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Gold Caught With Its Backwardation Showing
With all the discussion on the Internet, some of it confusing, we thought a picture would be worth a thousand words.
Backwardation is when there is a profit to decarry the metal. This is the simultaneous sale of metal in the spot market and purchase of metal in the futures market. Selling is on the bid and buying is at the ask. So the spread one could earn is the decarry: Spot(bid) – Future(ask).
We normally quote this as an annualized percentage (the basis), but we thought we would show the raw numbers. This graph was made about 10:15am ET on March 4.
Sure enough, there is a 76-cent per ounce profit to be made decarrying gold. This is a small number compared to the price around $1600, and it could be easily missed. It is the actual profit one would make in the real market by this arbitrage (not including commissions and fees, which a bullion bank would not be paying).
It is fascinating that it persists. It’s been there for weeks! Does no one have gold to put towards this trade? Is there no attraction to a 0.3% annualized return on a risk-free trade maturing in less than 60 days?
Monetary Metals publishes the basis and cobasis with commentary every week (free registration required).
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so i give up my physical gold to corzine and he promises to deliver in the future.
think i'll check with gerald on this idea.
or some midwest farmers...
or, well, lets just says the markets are
broken arrow -wounded knee.
send in the calvary
thanks dc for your unbrideled support for free market...
fucking joke.
I used to be an adventurer (investor) like you, but then I (the markets) took an arrow in the knee.
"Is there no attraction to a 0.3% annualized return on a risk-free trade maturing in less than 60 days?" - No, there isn't.
Thanks to all for sharing, but decarrying gold for a few 'risk-free' pennies is a sucker's play.
The article is written by someone who knows absolutely nothing about these markets and it was published because it brings up the emotionally exciting theory that "there's a gold shortage" which is complete rubbish; but beloved of the ignorant who believe they were wise to pay a premium for their coins; called "coinage". You can buy a metric tonne of gold right now as we speak and have the vault receipt recorded by tomorrow morning.
Go study what Fekete has to say. It is the trend that matters. He is talking what happens when you get a permanent backwardation. IT IS THE TREND.
Gold has NO business being in backwardation. If you don't understand what he has to say (don't need to agree necessarily) then you don't belong in gold.
It is noteworthy that the regular players on King World News don't talk about the basis.
Fekete also says that the gold basis is THE ONLY statistic in which you can have ANY CONFIDENCE. We all agree that you cant take the unemployment rate or CPI numbers to the bank.
I believe Fekete says that gold has to be in a longer-term backwardation, and likely at a higher rate. If I am right, then we are only CLOSE TO dangerous territory. Keep your eyes wide open, and NEVER SELL YOUR GOLD!
I think that's the point.
What if the casino is running out of suckers to fleece?
They may have to put a LOT more sugar on the table to get people to play again, or (shock horror) they might just have to let the USD price of gold keep rising to keep just ahead of the backwardation monster...
this is the essence of "I'll gladly pay you Tuesday for the price of a hamburger today."
Thanks, I was hoping someone said this! By charging $0.76 more for the burger, I'm really raking it in.
as a professional investor, I can see your thesis, but I wouldnt invest.. there are rumsfeldian known unknowns...
the reward of 0.3% for putting your collateral up and hoping that someone delivers in the future isn't really worth it on a risk return basis. you're better off trying to keep accumulating if you have a positive view on the metal.
"Possession is 10/10ths the Law," is what my Father used to say. Forget the paper stuff. You can have it.
The know unknown as a function is named well: Rumsfeldian.
Rm(($T)et+1) /0
please note: $ is a unit, Rmis a tool
That is f*cking funny!
76c ? Did you honestly say 76c?
Well if there was any gold left in the hands of the USA it could earn around $195 million dollars a year on its 8000 tonnes.
Did I say 8000 tonnes?
LOL !!!
They tried that. And that is why they don't have the 8000 tons any longer.
So after the event when the golden price coil is finally released,
can we then call it Gold Moonwalkardisation.
No one wants to assume the counter party risk of selling the physical they have in hand for a paper promise to replace that gold in the future.
Unlike many other commodities this backwardation should not exist in gold because of the stock to flow ratio.
DR. Antal Fekete and Sanjeep Jaitly are the guru's here!
