“Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold”
This makes no sense to me. If the futures price is less than spot doesn’t that mean that the market is expecting gold to be worth less in the future than today? If so, his conclusion about gold not being for sale at any price is dead wrong. It would mean that holders of gold would be happy to sell all they have and then some at spot since they can cover for less in futures.
This makes no sense to me. If the futures price is less than spot doesn’t that mean that the market is expecting gold to be worth less in the future than today?
Fekete is comparing the Dec 31st future price to one in Feb 2009. The FEB contract is running at 1.4% lower than Dec. The longer term future's price is less for the first time ever, per the author. Hence the normal expectation for higher prices down the road due to taking the increased long term risks is not presently there, and it has been this way consistently for years....an indication that some are beginning to think that a bird in the hand is worth something...while a promised bird in the bush down the road is just that....a promise.
In short, the market is tending towards passing on the long term bet of paper gold considering none may be there for delivery. You could end up with a piece of paper or at best a check/fiat, but no gold. As a commercial, if you knew that you could no longer replace your gold on the market would you short it and guarantee delivery?
Fekete is comparing the Dec 31st future price to one in Feb 2009. The FEB contract is running at 1.4% lower than Dec.
I could be wrong, but the way I read it, on Dec. 3 the Feb. contract (0.29% discount to spot, annualized) is higher than the Dec. contract (2% discount to spot, annualized), but both are lower than the spot price.
For Friday, Dec. 5, I see cash gold (I assume this is spot) at 755.92, the Dec. 08 futures at 750.5 and the Feb. 09 futures at 752.2. I'm not sure how to express this as an *annualized* percentage discount, but if I read it correctly both contracts are still in "backwardation". Actually, futures prices look to be below the "cash" price all the way through June 09.
Lower prices in futures contracts which are further out normally means that market expectations are for lower gold prices in future months. Normally, the further out month prices also incorporate interest and carrying charges, so even if the market were flat you would still expect future months to be priced slightly higher than spot.
I don't quite understand how "backwardation" is different than falling market expectations. Then again, I don't quite understand how the dollar is rising and gold is falling while interest rates are being pushed down and money is being created faster than any time in U.S. history.
My conclusion is, like many others, that the monetary system is broken, period. In my view, it all boils down to:
WHO DO YOU TRUST?
The bankers, who are so corrupt and inept that they trashed the economy with bogus financial instruments, collecting high sales commissions all along the way?
Or government, who hands our money to those very bankers with virtually NO STRINGS attached?
Or foreigners, who sell us cheap crap that's contaminated with ethylene glycol and lead, or counterfeit products that destroy our own markets, and then "re-invest" their profits into T-Bills, making our own government beholden to these foreigners who have no love for anything about our country?
If you think that the new social order is going to save you from your own bad decisions when the going gets tough, good luck with all that. I'll keep buying metals - at least I know what I've got.
Q: Are You Printing Money? Bernanke: Not Literally
One more time.... if there were a "coming crisis" with an inability to deliver gold, wouldn't gold prices be shooting up? Today gold dropped to $755.
Nope. The powers to be will keep such a crisis wrapped up with currency and market manipulations until the crisis hits everyone square in the face. This is how they handled the sub-prime mess for months until it literally blew up in their faces and landed on the front pages of newspapers in late summer/early fall of 2007. Remember all the quotes about sub-prime being contained through early 2007 into 2008 and major banks stating minimal to easily contained exposure? And during the first volley while things were stewing the FED and Co. kept gold at low levels right through August/Sept 2007. And those in the seats of power knew what was coming yet gold showed no signs of that from May 2006 to August 2007? How's that even possible with all the issues that were brewing? I think that answers your question. The gold pricing mechanism looks broke as well in the current environment seeing as the future's open interest can be blown back without much effort. For now, many are content to acquire physical gold and let the paper pricing mechanism remain broken. At some point in time Comex pricing could be irrelevant. Why do pricing mechanisms for any commodities stay out of whack for long periods? I submit that if it benefits someone, they will push to keep those mechanisms supressed. A good analogy would be the CDN prices for so many better dated 18th and 19th century coins that trade at 50% to 400% of listed prices. And even when those items trade or get sold at auction, the price guide does not usually get updated. It's obviously in "someone's" (ie buyer's) interest to keep those published prices low. And those early buyers have no problem selling them for the large premiums. The SEC/CFTC really could care less about seeing accurate pricing and fully legal trading mechanisms for gold. They do what they are told by TPTB.
