It seems that wise Professor Lance Lewis has detected a few noteworthy undercurrents in the gold sector. The item of consideration is the Gold Forward Offerred Rate (GOFO), which may indicate an imminent 40% rise in gold.

All the best - VHF

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Mother of All Short Squeezes for Gold?

Lance Lewis

November 5, 2008 3:45 pm

There's quite a bit of talk about this, actually - and it could happen. First notice day for the December contract is November 28th. If somebody is going to take delivery, that's when we'll know about it - and when a squeeze could potentially begin.

Along those same lines, some of the gold "inside-baseball" indicators are in fact finally beginning to reflect the tight physical market. Gold lease rates spiked back in September and October, but part of that move was in LIBOR (Lease rates are calculated by subtracting the 3M Gold Forward Offerred Rate (GOFO) from LIBOR).

However, the move in lease rates wasn't all the pop in LIBOR. As we can see in the chart of 3-month lease rates, lease rates remain elevated and near an 8-year high, even as 3-month LIBOR has collapsed back to below where it was in June, thanks to the Fed's print-a-thon.

click to enlarge: http://tinyurl.com/6mlykt

That's because the GOFO continues to collapse. As GOFO moves closer to going negative, we get closer to seeing gold move into backwardation, which is fairly rare and uber bullish. Is the physical market tightening simply due to the continued high rate of physical demand and European central banks pulling in their leased gold/not rolling over leases? Is it related to the market sniffing out what you are implying might happen on the COMEX? Or is this related to the gold market sniffing out a potential dollar negative at the coming G20? Or is it all of the above?

I have no idea, but the last time we saw GOFO collapse like this (see the chart below), it was in the days leading up the Washington Agreement (and gold's ensuing 40% upside explosion on the news).

click to enlarge: http://tinyurl.com/5sb5nr

And this happened even though gold didn't seem to give any indication in the way it was trading until literally 4 days before the G7 meeting at which the Washington Agreement was announced that weekend. I'm not sure exactly what's going on, but clearly there something bullish afoot in gold.

Best regards,
Prof. Lewis