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Gold Leaps Into Backwardation!

Monetary Metals's picture




 

 

Since late January, the February gold contract has been in backwardation.  This means that one could make a profit by simultaneously selling a gold bar and buying a February contract.  One would still have one’s gold plus a little extra.  I coined the term “temporary backwardation”, to describe this curious and very recent phenomenon.  In our “new normal”, most gold and silver contracts go into backwardation as they get close to expiry.

 

When the Feb contract first jumped into backwardation, it was well within the “contract roll” period.  The roll is when naked longs sell the expiring contract and buy a contract for a more distant month.  This heavy selling of the expiring contract pushes down its price.  Since cobasis is Spot minus Future (oversimplified slightly), the cobasis rises purely due to the mechanics of this selling.

 

But today something more serious occurred.  The April contract, which is not yet being  “rolled”, fell into backwardation.  See the chart.

 

This is a chart of the cobases for the February and April 2013 gold contracts.

The market is offering a free profit to anyone who will sell a gold bar and buy an April contract.  For whatever reason, no one is either able or willing to take the bait.  This is proof that the market for physical gold metal is drying up.  Speculators in the futures markets may believe that the gold price “should” fall because the central banks say they are not going to competitively devalue their irredeemable paper currencies.  Owners of real metal are increasingly reluctant to part with it at the current price.

 

We don’t recommend that anyone ever naked short the monetary metals.   Instead, we always advise to use an arbitrage position such as long gold / short silver.

 

Using the basis theory, we have been bearish on silver this year, against the consensus posting two videos (here and here).

 

Using the basis theory on gold today, we would suggest that now is a great time and a great price to buy gold.

 

And to those who may be shorting gold due to downward momentum, we would say this.  Caveat venditor.

 

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Fri, 02/15/2013 - 20:50 | 3248334 Silveramada
Silveramada's picture

very short supply of 90% lately for coin dealers, some of the half dollars(exp. walkers) have gained a 2-3$ premium over spot price of silver...

Fri, 02/15/2013 - 22:52 | 3248619 unrulian
unrulian's picture

funny that anything in physical seems to be eerily scarce and sliding up in price...g, s, lead, brass, guns, fd food ...what's the market trying to say?

Fri, 02/15/2013 - 23:19 | 3248653 Imminent Crucible
Imminent Crucible's picture

The market is trying to say that dollars are sliding down in price.

 

Fri, 02/15/2013 - 17:06 | 3247737 MeelionDollerBogus
MeelionDollerBogus's picture

At least gold is not the only good money. Silver, platinum & high-value items like farm tools & food that will last can serve as shorter-term money. Take dollars out of the equation, work in energy+time & the answer is clear.

Fri, 02/15/2013 - 16:35 | 3247628 bigkahuna
bigkahuna's picture

The only place I know this to occur is craigs list.

Fri, 02/15/2013 - 19:11 | 3248081 jimmytorpedo
jimmytorpedo's picture

You buy pm's on craigslist?

I prefer mine to show up in an armoured truck

Before I have my ice fishing accident

Sat, 02/16/2013 - 15:31 | 3249871 bigkahuna
bigkahuna's picture

there are some nice lakes around of course...many accidents...too many

Fri, 02/15/2013 - 16:14 | 3247530 Marty Rothbard
Marty Rothbard's picture

were there periods of backwardation before the last gold breakout?  I can't think of a good way to check.

Fri, 02/15/2013 - 19:55 | 3248192 malikai
malikai's picture

Big time.

Jan/Feb 2011 is the analog here.

Fri, 02/15/2013 - 17:13 | 3247761 Al Gorerhythm
Al Gorerhythm's picture

Yup.

Fri, 02/15/2013 - 16:12 | 3247519 apberusdisvet
apberusdisvet's picture

Chicken Twittle sez:

 

The vaults are empty! The vaults are empty! The vaults are empty!

Fri, 02/15/2013 - 17:14 | 3247765 Long-John-Silver
Long-John-Silver's picture

The vaults are not empty. The problem is the number of people that have claims on each ounce of physical gold. Each and everyone of them think they are the sole owner of that ounce when in reality 100 or more people share that ounce of gold.

Fri, 02/15/2013 - 17:55 | 3247887 catacl1sm
catacl1sm's picture

..And when 1% of them decide it's crazy out there and it's time to take physical possession of those oz's.... BOOOM.

