Guest Post: Backwardation In Gold And Silver

Tyler Durden's picture

Submitted and © by Keith Weiner

Backwardation in Gold And Silver

On Monday, May 14, something happened that hasn’t happened since Dec of 2008.  Two successive near-month precious metals futures contracts were in backwardation at the same time.  To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market.  It should not be possible for it to happen in gold and silver.

But ever since Dec 2008, it has been recurring intermittently, and recently it has become the “new normal” for each futures contract to head into backwardation before expiring.

Even in this “new normal”, however, it has been only one at a time: one metal, and one month.  This is because the backwardation occurs with the “contract roll”, as people sell the expiring contract and buy one farther out.  The selling pressure on the expiring contract is most intense for a short period of time.  After that, the spread widens as the market makers move on, the selling pressure abates, and with wider spreads all around, both the basis and cobasis fall into oblivion.  Except for the December month, gold and silver futures are liquid in different months.

That is why one does not see both monetary metals in backwardation simultaneously because they are “out of phase” by 30 days and temporary backwardation typically persists for only about a week or so.  And it should be even harder to see two different successive near-dated futures contracts in backwardation.

On May 14, this is precisely what occurred.  Both May and July silver are backwardated.  And June gold is backwardated.  Incredibly, the May silver contract is giving away a 3% annualized profit to anyone who would sell physical silver and buy a May future that delivers in a few weeks (thus recovering the same position).  Even more incredibly, no one can or will take the profit that is dangling out there!

July silver backwardation is smaller, and June gold backwardation is even smaller.  But still!  This should not be possible at all.

Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust.  I think that it is a lack of unencumbered metal.  The markets for precious metals, silver more than gold, have become quite tight.

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malikai's picture

Oh shit. Backwardaded and QE? Excelsior!

Max Fischer's picture

 

 

Silver shortage articles = catnip for doomer goons

Whenever a doomer goon sees a silver shortage article, they climb up on their desk, rub their mustaches all over the screen and then "flick" the screen with their "hind legs."

MF.

 

mayhem_korner's picture

 

 

My Ag coins are swelling like a bbw's feet in a heatwave.

CrockettAlmanac.com's picture

Ron Paul's final money bomb is today.

 

Stand for Liberty

http://ronpaul2012.com/

Max Fischer's picture

 

 

Why the hell would Ron Paul continue to plead for money when it's crystal clear he's not getting the nomination?  Oh, that's right... I forgot... he's a thirty year, career politician who uses unrealistic rhetoric to dupe Republican wingNUTS - otherwise known as libertardians - into thinking the colonial past is America's future.

Ron Paul:  Just say NO! to air traffic controllers!

MF

malikai's picture

By the way, Lockheed Martin handles Flight services and FlightWatch.

CrockettAlmanac.com's picture

Hey Max, when Ron Paul started duping me I was a life long Democrat. Please adjust your ad hominems accordingly.

Joe Sixpack's picture

Backwardation is expected when people realize the COMEX is a fraud. People realize that paper gold/silver may go up in smoke, so nw is the time to buy physical. Sing along with me:

 

Let's get Physical, physical, physical...

fockewulf190's picture

Just laid out 5g for more barbarian relics and Judas money. Also happened to see Pippi Longstocking on TV this morning playing around with her treasure chest full of Phyzz. What a smart girl.

CrockettAlmanac.com's picture

 

 

ELAINE: Who was Pippi Longstocking?

KATY: Pippi Longstocking?  Hmm, I don't don't know.

ELAINE: Did she have anything to do with Hitler?

KATY: Hitler?  Maybe.

Hobbleknee's picture

Could I interest you in some boating insurnace?

BalanceOrBust's picture

Backwardation only in the front months?  Do the paper shorties not have enough fire power to bring the whole chain into backwardation?

Seer's picture

In my mind I'm hearing Jane Curtin correcting 'Emily Litella' (http://en.wikipedia.org/wiki/Emily_Litella), with Litella then replying:

http://www.youtube.com/watch?v=V3FnpaWQJO0

jumbo maverick's picture

25percent more cats than leading refineries, how can they do that and make a profit?

Calmyourself's picture

Thanks Max, great analysis explains the backwardation perfectly, tool...

Max Fischer's picture

 

 

You guys have repeatedly proven that you don't want answers or the truth  ... you want an echo chamber. If I explain to you why there's backwardation, you'll only tell me that's it's bullshit and that your coin purchases last weekend are about to blow up JPM.

Besides, if the paper price of spot metal doesn't matter (the prevalent mantra around here), why all the hoopla about backwardation?

MF

malikai's picture

Permanent Backwardation, that is why. Also known as the crack-up boom.

