Gold move not confirmed by backwardation
Gold move not confirmed by backwardation
by Project Mayhem
*edit 10/07: I just received information that gold may actually be in backwardation after all, though the market signal may be disguised. See note by Rob Kirby at end of article.
The past two days have seen rather astonishing moves in gold , to a new 18 month high. This article is to briefly serve as a warning. I first want to say that this would not be possible without the brilliant work of Dr. Antal Fekete. I suggest you review his articles if you are not familiar with the concepts of the gold basis or with the concepts of contango and backwardation in a monetary commodity.
Dr. Antal Fekete's articles
http://www.professorfekete.com/articles.asp
This morning I received confirmation that the gold is NOT in backwardation. It is in contango. That is, the spot market price remains below the near-futures price. This means that the move in gold, although rather forceful, does not yet indicate the level of systemic crisis many of us have been expecting. I am writing this primarily to warn leveraged traders to exercise caution at this juncture , as there may be significant downside risk.
I am writing this from a position of a huge gold bull. I do not want to discourage anyone from buying gold. If you do not own gold, you would be wise to buy some of the physical metal immediately, while it is still available. However, that said, this particular move has not been confirmed to the level of crisis that many are suggesting. At least not yet.
Gold backwardation is determined by the difference between the spot price of gold and the nearest futures contract, not the difference between adjacent futures contracts. In this case, in any geographical location, we calculate the difference between the bid price for the physical metal in cash (spot) and the ask price for a near-futures contract. This number is called the gold basis.
Gold_basis(t) = Gold_nearFuture_ask(t) - Gold_spot_bid(t)
where t is a given point in time.
You must also compare at the same geographical location. For example, you cannot compare New York spot bid to Tokyo futures ask.. You must compare New York spot to New York futures, etc.
The gold basis indicates confidence in the futures markets. For example, if the gold basis is negative ,this is 'risk-free' profit for any holder of gold. For example , if the spot bid price of gold is $1000 but the futures ask price is $900, this means I can sell an ounce of my gold at $1000 into the cash market , buy a December futures contract for delivery at $900, and pocket the $100 difference (as well as get my gold back by waiting a couple of months). The only risk here is if there is a force majeure or currency crisis in the meantime, while I am waiting for delivery.
In any case, if the Gold_basis(t) is POSITIVE, this indicates continued faith in the futures market to deliver on its gold promises. If the Gold_basis(t) is NEGATIVE, this indicates a monetary warning signal -- the idea that traders are afraid that there may be default in the futures market, such as a force majeure and cash settlement. A failure of the gold futures market would constitute an international monetary crisis of the highest magnitude, as it would halt dollar-oil pricing as well as international dollar-based trade.
That said, this is NOT the case at the present time. The gold basis has been in fact steadily increasing from near zero in previous weeks, indicating a bearish signal for gold, at least short term. This could change on a dime, especially under conditions of any sort of crisis (flu pandemic, war with Iran, etc), but I felt it was prudent to write this article considering the levels of gold bullishness at the present time.
To confirm international monetary breakdown and gold launch into orbit, I would need to see the following:
1) Gold price firm despite equity declines, aka. a diminishing correlation coefficient with the equity market.
2) Gold basis vanishing towards zero again, or a turn negative in the gold basis.
Here is the email I received this morning with my European source regarding the gold basis:
"Hi [Project Mayhem],
No gold is not in a backwardation and neither is silver. The carry available is + 0.26% for gold viz the December contract and +0.08% for silver viz the December contract as well. Spot gold is 1035.70 and silver 17.165. These are all very bearish signs indeed. We have gone from a state in both markets where there was no carry available to positive carry a few weeks ago. Gold is more likely to fall $200 here than rise.."
While I disagree with my source regarding the direction of the current gold move (I believe we now have a confirmed breakout), I have written this article so people learn about and become familiar with the gold basis. I believe the current gold move does not signal the US dollar death spasm, at least not yet. Perhaps the fate of the US Dollar will become more clear over the next few weeks and months. The gold basis, as a signal, is very important for identifying and understanding 'end game' considerations in the global currency markets.
*edit 10/07: commentary from Rob Kirby:
"I want to let you all know that there is a VERY important corollary to my earlier fast blast. I’ve been told that players requesting physical metal in settlement have been offered significant “off-market” fiat premiums if they would settle in fiat rather than physical. The implications here folks are HUGE: it means that gold is ACTUALLY IN BACKWARDATION NOW.
I say this because, Antal Fekete has just come out with a piece saying the gold price break-out is not confirmed because there is no backwardation in the gold price.
His assumptions are false – gold “IS” in backwardation NOW and it’s being hidden from us."
(3 votes)
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on Tue, 10/06/2009 - 12:45
#90257
PM, imminent systemic crisis - although helpful - is not a necessary condition for Gold price to rocket. In fact, even a $2k price would just be equaling 1980's high and not represent a meltdown of the global financial system, so chillax, don't worry and just buy Gold.
In fact I think it's great that we are not in backwardation yet which means that we have a lot higher to run before "the system" blows up - which means we still have time to convert our paper profits from various markets into Gold.
BTW, only permanent backwardation would mean a collapse of the world financial system as it means that gold will not be dishoarded at any paper price. As long as we are able to switch from backwardation to contango with a rising Gold price, there is no problem as it means that there are Gold holders willing to dishoard at some higher fiat money price level.
on Tue, 10/06/2009 - 12:49
#90279
I agree. There is plenty of available energy in the charts to carry gold into the 1400 range by year end.
Does permanent backwardation happen before or after the system implodes??
on Tue, 10/06/2009 - 12:55
#90292
Great question! We don't know ! I suspect before, based on past moves, but if gold does not go into backwardation until after things implode , then the signal is more or less useless, lol...
