that.
thanks Ed, I will pass these condolences and compliments along to my wife as she could use a smile this week.
Sorry about your pooch, Bill.
“If there are no dogs in Heaven, then when I die I want to go where they went.”
Both you and Craig Hemke/Turd Ferguson find the negative GOFO rates to be historically unprecedented. Both of you also see it as a sign of extreme tightness in the physical market. I think the June delivery month will be a good test of that theory and reveal just how “bad” it is.
we’ll see, open interest is already somewhat low for June. Could be that fewer are willing to play the game now.
It’s tough when dogs die. Here is little Reina who I caught off the street in Mexico last month. She had pretty much every imaginable parasite and now she’s finally getting the last of her infections licked and growing some fur, and apparently is turning into a little Tasmanian Devil, which is a good sign. I’ll get her next week from my mom. Mexico streets are a great place to get puppies, they have the survivor genes. She has such an awesome temperament. They are free and the vet bills are really cheap. Except this latest issue with her blood infection up here cost us several hundred dollars, but still less than getting a dog up here. It would have cost $20 in Mexico to fix. So I think now every time I go to Mexico I’ll bring back a street puppy, and I’ll know what to treat them for down there for cheap, so it shouldn’t end up costing more than $100 for a great, cleaned-up dog that will appreciate you for the rest of her life.
A picture paints a thousand words. Those pictures along with this article says it all. Thanks again
So sorry about your dog, Ari.
My deepest condolences.
thank you Dan.