Turk

LBMA Might Stop Reporting GOFO Rates

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In a shocking report on Reuters, LBMA Chairman David Gornall said last month that the 150-member trade body could stop providing GOFO rates if stiffer new regulation makes it too expensive to run.

The Gold Forward Offered Rate (GOFO), the equivalent of LIBOR for the gold market, is used as a benchmark for dealers, central banks and others to swap gold for U.S. dollars with miners who may need gold to meet contracts or investors for short-selling and other purposes.
The LBMA already stopped reporting silver forward rates in November 2012 and are now contemplating if they shouldn’t stop reporting the gold forward rates. You can see on the chart below from Kitco what happened to the silver lease rates at that time. The same outcome is expected now for the GOFO rates which are now reported on a daily basis at the LBMA here. The LBMA currently sets GOFO each day by polling its eight major bank dealers on the rates at which they are prepared to lend gold. This could be ending and will make the obvious gold manipulation less transparent for us to spot out.

Continue to read here.

Gold Backwardation Explained By James Turk

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If you want to know what gold backwardation means, read this article of James Turk. Very interesting.

Let’s say we have two currencies A (euro) and B (USD). Then the following is true:

– A’s interest rate < B's interest rate
– A is in contango against B
– A’s value rises going into the future
– Higher interest rates means a higher risk of debasement of the currency.

Now let’s look at two other currencies A (USD) and B (gold):

– USD’s interest rate < gold's interest rate (lease rate)
– USD is in contango against gold (or gold is in backwardation)
– USD’s value rises going into the future (or gold’s value declines going into the future = negative GOFO)
– Higher interest rates means a higher risk of debasement of the currency.

Now gold’s interest rate is higher than the USD’s interest rate. Which means gold has a higher risk of debasement than the USD. This is virtually impossible because gold cannot be debased.

Which means something has to give. This is a rare event and will mark a bottom in the gold price.

Why are the silver lease rates flat at Kitco?

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At last we know the reason why the lease rates for silver were flat for so long (and still are). James Turk told us just recently that the LBMA (London Bullion Market Association) is no longer reporting silver interest rates and silver forward rates.

As you know, the lease rate is LIBOR minus GOFO and the same applies for silver. If they don’t report the silver forward rates, you can’t get the lease rate anymore, because we lost a parameter of the equation. James Turk says that the LBMA is underreporting on the silver forward rate. It’s reporting contango, but actually it should be in backwardation. When gold and silver are in backwardation, that means we will have high probability of getting inflation.

That’s what I’m making of this, unless there is someone who can give another explanation for the flat curve here:

Chart 1: Silver Lease Rate

Luckily, we still have the gold GOFO and gold lease rates. The GOFO is still in contango (3 month GOFO = 0.42%). So we just use those to “assume” silver forward rate … If we do get a spike down in GOFO, then severe backwardation could show up.

One thing is certain. If gold lease rates go up, the GOFO goes down and that means the gold goes in backwardation. And that also means that silver is going in backwardation. That ultimately means that you should buy silver when silver lease rates go up.

If this event of the LBMA isn’t a reason to buy silver, I don’t know what is.

And finally, isn’t it a coincidence that the silver priced started to move up just when the curve went flat (Chart 1)?

Analysis of Deficits to Outlay Spending Ratio

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I already talked about how the U.S. budget deficit is skyrocketing in this article. Reason was that outlay spending has outpaced government tax revenues since 2008.

I decided to make another chart of this going to the early 1980’s. As James Turk stated, when governments start to borrow more than 40% to fund their outlay spending, then we have come to a hyperinflationary scenario.

To see what this chart means, go to: the full version of this article.