Gold Silver Worlds: The year 2013 has set several extremes for gold (and silver). Apart from an epic price drop the metals witnessed a mass exodus in the Western investment world (symbolized by the GLD) but at the same time an unseen physical gold rush in the East.
From a technical point of view, the gold forwards rate (also GOFO, a rate which is used for gold leasing and collateral) has been negative for an extremely long time this year. Moreover, its steep rise afterwards has suddenly turned down. A negative GOFO points to physical gold shortage according to experts.
The “counterintuitive” observation about the GOFO rate is that it has turned down several times this year right before a significant gold price drop occurred. A declining GOFO rate should be indicative of stress in the repo and collateral market, a rising gold price should reflect this (in “a normal world”, although the rules appear different in “the new normal”). Alhambra Partners has laid it out perfectly, mind the chart below:
Gold prices rise when the physical shortage asserts itself, because it is a fact of the market. However, gold falls when called on by the banking system to fill in the growing repo and collateral cracks. It appears we have just concluded the third full episode of this yin and yang. Each and every gold smash is predated by a significant rise in GOFO.
After spending 39 trading days below 0.00%, 1-month GOFO moved out of the negative on September 2. That move upward actually began a week earlier, coinciding with the return of negative repo rates in not just the 10-year but also other maturities. Sure enough, gold prices that had been “celebrating” the obvious shortage quickly began to reverse again.
That downward trend in prices lasted until a low on October 15 (AM fix) of $1,255, coming close the year’s low point. However, GOFO began to precipitously drop in the days before that, actually hitting 0.00% (1-month) on that same day. Not coincidentally, gold has moved sharply higher since GOFO turned negative once more.
Since Wednesday October 16th, GOFO is in negative territory again. Whether or not GOFO will remain negative (indicating shortage in the physical gold market) and take the gold price higher as from here, remains to be seen.(...)Click here to continue reading the original ETFDailyNews.com article: Physical Gold Shortage Signaled Again By Negative Gold Forwards RateYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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