Fri, 02/15/2013 - 19:09 | 3248076 jimmytorpedo
jimmytorpedo's picture

all your ounce are belong to us

Fri, 02/15/2013 - 20:27 | 3248270 kaiserhoff
kaiserhoff's picture

Ah so, Yanke-san...

mus be "berong, or bewong."  No ews ah awowd.

You have much to wearn gwasshoppah.

 

Sat, 02/16/2013 - 09:44 | 3249193 goldfish1
goldfish1's picture

Kripke - didn't know you frequented this place.

Fri, 02/15/2013 - 17:50 | 3247867 Vooter
Vooter's picture

So...the vaults are empty.

Fri, 02/15/2013 - 20:45 | 3248318 Winston Churchill
Winston Churchill's picture

No, but who has the bigger gun wins the ownership tussle.

Trouble is,I think nonone ,iincluding Uncle Sam,has any idea how much

tungsten is within those bars.I think they are too scared to find out as well..

Sat, 02/16/2013 - 09:38 | 3249182 goldfish1
goldfish1's picture

Scared? More like brazen and corrupt.

Fri, 02/15/2013 - 19:08 | 3248071 jimmytorpedo
jimmytorpedo's picture

They didn't own that.

Sat, 02/16/2013 - 06:32 | 3249060 e-recep
e-recep's picture

i did not have sex with that woman.

Fri, 02/15/2013 - 21:05 | 3248368 kaiserhoff
kaiserhoff's picture

You belong to the government.   Think about that.  Well, you have.

The rest of the country is starting to.

Fri, 02/15/2013 - 16:10 | 3247507 LawsofPhysics
LawsofPhysics's picture

You guys are all talking like there is a real "market".  There is none.  Stop already.

Fri, 02/15/2013 - 16:08 | 3247498 Solon the Destroyer
Solon the Destroyer's picture

<i> I coined the term “temporary backwardation”, to describe this curious and very recent phenomenon.  In our “new normal”, most gold and silver contracts go into backwardation as they get close to expiry.</i>

Fuck you, Wiener. You did not coin this term.

And how nice to see your authorship now hidden behind the title "Monetary Metals"

You're a fucking joke.

Fri, 02/15/2013 - 16:35 | 3247627 Lohn Jocke
Lohn Jocke's picture

The spread goes into a carry as the delivery month expires. This happens with all futures if delivery is below cash/spot. Otherwise the spread goes into an inverse. It happens with all futures. This guy is an idiot.

Fri, 02/15/2013 - 16:07 | 3247493 Gold Dog
Gold Dog's picture

I have been removing supply from the market, into my strong hands, for the last month in, for me, pretty large quantities.

I laugh at your sell off, I am converting more shit into real money as soon as I post this!

Take that Blythe, you $2 whore!!

Dog

 

PS- FUCK YOU BERNANKE!!

Fri, 02/15/2013 - 17:15 | 3247769 drbill
drbill's picture

$2 whore? I think you're over valuing her!

Fri, 02/15/2013 - 23:07 | 3248635 Clowns on Acid
Clowns on Acid's picture

Bear Stearns intially setlled at $2, (before taken out by JPM @ $10 on orders of the Fed)

Fri, 02/15/2013 - 18:14 | 3247942 BidnessMan
BidnessMan's picture

My 1964 dimes will be very useful in the future....

Fri, 02/15/2013 - 18:24 | 3247967 kaiserhoff
kaiserhoff's picture

You gotta admire the handsome young man with a plan;)

Fri, 02/15/2013 - 17:33 | 3247813 kaiserhoff
kaiserhoff's picture

Fitty cent?

Fri, 02/15/2013 - 17:29 | 3247804 agent default
agent default's picture

CME fixes the price.

Fri, 02/15/2013 - 16:04 | 3247483 NoWayJose
NoWayJose's picture

There is no news that would support the drop in gold this week, so it is clearly being manipulated, however you want to explain it.  Wait until the Chinese see these sale prices next week.

Fri, 02/15/2013 - 16:23 | 3247575 Confundido
Confundido's picture

Fuck that bigger fool theory! You think the chinese are going to save your ass? These guys are in for themselves, buddy!

Fri, 02/15/2013 - 21:04 | 3248364 Quinvarius
Quinvarius's picture

Greater fools have been sitting in fiat while the money supply supply has been blowing up asset prices, stocks and hard physical gold money.  Stop trying to short stuff.  The US Base money supply increased 6.5% last month alone.  You are crazy if you are not buying physical on dips while we are hyperinflating.