As already stated the system is broken and has been for 1-2 years. The FED/Treasury now has an unlimited fiat machine with seemingly no holds barred.
Backwardation would indeed be a sign of upward price momentum. Unfortunately I dont quite see it yet. True backwardation would include futures all the down the curve.
Jan 09 $750 Feb 09 $752 Apr 09 $754 Jun 09 $755 Aug 09 $757 Dec 09 $753 Dec 11 $819 Dec 12 $828
Dan Norcini generally agrees with Cohodk's analysis.
First of all, I prefer to use the term backwardation to refer not so much to a negative basis as Antal defines it, but rather to the structure of the particular futures market that is concerned. I do agree with Antal’s use of the terms, “negative and positive basis”. This is really not an attempt to split hairs for me but simply a use of the terms in such a manner that I have learned to use them as a trader.
The normal structure of the majority of futures markets, a few are excepted, is one in which the nearer contracts trade at a discount to the distant month contracts. The reason for the higher price in the distant months is that those prices include the cost of storing the commodity or warehousing it, plus the insurance needed to cover the stored commodity in the event of theft, fire, etc and interest costs. Under normal conditions, the price of those distant commodities converges with the cash price as the time for delivery draws near. That makes sense since if you are no longer storing the stuff, you no longer need to pay for the warehousing nor do you need to insure it, etc.
In backwardation, the front or “nearer” contracts trade at a premium to the distant month contracts. Markets that go into backwardation are markets that are marked by exceptionally strong demand for that particular commodity or exceptionally low supply at current prices. What the market is attempting to do is as Antal states in his piece – that is, to draw out sufficient supply from potential sellers to meet the current levels of demand. If I cannot get you to sell me your scarce apples at $0.25 each, I raise my bid to $0.30. I might be able to make you a bit more willing. If that still did not do the trick, I would have to raise my bid even higher to perhaps $0.35 each in order to entice you to sell that same apple. If you look at the board for “Apple Futures” and see that apples for delivery in June of next year are going for $0.30 but you can sell them now for $0.35, chances are that you will sell those apples to me instead of waiting 6 months, during which anything might happen in the world of apples!
An example of a market that went into backwardation occurred back in the Minneapolis wheat market not all that long ago in which traders bid the price of the front month contract to a never-before-seen price of nearly $25 bushel for wheat! To give you an idea how extreme that was, wheat generally sells for anywhere from $3.50 - $5.50 or so. The market was telling sellers that it wanted hard spring wheat at any price and was willing to pay that price as long as the wheat was delivered RIGHT NOW.
Now as far as backwardation as I define it goes (a structure in the futures market in which the front month gold contract trades at a premium to the distant months), gold is not there yet.
I am linking below a few spread charts that compare the December gold contract to both the April 09 and the June 09 contracts to show you that December is still trading at a discount to both April and June with the notable point that its spread has indeed narrowed. While technically this is not backwardation as I understand the concept, it is a narrowing or a move in that direction and that is something definitely worth paying attention to.
Now let’s go to the term “basis”. That is the difference between the futures market price of a commodity and the spot market or cash price of that same commodity. Antal mentions that gold has exhibited a negative basis, one in which the futures market price is lower than the cash or spot market price. That is, as he points out, very unusual as it would seem to indicate a tightness in the physical market brought about by would-be sellers not willing to part with their gold. Again, Antal is absolutely correct – if spot gold is trading at $750 and the futures market is trading at $745, that is a $5.00 per ounce risk free profit just sitting there waiting for a type of arbitrage. One could immediately sell his physical gold at the $750 price and immediately buy it at $745 in the futures market with the intent of taking delivery to meet his contractual obligations and pocket $5.00 ounce for however many ounces one wished. Buy 5 million ounces of gold at $745 and sell that same amount of gold for $750 and you have gotten yourself a cool $25 million profit less the delivery expenses, etc. Not bad. That is why such a thing does not occur very often nor does it last for long. Too many would jump on the chance for a no-risk trade of such nature. Why then are they not doing so? Antal has answered that question – they are not willing to part with their gold for paper profits! That is what makes this development so noteworthy.