Anyway I agree, gold could easily continue to vault upward, I just want to point out that it is not in backwardation -- in fact , the opposite. The gold carry is increasing further into contango. Draw from this what you will, some of this is more of an art than a science... I just wanted people to be aware of the nature and state of the gold basis.
on Tue, 10/06/2009 - 13:00
#90308
Thanks for your excellent work PM.
on Wed, 10/07/2009 - 05:05
#91155
on Wed, 10/07/2009 - 17:34
#92142
Thanks for the clarification.
on Thu, 10/08/2009 - 06:39
#92621
forgot to log in
on Tue, 10/06/2009 - 22:09
#91057
+1000 Great work, makes this site roll
on Tue, 10/06/2009 - 17:09
#90789
PM, in your opinion, what is the best way to buy physical gold offshore?
on Tue, 10/06/2009 - 18:45
#90884
Try:
http://www.bullionvault.com
I've been with them for two years, costs are low, I doubt you'll find better.
on Tue, 10/06/2009 - 22:31
#91070
PM,
Would also note that trying to buy physical gold any where close to the spot price is a pipe dream. Currently we are getting premiums of $27 over spot from my distirubtor. So clearly, the cash price of buying an ounce of physical gold has moved well above the futures.
Have you taken this into account?
on Tue, 10/06/2009 - 22:58
#91083
According to Rob Kirby (Kirby Analytics) the dealers are offering cash premiums to settle contracts with fiat rather than metal. So there may be an implied backwardation going on under the radar. Time will tell.
on Tue, 10/06/2009 - 23:48
#91104
Someone please correct me if im wrong. But it's my understanding that as contango increases it eventually reaches a tipping point and "morphs" into backwardation.
It went into 48 hours of backwardation during December of 2008.
I'm trying to find the contago affect as it approached that date.
Think of this way. As you increase contango you draw gold from more and more sources. Think back to civil war. The unfunded war created a huge silver contango and the market literally got resupplied by people selling off thier silverware and silver jewelry etc.
We are in a huge contango market right now as we speak even if the crimex futures market won't print it. Wall to wall cash for gold commercials ARE golds huge contango. The economic downturn is nothing more than creating the necessary economic pain to make this hidden contango function. The more commercials you see will likely be the ONLY working sign of the conversion from contango to backwardation that crimex will NEVER print for you.
The seasonal demands for gold by india etc coupled with the suppression of contango signals for a prolonged "draining" and the longer it goes until people figure it out and start buying up gold at way above spot will be the speculative drive to crash the gold market into permanent backwardation.
on Wed, 10/07/2009 - 00:00
#91110
increasing contango does not morph into backwardation....
every buy / sell and supply / demand relationship
has some kind of feedback mechanism which tends
toward some form of equilibrium (although i don't
really buy equilibrium analysis as a linear
phenomenon or as commonly taught).....
but there is nothing which says that increasing
contango must lead to backwardation....in fact
gold had been in perpetual contango between 1975
and december 2008....
over that period, however, the basis had been
steadily shrinking indicating declining interest
rates and that implies backwardation....
healthy stable interest rates are required for
capital formation....take away an honest return
and capital goes into hiding...that is the meaning
of backwardation...once that happens economic
activity grinds to a halt and economic decline
sets in....
usually this is precipitated by currency debasement.....
on Wed, 10/07/2009 - 08:12
#91227
Well any commodity with spoilage or storage costs will have contango. The thing is the amount of contago is like the valve for sucking more commodity in. If gold goes up 80 bucks in Dec I guarantee you you'll see miners doing extra shifts and producing a bit more gold. My guess is that the contango relationship is based on production cycle timelines shipping consraints etc.
Backwardation on gasoline would indicate a huge glut and signal refineries to shut down.
Backwardation on gold though signals hording. That people don't want to supply the market.
It could also signal industry breakage. Like if Dec price on pork fell so low that it was unproducable at that amount then people would opt to pass on them and keep the pigs alive a few more months.
At least that's how I understand it to work.
Contango must match the inflationary tracts of a fractional reserve economy. It wouldn't be a normal part of a non fractional reserve economy.
on Wed, 10/07/2009 - 09:41
#91325
a non fractional reserve system says nothing about
the basis of gold....two totally different concepts....
gold constricts money supply in a fractional reserve
banking system...and it can exist with or without
a futures market....
the gold futures market was introduced to keep the
fiat system from collapsing....fiat MUST have gold -
which is why it was introduced in 1975...before that
time it was never needed because gold circulate
freely....
the production of gold in respect to the basis
is not modeled after other commodities because the
large large bulk of gold is already above ground
and always will be (that's not an easy thought and
is actually a taunt rather than a precise statement
of fact)...
i agree that if the gold price is too low production
will decline or cease as we have seen over the
past 8-9 years....but that is not so much a production
issue as a pricing issue...but even if we had production
issues the above ground supply of gold would serve
the needs of money...
on Tue, 10/06/2009 - 12:58
#90298
Right before. BTW, a system implosion would mean that there would be no futures market left for the backwardation to happen, so it cannot really happen after.
on Tue, 10/06/2009 - 13:34
#90393
Here you could argue what implosion is. Bond/equity markets tank -> rush into metals -> ETF holders (gld, slv) get nervous -> run on physical metal -> backwardation.
There are just so many possible combinations of events that will lead to the end game. It's all speculation at this point, but the discussion itself is an important one to have.
I think backwardation will begin in silver anyways, jmo. Central banks have 0 supply to contain that market.
on Tue, 10/06/2009 - 15:15
#90608
I would still suspect that they have derivatives that they can use to contain the price. In fact, I would guess that derivative are their primary method to supress gold as well.
on Tue, 10/06/2009 - 16:21
#90725
Derivatives do not replace physical delivery.
on Thu, 10/08/2009 - 00:02
#92524
So, can someone break this down more. This article assumes the reader knows what backwardation means.
on Tue, 10/06/2009 - 12:45
#90270
I like your article and do like the work of Fekete. The only problem I see is that there your "signs" of impending financial dislocation are still nothing more than hunches. What the breaking point is is anyones guess. I don't fault you for this viewpoint. Isn't guessing a large part of speculation?
I think there is also no such thing as a New York spot market. It is derived from the present month future contract. A true spot price is still determined by the gold fix.
on Tue, 10/06/2009 - 12:51
#90281
Thanks; you are correct. The following article is a good characterization of the various gold prices.
