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A recent post from The Speculative Investor argues that the negative GOFO rate has almost nothing to do with gold supply/demand:

The “gold backwardation” (a.k.a. negative GOFO) storm in a teacup

The writer states that “a negative GOFO effectively just means that it costs more for a major bank to borrow gold than to borrow US dollars” and argues that this development is neither strange nor important.  However, gold backwardation says something about fiat currency demand versus gold money demand.  We are living in a post gold standard monetary system – trillions of US dollars are pledged, stored, invested and lent without any link to a gold system.  Gold has been relegated to a pure commodity, and a commodity whose supply increases every day and never falls – every ounce ever produced continues to exist.  In that environment the demand to borrow gold should be minimal at best.  On the other hand fiat currency is in demand globally and at all times, and as Marshall Auerback explains so well, will always be in demand so long as governments dictate that taxes are to be paid in fiat currency.

Not only that but borrowing US dollars for a major bank has no net cost – they can borrow US dollars at LIBOR and lend it at LIBOR.  Contrast that to borrowing gold on swap where they have to give up their US dollar yield (USD posted on swap) and now they have to pay for storage of gold.  So all things being equal the modern day banker should much rather borrow US dollars than gold.  The fact that demand for borrowing gold presently exceeds the demand for borrowing US dollars (GLR > LIBOR) means there is some other reason to borrow spot gold which can only be called a convenience yield (i.e. some motivation (fear) to hold, finance and store gold now, rather than rely on a claim for future delivery). In oil that can make sense if a supply disruption is feared (geopolitical unrest) because your future delivery may never arrive and you have on-going needs to use your oil, but with gold future delivery should never be in question UNLESS you start to believe gold is going into hiding and won’t be for sale at any price in the future.  In other words a severe backwardation can mean that demand for fiat currency is plunging and gold is being re-monetised unofficially by large swathes of the global economy who are buying with the intention of never selling (sounds like the Swiss gold referendum which was quashed by orthodox central bankers).  We’re not there yet in the West, but the discussion is still worth having.