The key is whether or not this sort of thing continues for long so we will definitely have to monitor it
In essence, backwardation has been going on for 3-4 months now. People have been willing to pay huge premiums for physical metal RIGHT NOW instead of waiting weeks or months to get it at or near spot. It's because they think they won't be able to get it at all in teh future, or at a price much higher than spot.
From bank and stock analyst Reggie Middleton commenting on broken pricing mechanisms throughout the economy. It's difficult, if not impossible to have a true market, never mind a free one, unless prices are generally allowed to seek their own levels. Without accurate price discovery, you have nothing but socialism.
Asset prices must be allowed to correct, and the insolvent must be allowed to fail so the solvent can continue and investors can have confidence in the market pricing mechanism. Thus far we have no investor confidence, and as for the insolvents -well the walking dead are all over the place, and I'm talking some pretty big bodies.
It is not as if asset prices are not going to fall anyway. You cannot legislate, or administrate high risky prices in a market based economy (that is, if we still have a market based economy - the socialism is creeping). Yes, the government buys everything risky from everybody else, but what about the 2nd transaction? In order for prices to maintain that level or rise higher, someone must make a purchase at an equal or higher price. It ain't gonna happen for at least a decade, and that may be optimistic.
<< <i>Lower prices in futures contracts which are further out normally means that market expectations are for lower gold prices in future months. Normally, the further out month prices also incorporate interest and carrying charges, so even if the market were flat you would still expect future months to be priced slightly higher than spot.
I don't quite understand how "backwardation" is different than falling market expectations. Then again, I don't quite understand how the dollar is rising and gold is falling while interest rates are being pushed down and money is being created faster than any time in U.S. history.
My conclusion is, like many others, that the monetary system is broken, period. In my view, it all boils down to:
WHO DO YOU TRUST?
The bankers, who are so corrupt and inept that they trashed the economy with bogus financial instruments, collecting high sales commissions all along the way?
Or government, who hands our money to those very bankers with virtually NO STRINGS attached?
Or foreigners, who sell us cheap crap that's contaminated with ethylene glycol and lead, or counterfeit products that destroy our own markets, and then "re-invest" their profits into T-Bills, making our own government beholden to these foreigners who have no love for anything about our country?
If you think that the new social order is going to save you from your own bad decisions when the going gets tough, good luck with all that. I'll keep buying metals - at least I know what I've got. >>
Great post .
I would add however to Diversify-Diversify-Diversify and cover your as s !
An example of a market that went into backwardation occurred back in the Minneapolis wheat market not all that long ago in which traders bid the price of the front month contract to a never-before-seen price of nearly $25 bushel for wheat! To give you an idea how extreme that was, wheat generally sells for anywhere from $3.50 - $5.50 or so. The market was telling sellers that it wanted hard spring wheat at any price and was willing to pay that price as long as the wheat was delivered RIGHT NOW.
Sure that can happen in agricultural commodities where there are crop failures or shortages. It also happens in ag commodities in the spot market. For example, at the start of the cherry season prices sometimes get bid sky high by demand in Japan. But growers never really see those prices because they have no cherries yet since the fruit is not ready to harvest, which why the price is so high. Then the crop comes in and of course by then the price has plummeted since all of the growers now have product to sell.
But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates.
We sell gold retail in the coin shop. For the past two months or so we have been selling at one price for live delivery right now, and a lesser price for delivery in 4-8 weeks, when we can get more product in. This may explain the futures markets. TD
Numismatist. 50 year member ANA. Winner of four ANA Heath Literary Awards; three Wayte and Olga Raymond Literary Awards; Numismatist of the Year Award 2009, and Lifetime Achievement Award 2020. Winner numerous NLG Literary Awards.
