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Gold Basis Report RE: Silver "Smashdown"

Monetary Metals's picture




 

The “coordinated smashdown of gold and silver” was on everyone’s mind this week, but is it true? Did the price of paper gold (futures) divorce from the price of physical gold? One thing is for sure, the dollar gained from 21g to over 22g of gold on Friday. A 5% move in the world’s biggest paper currency is a big move.

We have long been predicting volatility as the paper monetary system goes off the rails. Those with their balance sheet in gold can safely watch. Just as most dollar-based investors do not lose sleep if a stock is rising that they don’t own, gold-based investors do not lose sleep if the dollar is rising. But those who borrowed dollars to buy gold are sweating…

Here is the graph showing the prices of the metals in dollar terms.

Gold and Silver Prices

 

One cannot understand the gold market in terms of the quantity of dollars the Fed “prints”, nor by looking at price charts. One must look at the basis (see here for a basic explanation). Week after week, we have been saying that the positive basis, i.e. contango is disappearing (hence the name of this report). This is a process of gold withdrawing its bid on the dollar. One cannot understand this if one lives in the dollar bubble, looking at the gold “price” as if it were comparable to the wheat price or the Mercedes E500 price. What would a falling gold “price” mean? The gold “bull market” is over? And when it rises, does that mean sell to take “profits”?

In this report, we have been tracking the temporary backwardation in both metals.

The cobasis in the June contract fell below zero; it went out of backwardation. This means that a big part of the price drop was driven by owners of gold metal selling (perhaps to cut their “losses” measured in dollars). After the big plunge, the cobasis began rising along with the price, showing that the price was rising due to buying of physical metal more than futures (more on the futures below).

Gold Basis

 

In the gold chart, we’ve marked the place where, rumor has it, 500 tons (assuming this is Imperial tons, it would be 16.3M troy ounces or 163K gold futures). According to the rumor, the price of “paper” gold was smashed down but physical gold has strong demand. It’s hard to interpret magical thinking, but if we were to take a stab at it, it should mean that physical gold is still trading for $1600 and only “paper” gold is now $1400.

There is a technical term for this, that some readers may have seen somewhere along the way: backwardation. If the June contract were at $1400 and physical gold were $1600, that would be a $200 profit to decarry (i.e. sell physical and buy a future) which would be 12.5% in about two months, or about 75% annualized.

Back in reality, the cobasis did not rise; it fell. Below zero. Now it has risen above zero again (though the magnitude is still a fraction of 1%, annualized).

Here is the basis chart for silver. We have included both May and July futures, as traders are rapidly closing May and moving to July.

Silver Basis

 

We marked the points at which the alleged massive “naked” short supposedly knocked the price down. As with gold, the cobasis fell.

Unlike in June gold, in May silver we now have the dynamic of the contract roll. Those who have naked positions must close those positions. Longs must sell. Shorts must buy. If there were a significant short position, this would drive up the ask in the contract.

Cobasis = Spot(bid) – Future(ask)

A rising ask on the future would cause the cobasis to fall during the roll process. Yet we see a rising trend in the red line until the crash and it has begun rising again. Everyone has to make up his mind whether he wants to believe in the tooth fairy, Santa Claus, and the Vampire Squid who shorts gold and silver “naked”. All we can do is provide the evidence. Santa would not fit into the chimney of a wood fireplace nowadays, much that of an oil burner.

Here is an update on the gold:silver price ratio. It ended the week at 60.5.

Gold:Silver Ratio

 

Here is the graph of the open interest in the metals. The rumor claims 163,000 gold contracts (and presumably an equivalent number of silver) were sold where the arrows indicate. All in all, we see about a 16K drop in open interest in gold, and about 12K in silver.Open Interest

 

If someone had sold 163,000 futures to cause the price to drop, then wouldn’t the open interest have risen? If Santa went down chimneys, wouldn’t there be soot on his red and white uniform?

 

This was the Last Contango Gold Basis Report for 21 April. If you found this information to be useful, you can sign up (free) to get automatic notification when new reports are published.

 

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Mon, 04/22/2013 - 12:42 | 3484194 aminorex
aminorex's picture

Regardless of the provenance of the COT numbers they are the best available evidence of the values they report.  Their genuous error is aleatory uncertainty, while their disingenuous error is epistemic uncertainty.  The values they report do not determine the values of interest to the argument made.  Whether they correlate is not in evidence either.  The result is a weak argument from weak evidence.  If it is correct, it will only be correct by miracle.

Mon, 04/22/2013 - 10:37 | 3483665 Conax
Conax's picture

Ok, 'monetary metals', we get it.  All hail the paper trade,  rah rah rah.

Now kiss my ass. 