London fix. The five members of the London Gold Pool confer twice daily to determine the a.m. and p.m. price for gold. These are big players, so the fixings they announce have a quasi-official ring to them. But the London fixings determine the price only for trades that by pre-agreement are tied to the fixings. And each fixing has significance only at the instant it's made. Trading between fixings runs on its own, independently of the preceding fix.
Comex spot contract price. The Comex is the busiest market for trading futures contracts in gold bullion. Each contract is for 100 ounces. Prices during the day represent actual trades taking place in a continuous, competitive auction. When, through the passage of time, a given contract reaches its delivery month, it becomes known as the "spot contract." At that point, the party on the long side of the contact is free to pay for the physical and demand delivery, and the party on the short side of the contract is free to deliver the gold and demand payment. The possibility of insisting on physical delivery keeps the price on the spot contract tightly linked to the price on large transactions of physical gold between dealers.
New York dealer prices. If you visit www.kitco.com, you'll find quotes, updated every 30 seconds, for the "New York Spot Price." These reflect the bid and ask prices quoted by wholesale dealers for spot delivery. Not surprisingly, during Comex trading hours, they track the Comex price for the spot contract.
Will the Real Price of Gold Please Stand Up?
http://www.safehaven.com/article-14391.htm
on Thu, 10/08/2009 - 01:40
#92563
Look at the GOFO versus the libor. No wonder libor is so useless. It's libor-gofo that matters?
Libor's the whore. GOFO is the room rent costs for the whore that work in it.
http://www.lbma.org.uk/?area=stats&page=gofo/2009gofo
I may be way off base. But londons paper currency looks something like an gold carry trade.
on Tue, 10/06/2009 - 12:47
#90274
The buying pressure today emanated from London...As soon as London closed, price settled back...
on Tue, 10/06/2009 - 12:49
#90282
Not dissing your source PM, but now I am even more bullish on Gold, if that's possible!
on Tue, 10/06/2009 - 12:50
#90283
I am still bullish as well, but I wanted to put this info out there so there was a balance in perspectives...
on Tue, 10/06/2009 - 13:06
#90321
Appreciate the warning PM. In times euphoric times like this it is probably the most important to keep a level head. To paraphrase the great Alan Greenspan: I stand ready with a truckload of cash, should the price fall.
on Tue, 10/06/2009 - 13:19
#90352
Hey PM...did ya read my thingy here:
http://www.zerohedge.com/article/gold-whats-next-0
on Tue, 10/06/2009 - 13:43
#90409
Yes I did ,great stuff
on Tue, 10/06/2009 - 21:07
#91009
man thats good shit Gekko.
on Tue, 10/06/2009 - 13:10
#90332
NATGAS: Take a look at Natural Gas whereas spot is trading almost 50% LOWER than the Nov/Dec futures. Fundamentals in this market are worse.
on Tue, 10/06/2009 - 13:20
#90359
He said contango.
on Tue, 10/06/2009 - 13:29
#90383
Did anyone else find the timing of the yesterday's new currency article all too convenient for POG?
After yesterday, I was wondering what could happen that could propel gold through the old highs, and this little gem hits the wire.
I know some here follow the GoldenJackass (myself included), and he was right on the money about the proposed new oil currency, with a backing of gold. I believe he was also right about a progression of events, and I believe this release could very well be one of them. For this info to be leaked right before new all time highs, just too much of a coincidence for me.
on Tue, 10/06/2009 - 13:39
#90402
I like irreverence and irreverent people and for that reason I started following the GoldenJackass (don't you just love the name? LOL!), and have been a fan ever since.
on Tue, 10/06/2009 - 20:39
#90984
i follow willie myself and think that on balance
he is well connected and has made a lot of good
calls....
on the other hand he called for a major take down
at comex gold in september which never occurred so
i have to discount some claims he makes....
i agree with his over all assessment of the financial
state of affairs and general corruption in government
and wall street firms....
on Thu, 10/08/2009 - 00:09
#92532
What currency article?
on Tue, 10/06/2009 - 13:32
#90385
Down $200? You may be long term bullish on gold, but for now, you sound like a trapped short.
on Tue, 10/06/2009 - 13:36
#90395
It's his source trapped short, not him.
on Tue, 10/06/2009 - 13:50
#90413
I'm unleveraged long. That comment was from my European source . He is gold-neutral I think.
on Tue, 10/06/2009 - 13:31
#90387
Hey guys, isn't the usual representation of the formula:
Gold_basis(t) = Gold_nearFuture_bid(t) - Gold_spot_ask(t), with Contango being a positive basis?...
So if you can buy cash gold spot and then sell (paper gold) forward to make a greater yield than LIBOR you make arbitrage profit, so the basis traditionally did not move greatly from interest rates.
Backwardation (negative basis) signifies that people are not willing to part with their physical gold because they think that although selling at spot and buying back at a cheaper futures looks theorerically possible, delivery wont actually happen. Thus the higher spot than futures price....
on Tue, 10/06/2009 - 14:00
#90427
You are exactly right , I fixed that. . . My sign was inverted. Thanks!
As for using the futures ask and spot bid (as opposed to futures bid and spot ask), I am not 100% sure. I used my correspondence with my European source , and I think the proper calculation is between futures ask and spot bid.
"[Project Mayhem], Yes you have to use spot bid and future offer at exactly the same time to get the calculation. Gold spot trading is actually 24hrs the same as foreign exchange. The pit hours 8.20 to 1.30 PM EST. Electronic bids and offer are left and traded 24hrs on the comex."
on Thu, 10/08/2009 - 14:47
#93312
Project Mayhem, I'm not surprised that you used the negative of Dr. Fekete's definition of basis.
Please see the web page at
http://chasegalleryconnect.org/FNC_C/Data/Personal%20Finance,%20Investing,%20Estates,%20Retirement/MacroEconomics/Money/Antal%20Fekete%20-%20writings/BASIS_and_the_negative_thereof.html
to understand how entrenched this definitional confusion has become!