For the past two months or so we have been selling at one price for live delivery right now, and a lesser price for delivery in 4-8 weeks, when we can get more product in.
Don’t any of your customers kind of scratch their head and say “Lets see, I want to own gold as an investment but the price is cheaper if I allow 4-8 weeks for delivery because a whole bunch of supply is going to be available then. Maybe it ain’t such a good investment right now after all.”
so if china moves into gold as the reports are saying would this change your mind
If the market belived this the futures prices would be way higher. By the way, China is struggling to keep its own economy afloat.
Cal gold who's money do you think china is using in the struggling in their economy and do you think we'll quit buying from them look at walmarts sales or earnings lately [mostly chinese goods] and where do you think their china's new money is going to go us bonds huh
<< <i> For the past two months or so we have been selling at one price for live delivery right now, and a lesser price for delivery in 4-8 weeks, when we can get more product in.
Don’t any of your customers kind of scratch their head and say “Lets see, I want to own gold as an investment but the price is cheaper if I allow 4-8 weeks for delivery because a whole bunch of supply is going to be available then. Maybe it ain’t such a good investment right now after all.”
CG >>
People want the stuff NOW, and are willing to pay a premium to get it now. They don't want to wait two months because they don't know if they will be able to get it then.
If you buy a February gold contract, will the COMEX be able to deliver it in February?
TD
Numismatist. 50 year member ANA. Winner of four ANA Heath Literary Awards; three Wayte and Olga Raymond Literary Awards; Numismatist of the Year Award 2009, and Lifetime Achievement Award 2020. Winner numerous NLG Literary Awards.
<< <i>Cal gold who's money do you think china is using in the struggling in their economy and do you think we'll quit buying from them look at walmarts sales or earnings lately [mostly chinese goods] and where do you think their china's new money is going to go us bonds huh >>
We have basically already stopped buying from China, as has Europe. Of course we will still buy stuff from China, but not to the extent of the past. I know the people will counter with "they are still growing at 7% per year", but after 30 years of constant and steady 10% growth, their slowdown will be horrendous. Already 1000s of factories have closed and people are moving back to the country. China is now overbuilt and will suffer from the policies of a pseudo-capitalistism.
And the lower wages that will be prevelant in the USA will encourage more manufacturing right here at home.
They may have $2 trillion in currency reserves but I believe the vast majority of this will be used trying to maintain a stabile currency and economy. I believe they have no more than a 50-50 chance of succeding. Russia had a $500 billion currency reserve cushion, most of which is now gone--in only 6 months.
<< <i>An example of a market that went into backwardation occurred back in the Minneapolis wheat market not all that long ago in which traders bid the price of the front month contract to a never-before-seen price of nearly $25 bushel for wheat! To give you an idea how extreme that was, wheat generally sells for anywhere from $3.50 - $5.50 or so. The market was telling sellers that it wanted hard spring wheat at any price and was willing to pay that price as long as the wheat was delivered RIGHT NOW.
Sure that can happen in agricultural commodities where there are crop failures or shortages. It also happens in ag commodities in the spot market. For example, at the start of the cherry season prices sometimes get bid sky high by demand in Japan. But growers never really see those prices because they have no cherries yet since the fruit is not ready to harvest, which why the price is so high. Then the crop comes in and of course by then the price has plummeted since all of the growers now have product to sell.
But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates.
CG >>
We also had severe backwardation in oil this spring and summer. And we have seen what happens when backwardation ends.
<< <i>But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates. CG >>
You contradict yourself. If today's buyers think the price is going to go down in the future, then either a) there's a shortage of material RIGHT NOW or b) they're going to wait for lower prices in the future. Which is it? How else do you explain today's price being higher than tomorrow's price?
In a NORMAL market, future prices must ALWAYS be higher than today's prices except when there's an immediate shortage that is not expected to extend into the future. As others have pointed out NO ONE is going to buy anything today that they can get cheaper tomorrow unless they absolutely need to have/consume it today and prices will reflect this.
Clearly in this backwardation scenario, people are anxious to get gold in hand hand NOW. Clearly, there are doubts about the ability to acquire material in the future.