 

Mon, 04/22/2013 - 10:57 | 3483736 dontgoforit
dontgoforit's picture

Only on the streets of NY.

Mon, 04/22/2013 - 10:25 | 3483608 DeadFred
DeadFred's picture

FYI Santa Claus can fit through the crack under the door and the Squid isn't selling the shorts, that's the job of the JPMorgue.

Mon, 04/22/2013 - 14:08 | 3484662 Bendromeda Strain
Bendromeda Strain's picture

Alas, I have but one up click to give.

 

 

Mon, 04/22/2013 - 10:17 | 3483550 strannick
strannick's picture

Wiener bending over backwards to make the facts fit his academic theories.

Silver's supply factors are hugely different that gold's (byproduct lead/zinc). Silvers demand factors are hugely different than gold's (huge industrial component getting used up). Yet their ratio band stays very small. This is because they are monetary alternatives despised by the government and their fiat monopoly, and only an idiot -or and academic- cant see they get smashed through naked short tidal waves, margin increases, -silver may 2011, gold august 2011-, ect.

Academics have a great resilience to facts. They are some of the dumbest most opinionated condescending people on the planet.

Wiener, please go away.

Mon, 04/22/2013 - 09:44 | 3483440 ChanceIs
ChanceIs's picture

Below is a repost of something I put iup last night.  Love to have a conversation on it:

 

 

Above is the opening of Keith Weiners weekly report on the backwardation/contango of the PMs.  (You need to register - free - to get access.)  Keith is "one of us."  He believes in holding metal.  He doesn't buy into the 10 million naked shorts coming out of the Fed.  He points at the open interest in the futures and that it contracted during the "dump."  The Cobabis also dropped.  I think that Keith sees a drop in the paper spot and uses that in his cobasis.  He could be 100% off.  If the physical were rising - as some here claim is happening through their direct experience - and the shorts hit the paper spot and near futures, then the cobasis would have risen.

I can say for sure that Jim Sinclair pays little attention to the COT - open interest - reports.  He writes that when he was heavily in the business in the '70s, he would maintain huge spreads.  When he wanted to get short, he would sell his longs.  That would close out a bunch of contracts and reduce the open interest.

Keith doesn't quite add up.  I have changed my mind.  Now I want to see Fekete, Weiner and Sinclair in a cage fight.  My bullion would be on Sinclair.  Why?  Because Fekete and Weiner are both academics and Sinclair spent 45 years trading.  You know......trading.  If you screw-up you don't get dinner.  Int he Academy if you screw up, you just go write another paper.  Bernanke comes fromt he Academy. 

Mon, 04/22/2013 - 10:14 | 3483541 TrulyStupid
TrulyStupid's picture

The smoking gun of manipulation is in the first chart... only a coordinated smackdown of both PMs could produce such near identical swoons which are of themselves extraordinary events. Whats the chance of 2 highly improbable events happening lockstep?

It also shows that silver is now trading solely as a monetary metal, like gold...

I beleive that the outcome of this event is to set the gold/silver ratio in stone....going forward they will trade in contango and present many cross trading profit opportunities for the manipulators.

Mon, 04/22/2013 - 13:11 | 3484328 ChanceIs
ChanceIs's picture

>>>The smoking gun of manipulation is in the first chart... only a coordinated smackdown of both PMs could produce such near identical swoons<<<

I agree.  What does (doesn't) Weiner see that we do?

He gives me cognitive dissonance.  He goes on about how there is no manipulation, then jumps on the bandwagon saying that he who has no gold in his personal posession is screwed.

Mon, 04/22/2013 - 09:42 | 3483418 RSBriggs
RSBriggs's picture

They sell options on futures, do they not?  Anyone taken a look at open interest on, say, July gold futures options?

Mon, 04/22/2013 - 09:06 | 3483287 earnulf
earnulf's picture

This is a smokescreen argument.    Want to know what's really going on, check the paper price and the price metal is actually selling for in the market on the same day.      Silver, at 23.50 paper price, could not be had for less than $28.00 (apmex) and was selling on-line in auctions for $34. (ebay, completed).   This was 1 ounce silver, not MS70 or some rare ounce coin.

Same day that gold was 1400 ounce, a 1/10th ounce gold piece sold on ebay at $400.   Again, not a collector coin.

Yeah, there's a serious disconnect between what you have in your hand and what a piece of paper says you have.

 

Mon, 04/22/2013 - 12:30 | 3484126 Chappy
Chappy's picture

My dealer was sellig 1oz silver rounds for$2 over spot.  Ebay is for chumps.

