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Gold Shortage Continues: 12-Month GOFO Trend Negative


Gold prices tank $31 an ounce as physical bullion remains in high demand.

Christopher-LemieuxSMBullion.Directory precious metals analysis 28 November, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

In early November, the GOFO rates turned negative. This means that investors or institutional players are willing to pay an interest charge in order to hold gold. As Deutsche Bank reported, “this is unusual as gold is traditionally used as a source of collateral for cash financing.” The one-to-six month GOFO are all in negative territory, and the 12-month GOFO is the lowest on record (.02667 percent) – also heading to negative territory. The six-month GOFO has hit a record 11 days in negative territory.

The gold shortage in question has a lot to do with what is available in the repo market, as central banks and large institutions largely rely on conduits opposed to buying over the open market.

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A shortage on physical bullion could cause a problem should the Swiss National Bank (SNB) be forced to buy over 1,500 tons of gold on a “yes” vote majority on Sunday’s referendum. The SNB would have five years to buy the require gold, but it would be rather bullish near-term.

Gold is seeing demand out of Japan with the Japanese economy sinking into recession for the third time since the financial crisis.

The Bank of Japan (BoJ) has successfully reached a positive inflation threshold, but the, now, three-plus percent inflation is wrecking the purchasing power of the Japanese. The Japanese consumer has been dead-on-arrivial after the three percent sales tax increase in April, a condition the BoJ said would only be temporary.

Once again, central banks missed the mark.

As inflation increases on the backdrop of a seven percent YoY contraction in GDP, the BoJ’s money printing scheme has fueled demand for gold. In comparison, the yen has collapsed 15 percent in the last six-months compared to a 10 percent increase in gold priced in yen.

Gold in yen-terms has reached levels last seen in March, with the trend starting after the BoJ surprised markets with more asinine quantitative easing.


Equities may show a picture of rosy economic growth, but demand in gold bullion show a different story. US treasuries are sharing the same story. The benchmark 10-year note has now inched to 2.1726 percent, and the 30-year bond hit 2.8888 percent – the lowest since May 2013.


Demand in treasuries have a negative correlation to yields (If bond prices rise, yields fall).

Something has got to give, and if history repeats itself, it’s likely to be risk.

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  1. Hi Stephen,

    Yes, it’s crazy to think about. I’m sure analysts at these very institutions hoarding bullion go out and spread their “gold to $700” plans.

    Gold has this uncanny way to hedging human behavior.

  2. Not only is the 1 Month GOFO rate the most negative it has been since 2001, not only is 2 through 6 Month GOFO also negative, and in fact the 6 Month GOFO is now negative for the longest stretch in history clocking in at 11 consecutive days, but, strangest of all, the gold curve backwardation is about to become absolutely historic with 1 Year GOFO just a whisper away from hitting negative territory for the first time ever at 0.02667%.

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