Fri, 02/15/2013 - 15:48 | 3247426 DowTheorist
DowTheorist's picture

Such backwardation (coupled with the GLD puke indicator) may be signaling that the current bear market in gold may be nearing its end. However, if a bottom is being made, the charts should will give us due notice. For the time being, the trend remains bearish for both gold (GLD) and silver (SLV), but a turning may be in the making:

 

http://www.dowtheoryinvestment.com/2012/12/dow-theory-update-for-dec-20-...

 

Fri, 02/15/2013 - 16:00 | 3247469 Bay of Pigs
Bay of Pigs's picture

Fuck those charts. GLD and SLV are useless indicators for anything. Fraud ridden and corrupted bankster garbage.

They are a pitiful joke to anyone with half a brain concerning the precious metal sector. Avoid them like the plague.

Sat, 02/16/2013 - 04:57 | 3249015 StychoKiller
StychoKiller's picture

In other words, the map is NOT the territory! :>D

Fri, 02/15/2013 - 22:50 | 3248615 vamoose1
vamoose1's picture

thats  the  most   up   arrows  i   ever   saw

Fri, 02/15/2013 - 20:56 | 3248349 Silveramada
Silveramada's picture

GLD and SLV are merely a paper charade that means nothing. What we see is a shrinking supply of metals and an expanding supply of paper-ponzi-contracts: the result of this will be detachment of paper price VS physical price... The spot can be 25$/oz but you will have to pay 5 or more $ premium to get your hands on the metals, because bitchez we ain't gonna sell you our gold and silver cheap!

Fri, 02/15/2013 - 16:28 | 3247606 kliguy38
kliguy38's picture

Paper vehicles created to destroy price discovery.....gl brotha pig

Fri, 02/15/2013 - 17:53 | 3247880 Lore
Lore's picture

He's right though. The charts are a wreck.

Fri, 02/15/2013 - 15:47 | 3247416 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Short silver?  When I can get an oz for $30?  No thank you.

Fri, 02/15/2013 - 16:02 | 3247474 TPTB_r_TBTF
TPTB_r_TBTF's picture

Short paper at the top, then close and buy physical at the bottom?

Fri, 02/15/2013 - 17:14 | 3247762 Bill Blackstone
Bill Blackstone's picture

Sounds good to me, provided you can catch the top.

Fri, 02/15/2013 - 15:34 | 3247357 mantrid
mantrid's picture

Art Cachin recently noted that "Some Trader Has Made A Very Big Bet That Something Very Bad Will Happen Within The Next 60 Days" (http://www.businessinsider.com/art-cashin-on-big-vix-bet-2013-2). I wonder.. gold backwardation and VIX speculation.. coincidence?

Sat, 02/16/2013 - 09:28 | 3249170 French Frog
French Frog's picture

"VIX speculation.. coincidence?"

If you actually follow that link and read the full post (rather than making up a theory based on what someone else is saying), you will see that the $11 millions spent was a 'call spread' (long AND short) with a fairly limited possible return and in NO WAY implying that "something very bad will happen in the next 60 days".

Honestly ... while most in here are rightly up in arms at the crap/lies/disinformation...that comes out of TPTB on a regular basis, I wish that some of those who come up with new theories on a regular basis at least check the basic facts.

Fri, 02/15/2013 - 21:20 | 3248382 Buck Johnson
Buck Johnson's picture

Something is on it's way and it's not good.

Fri, 02/15/2013 - 15:52 | 3247429 Lohn Jocke
Lohn Jocke's picture

It's called a carry...one could do the same thing with Wheat or Rice futures. It truly isn't that complicated.

Fri, 02/15/2013 - 16:42 | 3247640 DoChenRollingBearing
DoChenRollingBearing's picture

Deep thinker on gold Antal Fekete has written that a true and persistent backwardation in gold would be the indication of very rough times just ahead.  If one has doubt that a counterparty would deliver physical in the near future (via buying a futures contract and giving up some gold now), then backwardation may be a result.  Backwardation would also be a sign of profound distrust in the PM markets...

***

Yet, The Central Bank of DoChenRollingBearing is on a Buyer's Strike, even for gold.  Why?  N N Taleb's "Via Negativa", partially in penance, partly to simplify this Fringe Blogger's life and bring a little more peace...

"The Via Negativa: Less if More"

http://tinyurl.com/c4r29qb

Do NOT follow this link or you will be banned from the site!