The market is not made up 100% consensus. Some will buy at today’s spot both for need and as speculation that the price will go up. But the price has trended down over the past several months as the world economies have continued to deteriorate. Meaning that, on the average over time, there have been fewer and fewer buyers at what ever the current spot has been.
Also the futures market reflects in large measure hedge transactions. The producers would love to sell their output now at current spot in a declining market, as well as in the future at prices that appear reasonable in relation to the risk. If futures prices are lower than spot, it means that consumers who normally hedge their forward needs are less inclined to do so at current spot and/or expect their future need to be less, and by the same token the speculators are not bullish either and are not stepping up to bid up the price.
If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze.
As to consumers of gold being concerned that they wont be able to obtain supply in future--why would that be? Are the mines about to run dry?
Edited to add: Regarding China, why would they increase their gold purchases at a time when their economy is hurting and they are trying to implement an economic stimulus plan? How would using their cash to import gold help them stave off the recession?
<< <i>The market is not made up 100% consensus. Some will buy at today’s spot both for need and as speculation that the price will go up. But the price has trended down over the past several months as the world economies have continued to deteriorate. Meaning that, on the average over time, there have been fewer and fewer buyers at what ever the current spot has been. >>
To be specific, the price in US Dollars has gone done, but in other currencies prices are at near records. If you factor in the fact that the USD index has gone from low 70's to high 80's while gold has declined about $250 from its peak, you realize that gold hasn't really dropped that much... the USD has just made incredible gains - and, compared to other commodities, has held its ground quite well considering.
<< <i>Also the futures market reflects in large measure hedge transactions. The producers would love to sell their output now at current spot in a declining market, as well as in the future at prices that appear reasonable in relation to the risk. >>
If producer see that the price in the future is less, they will flood the market with current supplies - if they have them, thus causing current prices to go down.
<< <i>If futures prices are lower than spot, it means that consumers who normally hedge their forward needs are less inclined to do so at current spot and/or expect their future need to be less, and by the same token the speculators are not bullish either and are not stepping up to bid up the price. >>
Yes, and if this was the case, current prices would be lower than future prices because of the lack of demand. If consumers thought the price was headed lower, they'd even sell their current inventories and buy it back in the future at a lower price. This selling would cause weakness in the current price relative to the future price.
<< <i>If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze. >>
Not if they had no faith in COMEX to actually deliver.
<< <i>As to consumers of gold being concerned that they wont be able to obtain supply in future--why would that be? Are the mines about to run dry? >>
The US Mint is having a hell of a time locating gold for the UHR Eagles for next year. And other mints are having the same problems. So far 5% of outstanding Dec futures contracts have called for delivery, which is up from a typical 0.5 to 1%. Why are they suddenly seeing the ned to buy from COMEX? The prices on US $20 gold keep climbing despite falling spot price. Reports of auctions for physical gold in large quantities at $1075/oz.
Sounds to me like there's a shortage. Are the etra 4.5% of futures contract holders just crazy?
If producer see that the price in the future is less, they will flood the market with current supplies - if they have them, thus causing current prices to go down.
How can they flood the market? At any point in time, the producers stand ready to sell you all that they have available.
Not if they had no faith in COMEX to actually deliver
Isn't the whole point of a short squeeze that the shorts can't deliver and have bid up the price through the roof to get the physical for delivery or have to buy back their contracts from the longs at a big big premium?
People want the stuff NOW, and are willing to pay a premium to get it now. They don't want to wait two months because they don't know if they will be able to get it then.
This is obviously a point the anti-gold crowd does not get because they are so enveloped with charts, TA, and the constant fluctuation of news media reports...which by the way are typically inaccurate. Nor do they understand how well spot gold has actually done considering the amount of deleveraging into dollars that has occured by default, not by investor's choice. I've already read from one source (but still rumor) that London has already been sending gold to the Comex. We'll see if that pans out.
If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze.
Considering that the largest part of the gold "market" is the cartel (JPM, GS, Barrick) who have no real interest in seeing gold prices go up yet, even if a true shortage is around the corner. It's no surprise that the actual short term direction of the market can by completely opposite of the fundamentals that will ultimately drive the market.