-Fred Chase (Frederick N. Chase)
on Thu, 10/08/2009 - 14:17
#93255
Suggest you look at http://chasegalleryconnect.org/FNC_C/Data/Personal%20Finance,%20Investing,%20Estates,%20Retirement/MacroEconomics/Money/Antal%20Fekete%20-%20writings/BASIS_and_the_negative_thereof.html
on Tue, 10/06/2009 - 13:43
#90410
bless you for posting this....the imf gold sales were scheduled to ward off backwardation and that will keep us above water for a while...
however, that does not mean that gold is in for a fall....it could be but not necessarily....but i always consider it that dollars rise and fall - not gold....gold is the standard against which all else should be measured....
what is your net worth - in ounces? that is the way you measure wealth....
on Tue, 10/06/2009 - 15:30
#90636
the imf gold sales were scheduled to ward off backwardation and that will keep us above water for a while
I also believe this is the case.
on Wed, 10/07/2009 - 11:35
#91529
+1
They need to deliver to China's new Hong Kong facility, or so it seems to me.
No backwardation..., till next time.
on Tue, 10/06/2009 - 14:13
#90460
Gold not going into backwardation is not a bearish sign per-se, its just not bullish... lease rates (1-3 mo) have stayed negative for a while now(while gold rallied) and have actually been moving back towards positive territory as there has been some inversion in the rates. The forward rate/basis has dropped, but LIBOR has dropped faster so you've gotten neg lease rates and a glut of metal to be swapped/lent short-term. This is the markets natural way of correcting a rise in the price, adducing people to sell forward and mop up the glut of gold. BUT, people are not taking the bait and continue to buy forward(lend/swap gold for cash). Think of the incentive there is to borrow gold at neg rates and sell into the market at these "high" prices.
If you look solely at carry rates vs. interest rates you'll miss the bigger picture; the only time the basis becomes important is when it drops significantly lower than rates and the market starts begging people to lend their metal at more and more advantageous rates. That or a break between the technical basis(futures-spot) and the gold swap rate(GOFO) would indicate metal going into hiding/distrust of the COMEX. As mentioned there's no need getting excited about the basis until you start to see lease rates spike.
on Tue, 10/06/2009 - 15:03
#90571
Wow great comments.
on Wed, 10/07/2009 - 00:05
#91112
those are truly thought provoking insights from op....
need to work them over a bit...
i wonder what fekete's take on his analysis....
do you have any way to engage him on this subject?
on Wed, 10/07/2009 - 06:40
#91181
And if you don't own a central bank vault or a mining company this is useful for?
Man Tyler is popping up everywhere.
http://ftalphaville.ft.com/blog/2009/06/22/58316/libor-is-useless/
on Wed, 10/07/2009 - 11:45
#91549
+1
on Tue, 10/06/2009 - 14:24
#90482
UN calls for new reserve currency
The United Nations called on Tuesday for a new global reserve currency to end dollar supremacy which has allowed the United States the "privilege" of building a huge trade deficit.
http://www.breitbart.com/article.php?id=CNG.e272eaa74dccc30f21c6ff7638b0f37b.461&show_article=1
on Tue, 10/06/2009 - 14:30
#90497
Its 5:30 PM, do you know where the gold basis is?
I´m currently leveraged long gold just because that´s how my techical system works (and not terribly leveraged at the moment, will get longer if this pattern holds up).
I think you´re great for writing this because its true, the gold basis is probably the single most important secondary (non-price) number for people to keep tabs on, more than even M2 or unemployment (which are fudged anyway). When the gold basis closes negative and under its 8-week average then I´ll say, ok, emergency measurements, get out of all US bank deposits and into gold held in Zurich or something (I live in Argentina and am holding a small amount of physical gold, but I wouldn´t bother with holding a 100oz bar around here for security reasons).
Gold in Contango tells me that this rally is mostly due to short-covering and "buy high, sell higher" action in the futures market and is therefore technical in nature, profit taking will take its course when the waves get duly extended, perhaps somewhere between 1080 and 1130. I still think gold is going to $850 again before the Cycle wave 3 begins. Hugh Hendry thinks he could get it for $500 but I think that´s posh.
on Tue, 10/06/2009 - 14:31
#90500
allz ize knowz Iz dAt OctOber 25Th it all blOws up!
And den OH LAWDy how tah pay T3h b1llZ?
Howzin Ize GWOIN taH EAT!
Oh LAWD!
LAWD LAWD LAWD!!!
Poor ole meze!
on Tue, 10/06/2009 - 14:55
#90551
many writers were talking about this backwardation idea all of last year and i kept waiting for something to happen as a result of this and nothing did. they kept saying gold and silver were in backwardation, blah blah blah...nothing happened then. why would the concept concern me now, if it meant nothing then? this move is just the first of many. if it corrects. it corrects. whatever. the only people who worry about profits are those who play the paper game. of course we all know that paper gold is not the same as physical gold. gold and silver are not investments. they are money. real money. it is money that holds its value over time. it is good enough for me. was my confidence shaken a bit in 2008. you damn right it was. but i made it through and i learned a lot. while we were down we were kicked. fine. it is to be expected. imho, there is too much trust in the noble metal. i like it. many do. many don't. but let it be known that in the end game, the same people who control banking also control it. needless to say, i am not sure where that leaves us. perhaps more discussion should be on another metal that could become scarce very soon and that is lead. like gold, lead holds its value and over time, it makes for a good investment. it is my contention that as time goes by, it will disappear in this land of our birth and become hard to get. so, to use the veracular of many gun blogs, stack it high and stack it deep.
on Tue, 10/06/2009 - 19:42
#90934
backwardation of gold is always a concern when it happens
but it is a huge danger when persistent and then
permanent....
if gold moves into backwardation it may exit....so
fearful of backwardation were the usa that it ordered
imf gold sold....
over the past year gold has moved into backwardation
on a few occasions - something which has never happened
since 1975.....and then last happened during the
onset of the middle ages....
silver has been in backwardation for long stretches
of time over the past year....it is a leading
indicator for gold backwardation....again, it is
when it becomes permanent that bright neon red
flags should be raised and raised with the emergency
broadcasting sirens....
the fear is that gold supports a vast superstructure
of other assets vastly outsizing the quantity of
gold....the gold exchanges are where that support
is....so anyone who says that gold is irrelevant -
especially since so few own it - is a blithering
imbecile....
keep your eyes on the basis - it is your trading
friend...
on Tue, 10/06/2009 - 15:47
#90670
PM,
Great and timely article, and a fantastic running discussion in comments of basis, lease rates, etc. Thanks for writing it! Anyone who wants a primer on monetary metals should start here.
