Gold Backwardation (GOFO) Goes Mainstream

Back on April 19, I highlighted an excellent write up by Professor Antal Fekete on gold backwardation and the end of fractional reserve bullion banking titled: Who Said the Hydra Would Take it Lying Down. In it he wrote:

In waking up too late that there was a problem after gold futures markets have been flirting with backwardation for a year or so, officialdom was forced to act. Act it did in a typically haphazard fashion. A few days ago, on April 12 and 15 the paper gold market was demoralized by a ferocious attack on the lofty gold price. This in and of itself is proof that Bernanke is fully aware that permanent gold backwardation is imminent, and that it will create and unmanageable situation. It’s got to be stopped in its track at all hazards.

In fact, however, a lower gold price is making the problem more intractable, not less. The Fed is diving from the frying pan into the fire. This is the point missed by almost all observers and market analysts. They ignore the underlying flight into physical gold that continues unabated, in spite of (or, better still, because of) the panic in the paper gold market. The Fed’s intervention in bankrolling short interest is going to back-fire, for the following simple reason. The Fed’s strategy is inherently contradictory. A lower price for paper gold makes it easier, not harder, to demand delivery on maturing futures contracts. 

Several months later it appears Professor Fekete’s comments have been spot on, and the “hydra” has continued to employ brute force on the paper gold market in an effort to shake whatever supply they can from the financial trees. Unfortunately for them, it’s not working and gold’s backwardation continues to expand. Zerohedge has done a great job covering this ahead of the mainstream media as usual, most recently here.

Amazingly , it appears the mainstream media is now picking up on this huge development. In an article two days ago Reuters wrote:

July 19 (IFR) – A dislocation in the gold futures market indicating that demand for physical delivery of the metal is now far outweighing supply has intensified in recent weeks, increasing concern in the market that the change may not be a momentary blip and participants may have become over-leveraged.

Gold went into backwardation in comparison to the three-month futures contract in early January, meaning the spot price rose above the short-dated future contact. Now that process looks set to creep out the futures curve to longer-dated maturities, signalling some cause for alarm.

“The fact that has remained and widened … indicates that the physical market has tightened up substantially, a postulation that is corroborated by the growing premiums being paid … and the ongoing wholesale delays in the delivery of substantial bullion tonnage,” wrote Ned Naylor-Leyland of Cheviot Asset Management in a report this month.

“What is happening now is that the absolutely inevitable ‘run’ on the 100:1 leveraged bullion banking system is truly underway.”

“It could be a whole range of factors; a bullion bank may have overcommitted in the physical market, miners have reinitiated hedging programs since the April price dive and have to borrow gold to hedge, and that may have cascaded up the chain of physical demand,” said Robin Bhar, commodities strategist at Societe Generale.

“With the gold market you don’t find out the reasoning or explanation for an event until days, weeks, or even months after the event. What’s strange here is that a time of seasonal demand weakness we have strong physical demand and backwardation.”

“The actual message of the backwardation is that there is behind the curtains a lack of confidence in the fiat monetary system, a de facto rejection of paper money by some people who prefer the real money (gold and silver),” said Barba.

“That’s why a fall or rise in gold prices is not so relevant anymore. The monetary ‘fire alarm’ message, courtesy of the relationship between spot and futures prices, is: run for your gold, there is not enough for all.”

No there certainly isn’t enough for all, and if you don’t know who the sucker is in the fractional reserve bullion scam, it most assuredly is you.

Full article here.

In Liberty,
Mike

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