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Backwardation in gold returned yesterday, with a dramatic fall in the gold forward offered rate (“GOFO”).   Gold has been in backwardation 32% of the time during the past 12 months and, while recent months have not seen gold backwardation of the same magnitude as during the first half of 2014, the following chart shows the dramatic fall in the 1 Month GOFO to -0.10% which occurred over 1 day.

GOFO chart

GOFO rates indicate the gold market remains very tight and near to historical extremes. If 1 month GOFO breaks -0.12% that will be the first time since 2001 and if it breaks -1% that will be the only time except for the Washington accord panic in 1999.

Combined with the most recent Shanghai Gold Exchange weekly gold withdrawal (68 tonnes – the third highest on record) and the Russian Central Bank purchasing its biggest monthly gold amount (1.2m ounces or 37 tonnes) in September, we could be ready to see physical tightness spread again.  At a time when western investment demand is anaemic at best, gold tightness would be most unexpected, and any associated price rally would undoubtedly sting an underweight investor community into action.

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