As we all know, gold has flirted into backwardation before, as did silver. Such times call for increased vigilance IMO. The guesses I've come up with are these: I would be very concerned by a lasting (weeks) backwardation which grew over time into a deep condition that began to be noted by the popular financial press, was accompanied by large intraday moves up in gold ($80+ or so), was coincident with some catastrophic financial news event related to USD, and was accompanied by sudden and substantial interest in coin shops. I think the opening stages of a full-blown panic would look something like that. The first two above are initial conditions: ongoing large scale, determined international buying of gold and silver. The big guys know first. In other words, large scale international buying does not indicate a panic, but it will necessarily preceed one IMO.
on Tue, 10/06/2009 - 16:25
#90729
on Tue, 10/06/2009 - 17:10
#90790
Say I want to own gold and have no money. I borrow $1mm at 2% PA and buy gold.Say I buy it at $1,000.
At the end of the month I have to pay interest on the borrowed money. (2%/12 *1mm)=$1,666.
I can't put 1,000 ounces in my briefcase so I have to pay to store it. Say that is $500.
At the end of the month my cost basis is up by these costs. So is my break even.
So if you gave me an offer to buy one month gold at a premium less that the $2,166 it would be a better deal for me. I would be happy to pay a smaller premium.
That is why it is at a premium, no?
on Tue, 10/06/2009 - 20:27
#90963
The premium you are referring to is the cost of money , in order to trade gold. There is also storage cost, and more importantly , the cost of TRANSFERING gold that you already own to the futures market. So basically the gold basis is conceptually based upon a trader who already owns gold, but wants to sell it forward to pick up potential arbitrage. The cost (or lack therof) of transferring your gold to the futures market (by selling gold into the cash market, then taking the cash to buy a gold futures contract) , I believe this called the "carrying charge". Basically it's the same thing as the gold basis, except one is measured in dollars and the other in percentage. But same thing more or less.
Now, if the carrying charge/gold basis is negative that's basically free money for any holder of gold! Normally this is swooped upon by arbitrageurs, but occasionally it is not. When this arbitrage is not taken advantage of , it indicates diminishing confidence in the futures market by holders of physical gold.
In other words, if the cash gold price is ABOVE a near gold future price, basically that is a 'risk free' profit for anyone that owns gold (sell gold, buy future, pocket spread, take delivery). Except its only 'risk-free' if your futures contract comes through! If the music stops while you wait for delivery, you are SOL and might not get your gold back!
So my point here is basically to bring up the topic of the gold basis, encourage discussion, and to also get people to use some caution.
ie What happens if the plug gets pulled on equities? The increasing positive gold basis suggests there may be selling pressure by leveraged entities of cash gold holdings and/or futures contracts. This gold rally has been impressive, and it may be a technical breakout, I don't think it's 'big one' , not yet anyway! There has been too much positive correlation between gold and equties, and the gold basis has been steadily increasing over the past few weeks. Trade the breakout, but according to the gold basis, it's not TEOTWAWKI quite yet.
Not a sermon, just a thought!
on Wed, 10/07/2009 - 10:23
#91395
If I sell my gold in the futures market I get a value greater than the spot price. But I have to incur the cost of holding my gold till the futures settle and I deliver. So the costs i incur are equal to the premium I got. There should be no difference from selling my gold in the cash market vs the futures. The only difference is the premium, that is offset by the costs.
When the futures market is way out of whack with the spot/interest differntials then it get interesting. That is not the case today as yr guy confirms.
on Tue, 10/06/2009 - 17:43
#90827
I'm pretty sure that "backwardation" isn't a word.
on Tue, 10/06/2009 - 18:51
#90893
I'm pretty sure you're wrong.
on Tue, 10/06/2009 - 21:40
#91033
Moron:
http://www.google.ca/search?q=backwardation&ie=utf-8&oe=utf-8&aq=t&rls=o...
on Tue, 10/06/2009 - 17:56
#90844
Could the fact that China is shut down all week have anything to do with the sudden move?
on Tue, 10/06/2009 - 18:16
#90864
I finally got the camel to hold still and then dropped the straw. Crap
on Tue, 10/06/2009 - 19:43
#90935
where is the pizza man tonight?
on Tue, 10/06/2009 - 20:02
#90948
Mish Shedlock has a rebuttal against the Fisk article worth reading. Unless the Gulf states refuse to take dollars-and for now it's worth something-they will still take dollars albeit at a deflated rate.
The US is the biggest market in the world for all this stuff-so divorcing the entire world off dollars is not as easy as one would think.
It's probably just noise to scare the FED into raising rates and saving the USD a big plunge. They are bond vigilantes after all.
My guess is the oil rumor is an insider job between speculators and some "countries" to gun the market and make an assload before the crude market corrects for the season. Read: Goldman Sachs.
If you play that game you get to trade long for the run up and dump on the correction. Look at oil-it was up only 2 bucks midday on that news and actually closed up 60 cents. Somebody proft took on that.
And if that is true, then gold ran up to 1040 on a lie. Something to think about.
I'm long junior miners, so I'll take what I can get
on Tue, 10/06/2009 - 20:16
#90961
Mayhem you should be listed in the ZH author column along with Robo, Kasting, Dufrense and probably a few other core contributors - great stuff
on Tue, 10/06/2009 - 20:23
#90967
Concerning Backwardation A recent email from the inimitable Rob Kirby says this:
I want to let you all know that there is a VERY important corollary to my earlier fast blast. I’ve been told that players requesting physical metal in settlement have been offered significant “off-market” fiat premiums if they would settle in fiat rather than physical. The implications here folks are HUGE: it means that gold is ACTUALLY IN BACKWARDATION NOW.
I say this because, Antal Fekete has just come out with a piece saying the gold price break-out is not confirmed because there is no backwardation in the gold price.
His assumptions are false – gold “IS” in backwardation NOW and it’s being hidden from us.