Mon, 04/22/2013 - 08:44 | 3483237 Downtoolong
Downtoolong's picture

There’s a piece of this analysis missing. It’s the OTC derivatives contracts in PM. That’s the critical part we never get to see. The futures markets are primarily just a tool which the big banks and financial companies use to manage those OTC positions which are priced and settled on the futures index.

You don’t need to have a huge change in open interest associated with a major price move and high volume in futures either. It could be a matter of bank A and bank B trading just a few contracts back and forth thousands of times. The net dollar change in value of those few contracts could be miniscule compared to the change in settlement value of their OTC contracts. They would be happy to lose $1million in the futures market to make a $billion in their OTC.

Mon, 04/22/2013 - 09:39 | 3483414 ChanceIs
ChanceIs's picture

Am I to understand then that Enron didn't invent this game and that it has persisted lo these 12 years later.  I thought that we had Sarbanes-Oxley to address this mattwer.  I am sure tht Dodd-Frank - even though it has at best been 40% implemented in the last three years - will put this to rest forever.

Gun control and immigration legislation will take care of those issues as well.  Your whole problem is that you don't trust the government.

PS:  My doggy's meds went up 700% since ObamaCare started taking hold.  No bull.

Mon, 04/22/2013 - 08:44 | 3483236 swmnguy
swmnguy's picture

"One thing is for sure, the dollar gained from 21g to over 22g of gold on Friday."  Uh, No.  Milligrams, maybe.  But 21g is 3/4 oz., or at least that's what the friendly neighborhood dope dealers used to maintain back when that sort of thing mattered a lot to me.  And even at recent pricing, 3/4 oz. of gold is still more than $1000.

Mon, 04/22/2013 - 08:33 | 3483204 Lordflin
Lordflin's picture

I don't believe in the tooth fairy, or Santa Claus... So why would I believe the COT...?

Mon, 04/22/2013 - 08:30 | 3483193 anarchitect
anarchitect's picture

Catty remarks about the tooth fairy put you at risk for hubris when you write this kind of drivel. If even 10% of the contracts in one of these casinos were settled in physical, its stockpile would be wiped out. Why do you think Kyle Bass took delivery? Fortunately for the exchanges, most of the longs are just gambling on the price and would cringe at taking actual delivery. This allows the shorts to sell far more than they could deliver. If you want prices in the physical market, call an Eastern central bank that's buying and ask what they'd pay if they wanted, say, 50 tonnes shipped to their own vault. After they refuse to answer and slam the phone in your ear, find out what kind of premium you'd pay for 10,000 one-ounce coins.

Mon, 04/22/2013 - 08:38 | 3483190 Bendromeda Strain
Bendromeda Strain's picture

According to the rumor, the price of “paper” gold was smashed down but physical gold has strong demand. It’s hard to interpret magical thinking, but if we were to take a stab at it, it should mean that physical gold is still trading for $1600 and only “paper” gold is now $1400.

I don't know where you learned to argue, but I see a huge strawman and a whole lot of hand waving going on. The price of physical obviously did drop with the paper, which is why there was a worldwide run on shops - gold was on sale. Thanks for outing your "service" as being disingenuous, disinfo, or just plain diss worthy.

Mon, 04/22/2013 - 13:41 | 3484500 Panafrican Funk...
Panafrican Funktron Robot's picture

http://research.stlouisfed.org/fred2/series/BASE?cid=124

Refutation of gold bears.  Yes friends, we just passed the 3 trillion mark.  Funny, this was published around the middle of last week.  What happened around the middle of last week?

Mon, 04/22/2013 - 14:11 | 3484684 Bendromeda Strain
Bendromeda Strain's picture

Those darn round numbers again...

Mon, 04/22/2013 - 10:01 | 3483516 Jim B
Jim B's picture

I agree the PHY price dropped which set off a wave of buying...  Product is getting hard to get at the new price.  I am kind of bummed, I checked APMEX and most low premium products are sold out! 

Mon, 04/22/2013 - 08:19 | 3483150 blindman
blindman's picture

@"Here is the basis chart for silver. We have included both May and July futures, as traders are rapidly closing May and moving to July."
.
this chart is telling me that if I sell silver today and want to buy it
back in a month I am guaranteed to lose at least 1%, all things being
equal, which they never are, and I suspect much more than 1%.

Mon, 04/22/2013 - 08:08 | 3483127 goose3
goose3's picture

"If someone had sold 163,000 futures to cause the price to drop, then wouldn’t the open interest have risen? "

 

Wouldn't those 163,000 futures sold cause paper longs to close out their positions?    Net gain = 0.

Mon, 04/22/2013 - 08:12 | 3483137 Quinvarius
Quinvarius's picture

I suspect there are non-reporting entities in that market.  I don't trust any of the garbage we are being fed.