As to consumers of gold being concerned that they won't be able to obtain supply in future--why would that be? Are the mines about to run dry?
Essentially, yes. The contractions in business and geo-political/environmental risks are reducing mining output further. Central banks don't want to sell any gold, but are looking to buy as a whole. Gold production has already been in a deficit to demand for several years. It's only going to get worse. I guess as long as you don't mind stocking 100 oz bars in your safe deposit box, you can still buy some off the Comex.
Edited to add: Regarding China, why would they increase their gold purchases at a time when their economy is hurting and they are trying to implement an economic stimulus plan? How would using their cash to import gold help them stave off the recession?
With this mindset then all the central banks would be selling gold, which is obviously not occuring. The Chinese have longer range plans as well and not buying gold today when it's relatively cheap to paper currency values would be a mistake for them. Recessions happen. We've had a number of them since 1945. We didn't sell off the gold stocks to weather through them. If anything, the gold stocks got whittled down during times of inflation to help reduce the descent of the fiat currency.
The 2nd article explains Fekete's concerns a bit better. Still, Mish and others do no buy the concept. Oddly, Mish and Fekete both concur on the deflation end-result.
Backwardation has continued through today. This is a one off event according to Fekete who has some critical words for Mish and his minions concerning the concept of backwardation. The first step is gold owners becoming unwilling to part with their gold. His brief list of steps that will follow backwardation are rather shocking. But only for those with a rugged disposition.
Odd backwardation twist: deflation is caused by gold prices "kept" low
Did we not have lower gold and a falling dollar and falling interest rates in the 80's and 90's? If the dollar was falling those years, was gold "kept" low then? If so, then where was the deflation during that time?
These guys really have to get off their backwardation kick.
Did we not have lower gold and a falling dollar and falling interest rates in the 80's and 90's? If the dollar was falling those years, was gold "kept" low then? If so, then where was the deflation during that time?
In short, 1982-2000 was a commodity down cycle. The down half of a supercycle.
Gold was "kept" low by having a fairly high interest rate to offer a better alternative...at least until 2000. As those interest rates have slowly dropped over approx 20 yrs the situation has changed. This is the situation Fekete is discussing....an overly low interest rate environment and the distortions and misallocations it forces on the economy. There was no deflation during the 80's as the money supply never contracted though a recession began right around 1990-1992. The 80's were a time of general inflation with the gold price staying up and hard assets performing at the end of the cycle. I would label most of the 1990's as a deflationary cycle for commodities, which it was, while equities and paper assets performed well in a moderate to low inflationary environment with a never-ending increase in the money supply, that went much higher starting in 1996. Not a deflationary environment by any means.
The dollar can't be described as "falling" throughout the 1980's and 1990's. That is too simplistic. The dollar had a huge boom from 1980 to 1985 then fell off towards the end of the decade to once again rise up in 1988. From 1988-1994 the dollar moved up and down in a trading range. Other than the large spike from 1980-1985 as well as another smaller spike from 1995-1998 the dollar traded in a reasonably small range during the 80's and 90's. This is compared to a basket of 18 world currencies. If you used another subset the results would vary somewhat.
Agreed that we probably had a deflationary cycle in commodities during the 90s as the dollar rose. So it should also be of no surprise that the commodities have suffered as the dollar rose during the last 9 months.
The US dollar is still in a 25 yr downtrend and the magnitude of the current situation will determine whether that downtrend continues. If it is not as bad then the dollar will probably fall, if it as bad as many think, then it will probably rise. Some are calling for a devaluation of the dollar. I believe if that were to happen then it would also happen with every other major currency, so the net effect on global currencies would be nil. Perhaps it would help PM's, but dont look for the dollar to fall against the basket, as the basket would be similairly devalued.
Here's another view with more common sense and less analysis applied. Turk notes that he's only aware of 3X prior to Dec 2008 where gold traded in backwardation and each of those other than Nov 2008 were very unique situations that did not last long. Turk also notes that because of gold acting as "money" it very rarely (essentially never) trades in backwardation as other commodities often do. Worth a read.
Turk jumps to a number of conclusions without exploring alternatives.
