So what's really happening? As we've talked about numerous times in these pages, the spot price of gold is highly distorted by the manipulations that take place in the highly-leveraged paper gold market. Sorting out the physical demand from the paper buying makes it easier to understand just how much faith investors really have in the yellow metal.
With the latest massacre in Odessa, the Ukrainian military's ongoing operations in the country's restive eastern provinces, ongoing demonstrations, marches and counter-marches between pro-Russian and anti-Russian sides, and repeated warnings from international leaders that the country is on the brink of war, the situation in Ukraine remains as much on the knife edge of all out chaos today as it has for the past several months.
And as the entire world knows all too well by now, a civil war in Ukraine is almost certain to spill over into a larger military confrontation involving Russia and the NATO powers. Things are about as tense geopolitically as we've seen them at any time since the end of the Cold War.
So whither gold? It is a long-standing truism of the markets that gold and bonds are the go-to places for smart investors to park their money during times of crisis; the rock-solid, low risk, low interest places to take money out of the gain while the markets process the pandemonium. If there is such a flight to safety happening in the gold market right now, though, you wouldn't see it from the spot price. Gold pulled back yesterday after making some gains over the previous two trading days, but when you pull the chart back to look at the six months of the crisis, prices are solidly in the $1300 range, but hardly skyrocketing and not even close to the year-to-date high of $1382/oz. reached in March.
So what's really happening? As we've talked about numerous times in these pages, the spot price of gold is highly distorted by the manipulations that take place in the highly-leveraged paper gold market. Sorting out the physical demand from the paper buying makes it easier to understand just how much faith investors really have in the yellow metal. To get a sense of what the real underlying physical demand is, we could look at the gold forward offered rate (GOFO). GOFO is the rate used when gold is put up as collateral against dollar loans, and it's defined as the LIBOR rate minus the Gold Lease Rate. In regular circumstances, GOFO is positive, since it costs more to borrow dollars than to borrow gold. As David Jensen, Jay Taylor, and other analysts are noting now, though, GOFO has been negative throughout much of the past several weeks, meaning it's more expensive to borrow gold than dollars. Although there are numerous forces that can play into this calculation, one obvious source of GOFO turning negative would be panic buying in the physical markets and/or an increase in demand for physical delivery.
If this is true, panicked investors wouldn't be the only ones rushing to get their hands on the precious metal. Just last week, the IMF approved a $17 billion stand-by credit facility for Ukraine, and just this past Monday, acting chairman of the National Bank of Ukraine, Stepan Kubiv, announced that the country would be committing $1 billion of its first $3.2 billion portion to buying gold and currency reserves. Ostensibly done to “send a positive signal to foreign investors and domestic entrepreneurs” about the stable investment climate in the country and to prop up the hrvina, there are those speculating that this gold (along with the gold alleged to have been secretly shipped from Ukraine to the US last month for “safekeeping) may in fact be used by the Fed to cover their German gold repatriation deal.
Whatever the case, physical gold is still greatly in demand, and all things being equal it's only a matter of time before that is reflected in the spot price.