As per usual, gold prices followed forward rate movements. GOFO is again negative out to 2-months and is hinting negative for the 3-month rate. The 6-month forward rate is moving uite a bit lower, and even out to 1-year there has been a few bp drop in the rate. Bottom line: collateral issues abate; physical shortage reappears.
In truth, the physical squeeze never disappeared it was only buried under the much larger needs of the interbank cash markets. The size disparity in terms of actual dollars is why an uptick in gold collateralized lending can overwhelm even the most blatant (and continuous) shortage. How long will this reappearance of actual gold “markets” last?
That’s really the only factor that matters and it is near impossible to determine in this kind of dysfunctional market. Take t-bill trading, for example. There was a definitive shortage in September as the 4-week bill traded to 0.0% signifying overwrought repo demand for collateral. That came after several weeks of negative repo rates and various treasury securities trading as near continuous special.
After the shutdown drama faded, which had seen bill rates actually rise significantly as some money funds grew overly cautious, bill yields traded more in line with previous “non-shortage” indications. That has been true of not only the 4-week bill, but the other maturities as well. In other words, using bill yields as a proxy for collateral demand has been pretty inconclusive since the end of October.
On the other hand, that slight gold reprieve after the shutdown lifted in mid-October was interrupted only a week or so later (likely) by the turn toward eurodollar tightening – with no concurrent and obvious change in treasury bill trading or yields.
There simply is not enough clarity to predict ahead of time how gold forwards will behave as demand for gold as collateral has proven as spotty as 2008. Instead, we have to keep watching various interbank indications and gold forwards to try to sniff out these GOFO cycles – at least until “market” consensus turns again toward safety. That, to my analysis, seems to be the key difference in 2013 versus 2011 or 2008. Whenever these gold/collateral cycles had been evident in those previous years, they had been balanced by immediate and desperate demand for safety. The net result was gold prices were either even or higher at the end; whereas in 2013 that missing consensus for safety insurance is leading gold prices lower after each cycle.
That makes holding gold a proposition of extreme patience until the central bank faith “cycle” inevitably turns again – whenever that might occur.
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