Over the past month, gold prices have risen and fallen, but one thing has been constant - the situation surrounding gold as collateral has been consistently "complicated." We first noticed Gold Forward Offered Rates (GOFO) sliding below the X-axis on July 8, when 1 Month GOFO turned negative for the first month since the Lehman failure, while the 3 Month GOFO had a minus sign ahead of for the first time since the 1999 Washington Agreement (which allowed Gordon Brown to dispose of the UK's gold at blue light special prices).

However, what has been different about the current negative GOFO episode is that while in the past GOFO spiked negative and promptly reverted to normal, short-end GOFO rates (1-3 Month) have been negative now for the longest period on record: 25 consecutive work days. And it's only getting worse: after the 6 Month GOFO rate also slid below 0% in mid-July, only to recover positive for the next two weeks, as of today it has again turned negative for the second day in a row while the short-end procurement situation has gone from bad to worse.

What is unclear, is why GOFO rates continue to be negative (and are getting more negative). As we laid out over a month ago, it may be one of many things:

• An ETF-induced repricing of paper and physical gold
• Ongoing deliverable concerns and/or shortages involving one (JPM) or more Comex gold members.
• Liquidations in the paper gold market
• A shortage of physical gold for a non-bullion bank market participant
• A major fund unwinding a futures pair trade involving at least one gold leasing leg
• An ongoing bullion bank failure with or without an associated allocated gold bank "run"
• All of the above

One thing we do know that has changed since then, is that JPM's gold bullion holdings have slid to fresh record lows and JPM has been forced to scramble to procure gold from both HSBC and Scotia. Is there anything else going on behind the scenes? Absolutely (coughbundesbankcough), alas as usually happens in cases like this, we will learn the whole story after the fact. That's ok: we have lots of popcorn, and unlike those who rely on the JPM vault for storage purposes, our physical holdings are always at arms length.