GOFO Update: Physical Market Headache For Gold Cartel and My Short-term Forecast – Eric Dubin

TND Exclusive:  Eric Dubin |

GOFO slipped into negative territory last week, with even the three month rate going negative on Thursday.  The trend reversed on Friday.  That could be taken as a datapoint that supports the overall thesis that the gold cartel is not going to push their luck with generating large price declines over the balance of December for fear of creating still more physical demand.  Let’s take a look at this datapoint in the context of the last two months.

Compare the GOFO rate curve structure trends with the price of gold, with particular emphasis on the periods when GOFO rates moved very deeply into negative territory and the subsequent inflection point in gold’s spot price:

Notice that when the cartel truly pushed their case mid October, given what were already low gold prices at a time of high seasonal demand in India, their “victory” of lower prices saw unnatural negative GOFO rates move into hyper drive again, indicating major physical market tightness.  Gold managed to move higher through most of November, but sustained three large down days.  Initially, December was a large down day as well, and GOFO’s negative rate maxed-out.

With the last two trading weeks of the year immediately in front of us and the tradition of cartel smashes undertaken during thin, holiday trading, it must be underscored that the cartel will have a high price to pay if they want to repeat their late October performance.  India scarfed down over 200 metric tons of gold in November alone, and that’s not even counting smuggling.  Russia continues to accumulate, despite propaganda to the contrary.  Demand throughout the rest of the world is very healthy.

Even before this latest slip back into negative GOFO territory I didn’t expect the cartel to be willing to pull off raids of any meaningful duration during the last trading days of this year.  But now, with GOFO going negative and then turning towards positive again but still in negative territory (too little data to call a trend, but still interesting), I’m even more convinced we’re not going to see cartel-driven down drafts of any significant duration.  GOFO doesn’t lie.  The physical market is tight as heck and the cartel is being forced to stick to their “managed retreat” strategy.

While I do expect the cartel to attack in an aggressive way at least once, I don’t think we’re talking about pain for anything beyond about 5 trading days, and any retest of the recent lows will not get down to those lows.  On an intraday basis, December 1st saw gold fall down to $1,141.70 following the big down day November 30th.  Now, look at what was going on in the physical market as reflected by the GOFO chart above during the same trading days.  This is what I mean what I say the cartel had to pay a big price to get (and keep) gold down during that last week of November.

My forecast is based on more than just GOFO.  But I don’t think any sector analyst has illuminated for the general public (if at all) the sort of trends and inflection point relationships noted above and that’s why I’m tossing this out into the public domain.  Bottom-line:  it’s unlikely the cartel would want to take gold down to that Dec. 1st intraday low given current physical market conditions.  We already saw a snap-back on December 1st in BOTH the price of gold and GOFO.  If the cartel monkeys come out to play in an aggressive way, I think the odds are pretty good that we will bounce at around $1,155, and that downside pain will not exceed five days duration.

January should be a rocking month for the precious metals sector, and in particular the mining shares should see major gains for the month.