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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."
»
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.
lol,
Ms, as long as you are asking such questions you are ok.
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.
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!
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
moved
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/
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
Still good deals on Ebay and your local auctions if you know what you're doing.
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...?
45,000 immediately,
up to 500,000 over the next 5 years according to the leak of the classified report
doesn't look like much change in military policy...
another lie for obushma..
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
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
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.
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..........
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-dollar...
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.
Great article and comments. Does anyone have an opinion about buying/holding US numismatics versus new coinage/bars ?
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.
Speculative bubble! Plain and simple!
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.
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
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.
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...
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.
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.
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.
PM - Thanks for this very informative article and thanks to all the very well informed posters who commented.
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...
Yes ,I agree, there may be stealth backwardation that is certainly a possibility.
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.
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...
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.
Mayhem you should be listed in the ZH author column along with Robo, Kasting, Dufrense and probably a few other core contributors - great stuff
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
where is the pizza man tonight?
I finally got the camel to hold still and then dropped the straw. Crap
Could the fact that China is shut down all week have anything to do with the sudden move?
I'm pretty sure that "backwardation" isn't a word.
Moron:
http://www.google.ca/search?q=backwardation&ie=utf-8&oe=utf-8&aq=t&rls=o...
I'm pretty sure you're wrong.
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?
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!
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.
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.
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.
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...
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!