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Chart In Focus

GOFO Squeeze

Chart In Focus
November 27, 2014

There is a big squeeze under way in the gold leasing market, a condition which is usually followed by a meaningful gold rally in the weeks that follow.

The London Bullion Market Association publishes data each day on the Gold Forward Offered Rate, or GOFO.  These are rates at which LBMA members are prepared to lend gold on a swap against U.S. dollars.  Right now, all lease periods out to 6 months are showing negative rates, meaning that the lessors are willing to actually pay you to borrow gold from them. 

The chart above shows the 1-month lease rate back to 1995, and we can see that the negative lease rates we have seen in 2013-14 are a truly rare event.  Only 4 other times in history has this 1-month lease rate gone negative, and all were associated with important lows for gold prices.  This is a bit of an unusual time, though, because interest rates generally are low right now. 

Those of us who follow these lease rates typically compare them to the same term LIBOR rate (London InterBank Offered Rate).  That helps to normalize the lease rates for what other rates are doing at the moment.  Just recently, that spread has widened to the largest degree since the 2008 commodities bubble collapse. 

1-Month GOFO minus LIBOR

Thus far that squeeze has not started to matter much for gold prices.  But we have a lot of history on these data, and every time a squeeze like this starts, it eventually leads to a sizable rally for gold prices in the weeks or months to follow.  So I am confident that this one is going to “work” as well, perhaps after the Nov. 30 Swiss referendum on its central bank gold reserves. 

Tom McClellan
Editor, The McClellan Market Report

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