Max Keiser interviewed Feteke on his last two shows. Fekete is the man:
http://www.youtube.com/watch?feature=player_embedded&v=tkNa4tm9ZM8
http://www.youtube.com/watch?feature=player_embedded&v=mn-rTs2zSo4
(Max ia also the man - but he goes over the top sometimes)
Fekete also has several nice articles out:
AMERICAN BASES IN GERMANY AND THE GOLD BASIS
http://www.professorfekete.com/articles%5CAEFAmericanBasesGermanyGoldBas...
Above discusses recent German gold repatriation - you won't believe his take on it.
The Last Contango in Washington (Dated '06)http://www.safehaven.com/article/5295/the-last-contango-in-washington
Article list from his website:
http://www.professorfekete.com/articles.asp
+1 Great stuff, Fekete is the real deal.
+ 1 again
Fekete IS great. Don´t ever sell your gold.
Ummm... if you never sell it, why have it? What's the point? Personally I think the time to sell gold will be when the Fed decides to defend the Dollar. Once that happens, those holding gold will be fried. The alternative is a hyperinflationary collapse of the system, which remain a fairly remote possibility.
Pladizow
....'DR. Antal Fekete and Sanjeep Jaitly are the guru's here!'.....may be but,
From some dusty archives , Mr T's (Tom Tzabo) excellent thread although from Dec'08 when a shrinking contango fueled huge speculation on an impending permenant gold backwardation.This article still highly relevant and a must read in case you missed it.
This article dissects,delving deeper into the Prof.Fekete's backwardation thesis.
http://silveraxis.com/todayinsilver/2008/12/
Excellent reference PC...just excellent. And with it, we can begin to break the logjam back at Three Syne Rapids, and blow this whole sucker free.
Reading stuff from back in 09 now is like combing through dusty archives...MFG changed everything. Even Prof A, for all his smarts, reads like a neophyte now...because he assumes a RULE OF LAW - which does not in fact or in deed exist - and makes his fatal mistakes compound upon each other because of that.
That said, however, Feteke reads like a savant compared to whoever is the clown responsible for the piece...unless I failed to see the sarc button! "Risk free return"...is it possible someone could have really written that in the context of the present moment of marketless markets and manipulated manipulations??? Is that you, Signor Grillo?
Here's the problem with debt...be it 'real bills' or Benbucks or Zimbabwe special issues or whatever....it allows for somebody to risk somebody else's money, risk free...for them. It's the essence of socialistic capitalism, and the program which has been coming down the pike for the formerly first world long before they got their chosen chump into the WH for the final 9 holes. And it leads to waste, extortion, and theft.
Gold is money, but money is not capital. Confusing the two always leads to waste...as in loss of OPP! The fact that going back to gold is a necessary part of reconstructing our societie(s), West and East, post collapse, does not mean gold can be a panacea, not a gold-backed currency system a solution. Gold is a metal, and people are people. The one can be melted into 99.9 purity, the other is a malleable tool of evil, and always heads towards impurity of thought and action. That's why mores and moral will always be a necessary, if irritating, part of our existence.
Gold(&silver!)will be the backbone of our trading systems in the near future....and those systems will not involve usury\interest banking, nor the parasites who have imposed those diseases upon us. Going beyond Feteke, to see the big picture truth, is as necessary as going from adolescence to adulthood. Time is not money, gold(&silver!) is money...and interest is not permissible in self-sustaining civilizations. All the rest is just smoke and mirrors. Goodbye 'gurus,' we're on our own now!
...the other is a malleable tool of evil, and always heads towards impurity of thought and action. That's why mores and moral will always be a necessary, if irritating, part of our existence."
Confronting entropy, as the natural trend toward disorder, assuming no input toward order, is a physical universe law. Humane or spiritual inputs aint so clear as to results.
There's 'gold' then there is gold. 76 cents doesn't pay for the risk inherent in the trade.
The spread is a bookkeeping artifact: thousands of ounces would have to be traded to remove the spread ... it's not worth it.
Particularly when the markets are crooked.
PLUS ... heaven forbid the backwardation in the futures market indicates the price of gold might go down!
Trade gold for central bank notes?
DUUUHHHH
Gold bugs like to trade up me thinks
this is the key
bullion banks are above the law and are rigging the basis/cobasis with impunity; and since the bb's have no fear of being held accountable, ever, the basis/cobasis is a false indicator. we could be in severe and/or permanent backwardation now and the price of paper gold will still continue falling - for as long as defaulted deliveries can be settled in some dark corner with more etf iou's, all is ok. everybody can stay in the water and frolik