I hope Rob is not too pissed at me for copying his post here....just thought y'all might be interested in what the rumor mill has generated today.
on Wed, 10/07/2009 - 08:50
#91269
Ah thanks
I trust Rob Kirby's judgement over my own -- he is one of the people who I have learned from. If Kirby says it is actually in stealth backwardation, he is probably correct. I will add an edit to note the fact that there may be disguised signals.
on Wed, 10/07/2009 - 09:00
#91278
this is huge because it implies that the comex
spot and futures prices cannot be relied upon
to calculate the true basis....
fekete and some of his followers/tormentors were
debating this very issue a while back based upon
public exchange data and it was still a challenge
to get everyone to see the backwardation...
so if there are implicit indicators it will make
the discussion even more difficult...
this was a great insight...
on Tue, 10/06/2009 - 22:08
#91054
VERY IMPORTANT POINT
there was a rumor floating around my end that there is a severe shortage of spot bullion, est. perhaps as little as 600 m. tons in the market. i heard also that large buyers were offered a large premium to take delivery in paper v. physical.
this seems like de facto backwardation, no, albeit covert?
these are things i hear. the sources and conclusions are obviously unverified...
on Wed, 10/07/2009 - 09:26
#91310
Yes ,I agree, there may be stealth backwardation that is certainly a possibility.
on Tue, 10/06/2009 - 23:44
#91105
PM - Thanks for this very informative article and thanks to all the very well informed posters who commented.
on Wed, 10/07/2009 - 00:40
#91120
thanks to everyone for this site!
i am partial to platinum. prior to catalytic converters....platinum was normally 1.7 times gold price....after it averages about 2 times.
makes platinum a better value at the moment.
on Wed, 10/07/2009 - 05:27
#91162
From London:
The basis is a wonderful concept. It gives a measure of the premia available for the most simple of arbitrage opportunities – that of warehousing. This is also known as ‘temporal arbitrage.’ ‘Spatial arbitrage’ is the more commonly understood form of arbitrage – the buying and selling of the same good at different places for an earned ‘spread.’ Temporal arbitrage is the buying and selling of the same good at different times and its earthly (literally) manifestation is a ‘warehouse.’
If the arbitrage opportunities for the warehouseman are increasing on a daily level (i.e. the basis is increasing) then it implies something about the state of warehousing. Namely that the opportunities for warehouses to fill and carry on filling are there. Whether that spread is taken or not is another matter – but the opportunity for the warehouseman to make continually higher profits (i.e. the next warehouseman can make more money than the one before – when the basis is rising) assuming no change in cost of funding indicates that there is a relative shortage of warehousing space. That can only mean because the good cannot be cleared in the spot and near term months without a discount. And that can only mean a non-bullish sign as opposed to bearish (which is strictly different). Why it cannot be cleared without a discount in the case of the ‘good’ gold is probably because the sink for gold for the past 5,000 years (India) has turned into a source. That could be disastrous when you are 10% of the market. It could be catastrophic is you are one-quarter of it!
A non-bullish sign in gold at the moment is all that is needed to ‘burst’ it short term judging by the enthusiasm of the common financial media and press.
on Wed, 10/07/2009 - 06:03
#91169
I am unsure about much of the ado about gold for a fundamental reason, that I'll guess PM or GG or someone else can address. As far as I know, there simply is not enough physical gold in the world to "represent" the wealth that needs to change hands every minute in a functioning global economy. So while it is a form of money, no doubt, it is necessarily confined to a rather small percentage of the overall wealth. Gold also has that "commodity" character too (like in physics, it is both particle and wave) since it is also useful and needed for certain things, including some manufacturing and industrial applications. Paper dollars have no such value, its obvious uses as a commodity (convenient note paper, toilet tissue, heat source when burned) representing a profligate use of it.
I'm thinking fiat currencies, though afflicted with many problems (not the least of which is the ease of its creation, as opposed to a store of value like gold which has to be mined, processed, etc.), are needed supposed to represent the overwhelming majority of this wealth, and serve as a medium of exchange. I can't carry around gold in my wallet, unlike a Capital One card. And I have assumed, perhaps incorrectly, that there is simply insufficient physical metal in the world to back a 100% gold backed US dollar. Aren't currencies of whatever form merely a more convenient way to handle what was originally a barter transaction? Isn't a currency an agreed form of "language" for value exchanges that one way or another must occur?
What I have been listening hard to on ZH and other websites is the notion that the Federal Reserve has been a poor steward of the U.S. Dollar, and that a different mechanism is needed to manage the problems of a fiat currency. But, thinking simply, I see no problem with a common covenant in an ordered society that a piece of paper serves as a convenient medium of exchange, with a "fixed" value that really doesn't mean anything until it is used in a stream, or history, of transactions.
And in a apocalyptic scenario, you'll be better served by stores of food, water, toilet tissue, guns, ammo and kerosene. Mad Max wants gasoline, something to eat, and best of all, a hot shower, not gold.
on Wed, 10/07/2009 - 07:30
#91199
There is some truth to your point. Most people live hand-to-mouth and are not in a position to keep any gold or silver on hand. The current demand for physical gold and silver is satisfied in part by hapless folks willing to part with their possession of the same in order to keep the electricity on or food in the pantry. I think most agree that gold and silver will not be the actual currency used as a medium of exchange. It has the potential to bridge the gap of a falling fiat currency and the currency staged to takes its place if the new currency is backed by commodities and promises future stability. The time period between any collapse and restoration to stability could be long and ugly.
