Sandeep Jaitly on negative gold forward rates (GOFO)

the following is a response by Sandeep Jaitly (on Twitter @BullionBasis) to the historic negative GOFO rates, as discussed today on Zerohedge.

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

10 comments on “Sandeep Jaitly on negative gold forward rates (GOFO)
  1. Sandeep Jaitly… One of Mother Nature’s “True Gentlemen”. It’s a constant pleasure to listen to him. (As it is with most of Max & Sherbert’s guests!;D)

  2. Salim Turdaliev says:

    So you are actually saying that there is an arbitrage opportunity for the holders of Gold and Silver? If so, doesn’t it indicate that the indexes for gold and silver going to depreciate even more?

  3. Janet says:

    I still dont ‘get it’…….but then I’m financially illiterate. I’ll just hold on to my PM’s anyway. In for the long haul.

  4. daddy warbucks says:

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    July 8, 2013
    Today James Turk warned King World News that something “shocking” has occurred in the gold market. Turk also spoke about a key change in another market that KWN readers around the world should be aware of. Below is what Turk had to say in this powerful interview.
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  5. WeLoveIt! says:

    Lets see here.

    Lets go back to 6 months ago.

    At that time, I insinuate to you an opinion that the gold price in dollars is going to go up in the future. “Up, I say!” Maybe you thought that was quite a reasonable guess.

    That day gold was at $1678 per ounce of gold. I make you an offer. The offer is that for every ounce of gold you give me I will give you 1.05 ounces of gold half a year later. In other words you give me 20 ounces of gold and in 6 months I will will give you 21 ounces back. It sounds like a 10.25% gold gain for a year. (1.05*1.05)

    If you thought gold was going up that sounds like a great deal!

    Now we are here today. You got a 1.05 ounces of gold for every one you gave me, a 5% premium denominated in gold in 6 months! You gave me 20 ounces and got 21 back. You genius, you! Sound familiar?

    But, today the gold price is $1255 dollars per ounce. So now calculate your gain denominated in dollars.

    1.05 [Present ounces/6 month past ounces] * 1260 [$/ounce of gold] / 1670 [$/ounce of gold] = .785

    Invert that and that is how many times gold would have to go up denominated in dollars for you to break even in dollar terms; times 1.273. It would need to go up 27% to break even in dollar terms. You would have been better off holding paper dollars you would have the same amount.

    You lost (.785-1)*100=-21.45 % in dollar terms.

    So there was:

    Gold ounce premium across 6 months time= (1.05/1.0-1)*100 =5%

    Dollar ounce of gold discount across 6 months time= (1260/1670-1)*100 = 24.6% (Premium of -25%)

    Looking back that sounds like a very sophisticated way to have lost value. Contango, fandango, backwardation, discount, maturity, futures, obligation,.

    Recap on the method: A study of history. If we did this what might have happened?

    Thinking of Nixon. Who’s gonna close the dollar gold redemption window now?

  6. WeLoveIt! says:

    If you prefer more sophistry look at this graph:
    from this page:

    Realize this graph is assuming or false predicting the future from “Today” to “Maturity”.

    Now grab the price at maturity for all three lines and drag it below Today’s blue line price (“Forward price in normal backwardation”). In other words drag the apex of last prices down below all of the prices (including today’s price).

    That’s how you can loose value in backwardation. Hard to tell the future.

  7. WeLoveIt! says:

    6 month gold history chart that goes with the first 12:45 am comment.

  8. WeLoveIt! says:

    Does that mean if the commodity is going to go down you want enough backwardation to compensate you?

  9. In India you buy Gold to keep for your funeral expenses, anything left over is divided up among your next of kin. What does it matter if the price goes up or down? other than the fact that you can buy more gold when the price is low.

  10. General Rasta, SLA says:


    someone should call Buffett’s boyfriend, Charlie Munger, and make him aware that it looks like chinese garment manufacturers got a HUGE ORDER from 1940’s Viennese jews.

    how UNcivilized!

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