He totally ignores the impact of the expectation of price deflation on futures prices. Why?
He says that no one will sell gold and take dollars if they fear the collapse of the dollar but he ignores the fact that investors are not required to hold dollars and instead can hold other currencies. Why?
He ignores the fact that instead of a flight from the dollar there has been an influx of investment into dollars on such a large scale that the T-Bill the rates even went negative briefly and are now at unprecedented lows, despite higher rates availabe in Europe (which has probably contributed to the rise in the Euro). Why?
Gold has risen in conjunction with declining interest rates, which is to be expected as the opportunity cost of holding gold fell along with interest rates. There is something alluring about owning gold when three month T-Billl are 0.01% and three month CD rates are 1.5% or less. But the flight to the dollar also tempered the rise in the price of gold as those “scared” dollars seeking a safe haven did not choose gold. Why?
I thought we had already established that it is not backwardation unless it is all the way along the curve. There is no backwardation. Why is this so hard to understand?
Backwardation is a futures market term. It describes a situation where the amount of money required for future delivery of an item is lower than the amount required for immediate delivery of that item. For example, immediate delivery of gold may cost $1,000 an ounce, whereas delivery in two months only costs $900 an ounce, with that $900 to be paid at time of delivery. It is a peculiar situation, because no rational person would buy gold for $1,000 an ounce today, when they could enter into a contract to take delivery for $900 in two months time, except when they do not believe their counterparty will be able to deliver at the $900 forward price. Thus backwardation is a signal that the item in question is in short supply. [1]
Formally, backwardation means a downward sloping forward curve (as in an inverted yield curve). A backwardation starts when the difference between the future price and the cash price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase.
The opposite market condition to backwardation is known as contango, in which the spot price is lower than the futures price. Different from contango, in backwardation the difference between the cash price and the future price is unlimited. There have been situations in metal markets in the last 30 years where there was a contango in nearby quotes and a backwardation in two different futures quotes.[citation needed]
Backwardation very seldom arises in money commodities like gold or silver. In the early 1980s, there was a one-day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses[citation needed]. Gold has historically been postive with exception for momentary barkwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972. .[2]
The term is sometimes applied to forward prices other than those of futures contracts, when analogous price patterns arise. For example, if it costs more to lease silver for 30 days than for 60 days, it might be said that the silver lease rates are "in backwardation."
What it means is that investors are unwilling to take the "Easy Profit" (no risk) of selling a commodity (gold) today for more than they can contract to get it for in a few months.
The reasoning is usually a) For some reason they need the commodity NOW vs a few months from now or b) There is no confidence or there is uncertainty that the commodity will actually be delivered in the future
several years ago when I sold a house, I had this discussion with my realtor:
Me: Let's price the house at 100X today (x = any number)
Realtor: I think you will have trouble selling it at that, Alan. So next month why don't we be ready to cut the price to 98X ?
Me: Okay. If it doesnt sell for 100X this month, we can try 98X next month. But I really need the sale for my new home purchase. Should we consider 95X a month later?
My question is, is this backwardation or just cutting prices to find a point where price will meet what a buyer will pay?
You're talking apples and oranges. Pricing a unique, illiquid asset is much different than transacting commodities. You're talking about opinion of value on a home which varies from every other home on the market by condition, age, location, ammenities, and other factors including marketing efforts and "finding the right buyer."
The gold markets are almost perfect. Tens of thousands of contracts (if not more) are transacted daily. The price paid in those markets is the going price - I don't know how you can say or suggest otherwise.
And a key element of gold is that most of the investible gold is (or theoretically) should be available on short notice to correct a backwardation problem via arbitrage. Gold typically just doesn't disappear from the market never to be seen again. It's always lurking as a regulatory agent. It's one reason why 1000 oz silver bars (or 400 oz gold bars) are probably being melted to satisfy strong demand on the 1 ounce products. The fact that most silver is consumed constantly makes it a poor choice as a regulatory agent. But the relative abundance of gold (rarely consumed) makes it a very good agent. And the relative abundance of it should almost always ensure that it stays in contango. If in fact it is not as abundant as thought (CB's sold away too much of it), then a drift towards backwardation seems reasonable.
