Gold forward rates (GOFO) have officially turned negative for the first time in a while. This forward, over the counter, measure is useful but isn’t telling anything new. The ‘market’ form of GOFO is none other than the bases in the (public) futures markets and the futures markets have been in backwardation for a while. As of yesterday, the co-basis on the August gold contract was +0.83% annualised or 145c per ounce (gross.) This means that physical gold holders could exchange their gold for dollars and exchange those dollars for gold futures at a 145c per ounce discount. This has advanced from the 59c available on 22nd May. The same measure for September silver yesterday was +4.2c per ounce or +0.99% annualised.
August gold is currently rolling to December gold, and the same measure with December gold was –0.15% or –85c. It’s a matter of a fortnight or so before December gold moves into backwardation. Seeing as there’s currently 171 days to December gold’s expiry, the current action is unprecedented.
It seems there is unparalleled demand to exchange dollars for physical bullion (silver and gold) – so much so that the availability of bullion to settle bullion obligations – whatever their nature – is dwindling. Naturally, bullion obligations have a maturity, just like any other obligation.
This backwardation is a variation on the ‘gold window’ that was in place after the collapse of the London Gold Pool in 1968 because of the treacherous (to the Pool members) action of France. Following the collapse, a two tier gold “price” system was in operation whereby official exchange between the United States government and other governments was kept at a rate of $35 to one ounce of gold, but the public market was also allowed to find a gold “price.” Of course, this system failed with the (effective) unilateral suspension of the Bretton Woods system by Richard Nixon closing the ‘gold window’ in August 1971, notwithstanding efforts to punish (via suspension from the system) of those governments that dealt in the public markets for gold.
Prior to the closing of the gold window, dollar exchange reached as high as a 23% discount to the official par against gold. Notwithstanding the discount reaching close to 0% in early 1970, the system failed by August 1971.
What followed is well known and is described as a ‘gold bull market.’ Sadly, this painted a pretty picture of a tragedy that had to occur, and is still occurring…
Sandeep Jaitly, 9th July 2013