Mon, 04/22/2013 - 08:08 | 3483126 blindman
blindman's picture

http://www.zerohedge.com/contributed/2013-04-22/why-western-banking-cart...
.
Why the Western Banking Cartel’s Gold and Silver Price Slam Will Backfire - And How You Can Protect Yourself from the Blowback
.
hmmmm?

Mon, 04/22/2013 - 08:09 | 3483125 Buzzworthy
Buzzworthy's picture

This report reminds me of someone staring at his bellybutton and counting lint.

Mon, 04/22/2013 - 08:10 | 3483123 Quinvarius
Quinvarius's picture

In my opinion, the last 6 months have been a bailout of JPM funded by the Fed and or Treasury via gold market operations.  I think after JPM's whale trade, Jamie Dimon lost the trust and confidence of the Fed.  He was helped to liquidate his paper scerw ups in the bullion market.  What we are seeing is direct government involvement as they take on JPMs book and try to get rid of it themselves.  I suspect they contracted out GS and the algo which GS bragged can "crash a market" to do the dirty work with Fed money.

And eventually those asswipes are going to turn this game loose on the stock market again.  But the stock market is all paper and has no chance of survival based on real demand.

Trust the history:  http://www.youtube.com/watch?v=Q8e-e9xtFWA  Watch this series and understand how many times we have been in this exact cycle.  However, at this point, a history of money in the Soviet Union might be more applicable.

Mon, 04/22/2013 - 10:48 | 3483709 dontgoforit
dontgoforit's picture

Seems to me they're working that whale in every blubbery way they can get away with - except with justice. Where are the indictments?  Have these folks not pulled-the-wool over everyone's eyes, or is there a direct and complicit relationship between them and the Feds?

Mon, 04/22/2013 - 08:05 | 3483110 Pseudo Anonym
Pseudo Anonym's picture

is there any way to know if expired contracts were settled in cash rather than delivered phyzz?  i know, i know, conspiracy, blah, blah, no way, that would make the news.  but really, would cash settlements, especially if there was a large enough premium attached to such settlement along with a non-disclosure agreement, be broadcast?

Mon, 04/22/2013 - 10:46 | 3483702 dontgoforit
dontgoforit's picture

Many might feel too 'embarrassed' to talk about it.  "Been snookered, eh?"  Dumb ass.

Mon, 04/22/2013 - 07:53 | 3483077 casey13
casey13's picture

They manipulate everything else. Can the COT reports be trusted?

Mon, 04/22/2013 - 07:31 | 3483033 paint it red ca...
paint it red call it hell's picture

Oh My, could someone be manipulating the markets?

Mon, 04/22/2013 - 08:10 | 3483128 Glitterbug
Glitterbug's picture

Why do you compare the paper price now with the paper price for next month?

Look at the paper price now and the price of physical Gold delivery - guaranteed - next month. Then you will get a true picture of the scam.

If LBMA and COMEX had Gold, knocking the price down would hurt them. They would have to deliver any physical thay had at that price. If they don't have the Gold (or have something in the small print that says they are allowed to pay out in cash instead of Gold) then they are on to a winner.

Some poor sucker who ordered Gold when the price was 1650 and paid for it (probably margined) will only get 1450 in cash - that hurts.

If he got his due amount of Gold, then he couldn't care less about the current price - he is confident it will gain its true value over time.

R.

Mon, 04/22/2013 - 07:25 | 3483015 scatterbrains
scatterbrains's picture

I'm thinking a straight rip to 1500 before it starts to doubt itself a little bit but ultimately new highs above 2k in the coming months.

Mon, 04/22/2013 - 07:11 | 3482985 blindman
blindman's picture

what if some one took much delivery, would open interest rise?

Mon, 04/22/2013 - 07:01 | 3482970 negative rates
negative rates's picture

It only takes one dealer to keep it all together. But YOU have to find him. 

Mon, 04/22/2013 - 05:10 | 3482894 eddiebe
eddiebe's picture

How do we know for sure the open interest didnt rise? Can we trust the figures supplied? Especially in the PM's?

Mon, 04/22/2013 - 03:59 | 3482858 Ungaro
Ungaro's picture

16.3M troy ounces, or $2.3146 billion notional value? Really?

Mon, 04/22/2013 - 12:39 | 3484157 Pinto Currency
Pinto Currency's picture

 

These basis numbers do not look right; gold and silver were in backwardation in Feb and subsequently.

See this link:

http://www.tfmetalsreport.com/podcast/4528/tfmr-podcast-40-sandeep-jaitl...

Basis is a very sensitive measurement and it looks like the wrong measurement is being taken in the article above.

 

This is a better source for basis analysis: http://www.feketeresearch.com/gold-basis-service.php

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