But in the case of the apocalypse, consider the possibility silver and gold being plundered by the same players who bring about the apocalypse. It may be dangerous to hold silver and gold. Protect it with your guns and ammo? Consider "all who take the sword will perish by the sword." The perceived strength of men will fail them in such a time.
on Wed, 10/07/2009 - 09:29
#91314
gold has never represented all of the wealth in the
world and such an expectation is an enormous
misunderstanding of its function and value....gold
is a store of value and medium of exchange for
marginal wealth representing social capital and the
wage fund....see fekete for an elaboration of these
points....
for example, during the great classical age of gold
in the 19th c. gold functioned to fund self clearing bills of exchange...there was clearly more circulating
goods and capital than gold but gold served to clear
markets and move or transition them from one state
of production / consumption to the next....think
of gold as a lubricant....
in the event that the value of gold is insufficient
for commerce then the value goes up to meet the needs
of commerce and the mediation between capital
hoarding and dishoarding via the interest rate
mechanism....silver serves as money in the small
to provide granularity where gold is unable to do so....
as an implaccable hard money man i can agree with
your idea that paper can serve as a proxy for money
insofar as it is a receipt for unit of labor....however
the problem with any utopian scheme is that it is
impractical and subject to corruption....currency
may be provided high minded virtues but it is
always a whore to those who control it....fiats are
like potato chips - you can always make more when
the first bag is empty....ad infinitum, world without
end....
gold supports a vast superstructure of derivative
weatlh and we do not know what that theoretical limit
is....neither research nor practice has allowed us
to observe that limit....however for all practical
purposes there is sufficient gold to conduct commerce...
its ownership by everyone is a non-sequiteur although
gold should be open to the free and unlimited
mintage by the people to safeguard liberty...without
the thermostat of gold, all of these derivative
melt and evaporate...
in the apocalypse gold is needed more than any of
the survival items you and many others mention
because only gold can lubricate the wheels of
commerce and undergird order...without commerce
you have a miserable dark age....
whether you realized it or not your questions about
the language of money are superb and that is the
beginning of monetary science about which i do not
have space to elaborate...but one thing to think
about in selection of money is constant marginal
utility where supply is constrained...again paper
is createable at will; gold is not....that's really
the bottom line...
on Wed, 10/07/2009 - 06:49
#91185
What the hell is this?
http://www.lbma.org.uk/stats/statsfaqs
FAQs on Statistics The London Gold and Silver Fixings What is the guiding principle behind the London Gold and Silver Fixings?
The Fixings are an open process at which market participants can transact business on the basis of a single quoted price. Orders can be changed throughout the proceedings as the price is moved higher and lower until such time as buyers' and sellers' orders are satisfied and the price is said to be 'fixed'. Orders executed at the fixings are conducted as principal-to-principal transactions between the client and the dealer through whom the order is placed.
How are the fixings used in the market?
The fixings are the internationally published benchmarks for precious metals. They are fully transparent and are therefore used to deal in large amounts, or to achieve the accepted average price of the metal. As a benchmark, many other financial instruments are priced off the fixing, including cash-settled swaps and options. The silver fixing started in 1897 and the gold fixing in 1919.
Which banks are the members of the London Gold Fixing?
The Gold Fixing is conducted twice a day by telephone, at approximately 10:30 am and 3:00 pm. There are five Gold Fixing members - all of whom are Market Making members of the LBMA. They are the Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA, NA and Société Générale. The chairmanship of the Gold Fixing rotates annually amongst its members.
Which banks are the members of the London Silver Fixing?
Three Market Making members of the LBMA conduct the Silver Fixing meeting under the chairmanship of The Bank of Nova Scotia–ScotiaMocatta by telephone at 12.00 noon each working day. The other two members of the Silver Fixing are Deutsche Bank AG and HSBC Bank USA, NA.
What is the procedure for arriving at the Fixing price?
Clients place orders with the dealing rooms of fixing members, who net all orders before communicating their interest to their representative at the fixing. The metal price is then adjusted to reflect whether there are more buyers or sellers at a given price until such time as supply and demand is seen to be balanced. Throughout the proceedings customers may change their orders, at which point the fixing member will raise a small flag to visually convey to the other members that they are changing their order. The price cannot be 'fixed' whilst a flag is raised. The fixing is an open transparent process that allows customers to be kept advised of price movements, together with the changes in the level of interest, while the fixing is in progress such that they may cancel, increase or decrease their interest dependent upon this information.
GOFO (Gold Forward Offered Rates) What is GOFO?
GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods.
Who provides the rates? The contributors are the Market Making Members of the LBMA: The Bank of Nova Scotia–ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA London Branch, Goldman Sachs, JP Morgan Chase Bank, Royal Bank of Canada, Société Générale and UBS AG. When are the rates quoted?
The means are set at 11 am London time. These are the rates shown on the LBMA website, along with the means for LIBOR (London Interbank Offered Rates) for US dollars for the same time periods as GOFO. To show derived gold lease rates, the GOFO means are subtracted from the corresponding values of the LIBOR means.
How are the GOFO means established?
At 10.30 am London time, the Reuters page is cleared of all rates. Contributors then enter their rates for all time periods. A minimum of six contributors must enter rates in order for the means to be calculated. At 11.00 am, the mean is established for each maturity by discarding the highest and lowest quotations in each period and averaging the remaining rates.
What are some uses for GOFO means in the market?
They provide a basis for some finance and loan agreements as well as for the settlement of gold Interest Rate Swaps and Forward Rate Agreements.
on Wed, 10/07/2009 - 07:38
#91206
on Wed, 10/07/2009 - 07:59
#91218
I figured it out but it lead me to something nasty. I got into all the Derivitaves market crap. Now I know that webbot crap about this stuff getting shut down is so much more likely in my mind.
These people are just nuts.
http://www.isda.org/c_and_a/oper_commit-usefuldocs.html#sbp
http://www.isda.org/press/
http://www.hedgemedia.com/articles/detail.jsp?content_id=8733
on Wed, 10/07/2009 - 07:11
#91189
Speculative bubble! Plain and simple!
on Wed, 10/07/2009 - 07:26
#91196
Great article and comments. Does anyone have an opinion about buying/holding US numismatics versus new coinage/bars ?
on Wed, 10/07/2009 - 09:06
#91284
I only purchase bullion (1oz coins) but Bob Chapman has repeatedly mentioned he feels the premiums on numismatics will continue to increase. Either one is probably a good bet, but numismatics you'd have to invest some time and energy to learn about what you are purchasing.
on Wed, 10/07/2009 - 08:28
#91242
Great point on backwardation! From a pure technical perspective this rise is purely an inverse reaction to a falling dollar...see
http://bespokeinvest.typepad.com/bespoke/2009/10/price-of-gold-in-dollars-record-high-euros-10-and-yen-10.html
This chart shows gold has actually declined in euro and yen terms. Further the dollar is attempting to form a base and has been holding current levels in a weekly declining wedge chart pattern. It is at the upper edge of this wedge and should it break out of the wedge could lead to a significant counter trend rally in the dollar. This would obviously hurt gold.
