Dear Prof. Lewis,

A client of mine tried to buy actual gold, and said there was so much demand it was almost impossible to buy. He also said they were charging a huge mark-up on the price.

So the question: How could there be so much "demand," and such a mark-up, while the SPDR Gold Shares and the price of gold are going down? Why that disconnect?

Given huge demand, it seems only a matter of time before small gold miners are scooped up -- eventually, they'll have to get the gold out of the ground..

Thanks for your thoughts,

Minyan Scott


Dear Minyan Scott,

SPDR Gold Shares (GLD) isn't selling gold. The only selling is in the paper market (i.e. the futures).


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The physical market for gold continues to be tight and is getting tighter. In fact, the 3M Gold Forward Offered Rate (GOFO) fell another 13 basis points today to 0.20%, and one-month GOFO hit 0.07%.


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When GOFO goes negative (which will likely happen tomorrow or early next week), then gold will be in backwardation, something that last happened after the Washington Agreement was announced in 1999 and there was a mad dash for physical gold by shorts.

I discussed this possibility in Mother of All Short Squeezes for Gold.

Unlike other commodities, gold very rarely goes into backwardation, and only when 1) the market fears a collapse in the currency, and/or 2) the market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).