But by all means, please do explain to us unwashed imbeciles why it is in such a state, again?

Zero Govt's picture

Max  -  agree with you regards the backwardation nonsense and another pile of garbage to hoodwink the Gold-bugs with

small point but stop signing off with 'MF' on your posts, you're wasting cyberspace 

Bastiat's picture

Anyone who uses "doomer" "birther" "truther"  or similar no-content name calling, is engaging in middle school stigmatizing of non-conforming thought and behaviour. 

Max Fischer's picture

 

 

"non-conforming thought and behaviour" is respectable when it's Copernicus - NOT when it's a doomer goon, spewing out nonsense or a hypocrical wingNUT at a Tea Party equating Obama to Hitler.

MF

CrockettAlmanac.com's picture

There's no comparison. Hitler's drones were far less accurate than Obama's.

Esculent 69's picture

What's wrong with that? Hitler was a national socialist, and obama's a socialist with a leninist/stalinist/maoist tinge to it.  Besides, socialism and communism are basically brother and sister.  Siblings from the same father with the same goal; world government.  Just like you and MDB are from the same father, the Bernanke, with the same goal; deception. 

As for the mothers? They're fuckers.  Bithcezzzzz

VonManstein's picture

Stalinism has nothing to do wit world gov.. he is not trotski.. he believed in socialism in one country... the rest wanted globla revolution.

stalin was a legendary rationalist.

dwayne elizando's picture

American debt is definitely a bubble and we do have the worlds highest prison population.

StychoKiller's picture

Son, we live in a world that has printers, and those printers have to be guarded by men with guns.  Who's gonna do it?  You?  Lloyd Blankfein?  I have a greater responsibility than you could possibly fathom.  You weep for Santiago, and you curse the Banksters.  You have that luxury.  You have the luxury of not knowing what I know. That Santiago's death, while tragic, probably saved lives.  And my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth because deep down in places you don't talk about at parties, you want me on that printer, you need me on that printer.  We use words like interest, easing, and liquidity.  We use these words as the backbone of a life spent debasing something.  You use them as a punchline.  I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the waves of the very liquidity that I provide, and then questions the manner in which I provide it.  I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up an ink cartridge, and man a printer.  Either way, I don't give a damn what you think you are entitled to!

resurger's picture

i wont babe, please explain, am all ears ...

BeetleBailey's picture

Max Fischer Articles = given to him to type up courtesy Ben Bernanke's lackeys.

Whenever a Max Fischer post is saved, it is comedic theater. Hilarious - if it weren't so tragic that someone would believe two absolute criminals and liars (The Bernank and Timmah) are his "heroes".

Max. Look up the word rube.

I did - just to see. Voila~

The same picture you use as an avatar on here is ....there!

Vendetta's picture

PM goons are just sewing the stuff in their garments and getting out of Vienna just like people who are trying to escape certain death... you know, the uncivilized. /snark

DosZap's picture

How much Sliver you want, I can get you A WAD..................no shortages of either.

LowProfile's picture

Question is, at what price?

Given the dealer premiums, etc. seems like 3% isn't nearly enough to bring physical onto the market.

Cheap bastards are cheap.

vmromk's picture

A 3% premium to unload my silver and get back Bernanke Bucks ?

FUCK NO.

I don't need any more Monopoly money.

Godisanhftbot's picture

 That ought to sooth all those folks getting margin calls on their long positions.

Al Huxley's picture

Anybody trading leveraged paper in the gold market deserves what the bankers give them.  Anybody buying physical with cash doesn't have any margin calls to worry about.

bobola's picture

So, that means the price of physical gold and silver should start going up, based on supply and deman, right..??

Ahmeexnal's picture

Right, and don't forget to place your rotten molars under the pillow so the tooth fairy brings you a trillion euro bank note.

Jonas Parker's picture

"Right, and don't forget to place your rotten molars under the pillow so the tooth fairy brings you a trillion euro bank note."

"Right, and don't forget to place your rotten molars under the pillow so the tooth fairy brings you a trillion drachma bank note."

There, I fixed it for you!

 

Bindar Dundat's picture

Holy Cow, Holy cow. Just as we got rid of the tax...

EBR MOD 0's picture

I am still stacking, wired da fiat :-) come on Fed-Ex....

GeneMarchbanks's picture

'The markets for precious metals, silver more than gold, have become quite tight.'

Understatement of the week.

mick_richfield's picture

It's funny.  The image that brought to my mind was not one of the COMEX, or nearly-empty silver vaults.

It was of JPMC employees staying at work all night, shredding documents and erasing hard drives.

Weird.

Kingbingo's picture

Does this mean that the market feels the risk of fiat collasping within a few weeks is not worth 3%?

 

That is hardly negliable.