This may not happen, but like the backwardation issue deserves watching.
on Wed, 10/07/2009 - 08:43
#91259
they are talking about the gold/silver ratio this morning on cnbc. my, my, what a difference a year makes. if some of you think that gold bugs are crazy, you have no idea what you are talking about, since you don't know any silver bugs...ha ha ha...
as the former 16 time world champion rick flair would say....
WOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!
i love it when a plan comes together...
but on a more somber note, as jim sinclair is saying this morning on mindset......
http://jsmineset.com/2009/10/06/golds-breakout-not-a-cause-for-celebration/
this is no cause for celebration but the advent of the destruction of the american financial system and the american way of life. and so it is now..........
on Wed, 10/07/2009 - 08:46
#91264
Mayhem not sure if you are aware of this site
http://jsmineset.com/
Jim Sinclair seems to be a smart guy - currently on Bloomberg radio discussing gold, inflation and currency - I will post the link when it appears
Also Mayhem - you're posts are among the best
on Wed, 10/07/2009 - 10:39
#91429
Thanks, yes I am a big fan of Jim Sinclair
I like that site , as well as
http://financialsense.com
http://safehaven.com
http://321gold.com
on Wed, 10/07/2009 - 14:06
#91807
yo mayheim, Eddie Haskell, here, checking in and loving Zerohedge and all of the gold bugs who are allowed by management to run amok. May the gods adore you, Tyler.
on Wed, 10/07/2009 - 09:10
#91289
I have read that GTU (a company) holds physical gold and CEF (a fund) holds physical gold and silver. Also, CEF is in Canada. Possible alternatives to GLD and SLV? I have a little CEF. I was waiting for "the usual October dip in gold" to buy a little more, but maybe that dip won't happen this year. Especially if Obama sends, what, another 40,000 troops to Afghanistan...?
on Wed, 10/07/2009 - 10:40
#91430
45,000 immediately,
up to 500,000 over the next 5 years according to the leak of the classified report
on Wed, 10/07/2009 - 15:04
#91908
doesn't look like much change in military policy...
another lie for obushma..
on Wed, 10/07/2009 - 09:18
#91300
Still good deals on Ebay and your local auctions if you know what you're doing.
on Wed, 10/07/2009 - 12:50
#91671
IMO this is a must listen from Bloomberg Radio this morning
Jim Sinclair on Gold, Currency and Inflation (MP3 format)
http://media.bloomberg.com/bb/avfile/News/Surveillance/v.gzTPQo3tfY.mp3
on Wed, 10/07/2009 - 15:44
#91972
As much as the Chinese want a pegged currency for economic reasons however, they are now realizing that at some point their store of dollars will not be worth much in real terms. The possibility of replacing the dollar as the reserve currency is immaterial to this fact. Regardless of whether the US dollar is replaced as the reserve currency, its value will decline so long as economic activity is healthy. The fact that gold remains as a monetary asset that cannot be devalued is a fact that I think is slowly dawning on the large dollar holders of the world. It is for this reason, more than any other, that the continued increase in gold price is assured. Gold will be the safety valve, the escape hatch, and the attempted route out of the dollar holder dilemma.
I outline 3 choices facing monetary authorities in China and give costs and benefits to each choice. I also tie in the relationship to Triffin's dilemma and the apparent reality that economic health is inexorably tied to increasing CA deficits in the US and the decline in the value of the dollar. The attempt of dollar holders to maintain purchasing power by divesting into gold and other real assets is a sideshow to this reality. Read more on my blog which I am shamelessly posting here:
http://outsidetheboxecon.blogspot.com/
on Wed, 10/07/2009 - 17:51
#92167
moved
on Wed, 10/07/2009 - 19:56
#92313
Here's a linear regression look at gold miners AEM KGN THM TLR VGZ which are at or near YTD highs. The probability of price retreating outweighs the risk of a supply/demand shock to push price higher.
http://www.gamingthemarket.com/inflection-point-update.html
on Wed, 10/07/2009 - 21:10
#92401
Gold is priced in dollars. In my opinion it all has to d with the value of the dollar. If it falls further, gold will rise further. But if the dollar reverses higher (e.g., due to stronger than expected GDP numbers in a couple of weeks), then gold price will go much lower.
Nobody knows where the price of gold will be in the future. But if one uses a market timing system to enter and exit positions, then one may end up making lots of money. Buy and hold is dead as knew it!
Consider http://invetrics.com Its daily DJIA index trading signal is up significantly this year, and it is free of charge for individual investors. Timing signals work!
on Wed, 10/07/2009 - 23:21
#92502
Seems like a false dilemma to me. Here is how I see it in simpler terms. If the gold market and its futures curve decides to express systemic mayhem and collapse, then it can move to backwardation. But if the gold market and its futures curve wants to express a raging, conflagration of inflation in the future, then it can move into a monstrous contango. In the oil market, there are no shortage of view and theories that attend the move to, from, and back from steep, shallow backwardations and contangos. Alot of these views which appear to conflict with each other are actually reasonable and can be "decent" explanations even at the same time.
At the moment, with green blood from the FED coursing through the system I'd prefer to see a steady contango (its usual state) as a forecast for future price inflation if I was holding alot of gold. Backwardation, should it occur, would be a sign to me of systemic risk which is often paired with liquidity crunches. If gold moves to backwardation I would prepare for the following. 1. Gold to scream higher. 2. Gold to collapse in price along with everything else.
on Thu, 10/08/2009 - 00:47
#92547
Hi,
My name is MsCreant. I think I am a gold bug and a silver belle. OMFG. Mayhem, nice work. All, good conversation, appreciate the ability to lurk, and soak it in.
Do I need to go to rehab or something? I'm gettin awful high on these PM prices. :-)
Peace.
on Thu, 10/08/2009 - 06:58
#92630
lol,
Ms, as long as you are asking such questions you are ok.