Something significant may have just occurred in the physical gold world. According to Zerohedge, the one month Gold Forward Offered Rate (GOFO) rate just went negative for the first time since 2008, and perhaps even more significantly, so did the three month rate. The last time both went negative was in 1999. In both cases it marked the beginning of significant higher prices for gold.
So what is the significance of a negative GOFO? One explanation is provided by Victor the Cleaner:
“Whenever GOFO turns sharply lower or even negative, this indicates stress in the London gold market, i.e. that some of the participants are desperate to get their hands on gold on short notice and are prepared to pay a premium for borrowing gold against US$ collateral.”
This is similar to backwardation in the futures market where the price of gold for immediate delivery is higher than gold purchased for delivery at a future date, indicating that buyers need physical gold sooner rather than later. In the normal environment of a positive GOFO, a swap of gold for dollars can be viewed a loan in dollars to be paid back with interest using gold as collateral. With a negative GOFO the situation gets turned around. Interest is now being offered to parties willing to lend their physical gold in the short term. Someone needs physical gold in a hurry and the normal channels for obtaining it are not available.
Is this the beginning of the end of the long correction in gold? Who knows? But, it is interesting that Citi recently announced that “no gold company under our coverage will generate Free Cash Flow at spot gold.” With the physical market showing real signs of stress and gold miners underwater, it will be interesting to see how much further paper gold can push the price.