- Andrew Maguire Discusses GOFO and Gold “Backwardation”!
by Turd Ferguson, http://www.tfmetalsreport.com/
With LBMA Gold Forward rates remaining negative for an unprecedented sixteenth consecutive day, I asked Andrew Maguire for his opinion on what this means and whether or not it indicates “backwardation” in the global gold market.
I (Andy) have been asked by some members to allow a section of Commentary to be made public in order to demystify the backwardation argument. As noted it is not my intention to attack good people, however, it is important that the differences between the global cash market and paper markets are understood. Therefore I have agreed, especially as there are a certain mints and brokerages running pooled accounts that IMO have a vested interest in throwing up a smokescreen on this very important subject.
I received some more good questions this week regarding backwardations that need clarifying especially after a series of recent blogs claiming there are no backwardations in Gold. I would first like to say that one of these assertions came from Trader Dan, a person I do not know personally but respect as a good technician and very likely a good trader, too. This response is not an attack upon him or any others who I know have no vested interest in trying to debunk what is clearly the most important signal of physical shortages historically ever seen. In a nut shell, he is comparing apples to oranges. By isolating the real global cash market for gold and then only comparing Comex futures contracts in series out several years, I agree they are largely in contango. But this is a purely US centric Comex paper market phenomenon and has nothing to do with the divergence between the futures market and REAL CASH PRICE of bullion as determined by London fixes each day.
I am not comparing prices in select regions around the world where premiums are anywhere from $6 to $100, I am benchmarking the cash price of gold as determined twice daily in the largest global marketplace for gold in the world, London. When comparing this delivery market vs. the future-dated, largely non-delivery Comex market, then from a real cash wholesale perspective the London spot or cash market dwarfs physical activity on the Comex. This is where an apple becomes an orange and bears little comparison. The LPMCL clears some 700 tonnes of gold and 5000 tonnes of silver every single day. Understood only a portion of these transactions result in physical allocations but the point here is that this is the actual real cash price I can buy or sell my physical twice a day in any size I wish and at a price that has been averaging far in excess of several sets of future prices. This, in simple terms, is what is referred to as real world backwardation, not an isolated set of future paper settlement prices but how the real cash market for gold relates to these synthetic sets.
Nor can gold be lumped in and compared apples to apples to Oil or other commodities. NONE of these commodities trade as an FX currency cross, in other words gold is distinct in that it trades as a currency cross being sold and bought long and short against all other currencies 24 hours a day. The FX price is the real determinate of how much gold can be swapped for $ or vice-versa. Nor is gold consumed, affected by weather, or has a production season etc. Unlike other commodities there is an assumption of an abundant large supply of above ground bullion to meet whatever demand is required at any time.
Sure we can expect to see backwardation occur in gold and silver when we are very close to a front contract expiry but when it happens so far in advance of this event, as we have been tracking for many months, and then even worse, now extending into the next 3 successive months, (August October and progressively in and out of backwardation with GCZ3 December), then there is no argument that can be presented that can explain this as a normal condition, nor has it ever been seen before. It simply means there is an auditable distrust in exchanging physical gold for paper gold, especially when this condition technically guarantees an arbitrage profit by simply selling physical into the spot market at the fix and contractually having to wait a maximum of 30 days, let alone 180 days to be repaid ones physical. When you consider just how long that the largest most liquid gold market in the world has been backwardated against front month futures, (continuing in July for a protracted period of time at $1.60 and at times up to $2.15 above the August Futures contract set to expire in a matter of days), there is very little interest in arbitraging this ‘risk free’ profit in the millions of ounces… then Houston, we have a problem. There is demonstrably little confidence that by giving up your bullion for even a near date paper promise, you will ever receive it back.