<< <i>That is not true backwardation. Trade at your own risk as I am done with this topic. >>
I'm sorry to frustrate you on this, cohodk, but perhaps there is another name for this Futures Pricing situation that does not need a "curve" to define it.
derryb
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This makes no sense to me. If the futures price is less than spot doesn’t that mean that the market is expecting gold to be worth less in the future than today? If so, his conclusion about gold not being for sale at any price is dead wrong. It would mean that holders of gold would be happy to sell all they have and then some at spot since they can cover for less in futures.
CG
Fekete is comparing the Dec 31st future price to one in Feb 2009. The FEB contract is running at 1.4% lower than Dec. The longer term future's price is less for the first time ever, per the author. Hence the normal expectation for higher prices down the road due to taking the increased long term risks is not presently there, and it has been this way consistently for years....an indication that some are beginning to think that a bird in the hand is worth something...while a promised bird in the bush down the road is just that....a promise.
In short, the market is tending towards passing on the long term bet of paper gold considering none may be there for delivery. You could end up with a piece of paper or at best a check/fiat, but no gold. As a commercial, if you knew that you could no longer replace your gold on the market would you short it and guarantee delivery?
roadrunner
Where is the "crisis pricing?"
When gold starts shooting up by fifty or a hundred dollars a day, then I will start to think about a problem with future deliveries.
www.AlanBestBuys.com
www.VegasBestBuys.com
I could be wrong, but the way I read it, on Dec. 3 the Feb. contract (0.29% discount to spot, annualized) is higher than the Dec. contract (2% discount to spot, annualized), but both are lower than the spot price.
I'm trying to interpret the current numbers from this website.
For Friday, Dec. 5, I see cash gold (I assume this is spot) at 755.92, the Dec. 08 futures at 750.5 and the Feb. 09 futures at 752.2. I'm not sure how to express this as an *annualized* percentage discount, but if I read it correctly both contracts are still in "backwardation". Actually, futures prices look to be below the "cash" price all the way through June 09.
Interesting article, thanks!
My Adolph A. Weinman signature
I don't quite understand how "backwardation" is different than falling market expectations. Then again, I don't quite understand how the dollar is rising and gold is falling while interest rates are being pushed down and money is being created faster than any time in U.S. history.
My conclusion is, like many others, that the monetary system is broken, period. In my view, it all boils down to:
WHO DO YOU TRUST?
The bankers, who are so corrupt and inept that they trashed the economy with bogus financial instruments, collecting high sales commissions all along the way?
Or government, who hands our money to those very bankers with virtually NO STRINGS attached?
Or foreigners, who sell us cheap crap that's contaminated with ethylene glycol and lead, or counterfeit products that destroy our own markets, and then "re-invest" their profits into T-Bills, making our own government beholden to these foreigners who have no love for anything about our country?
If you think that the new social order is going to save you from your own bad decisions when the going gets tough, good luck with all that. I'll keep buying metals - at least I know what I've got.
I knew it would happen.
Nope. The powers to be will keep such a crisis wrapped up with currency and market manipulations until the crisis hits everyone square in the face. This is how they handled the sub-prime mess for months until it literally blew up in their faces and landed on the front pages of newspapers in late summer/early fall of 2007. Remember all the quotes about sub-prime being contained through early 2007 into 2008 and major banks stating minimal to easily contained exposure? And during the first volley while things were stewing the FED and Co. kept gold at low levels right through August/Sept 2007. And those in the seats of power knew what was coming yet gold showed no signs of that from May 2006 to August 2007? How's that even possible with all the issues that were brewing? I think that answers your question. The gold pricing mechanism looks broke as well in the current environment seeing as the future's open interest can be blown back without much effort. For now, many are content to acquire physical gold and let the paper pricing mechanism remain broken. At some point in time Comex pricing could be irrelevant. Why do pricing mechanisms for any commodities stay out of whack for long periods? I submit that if it benefits someone, they will push to keep those mechanisms supressed. A good analogy would be the CDN prices for so many better dated 18th and 19th century coins that trade at 50% to 400% of listed prices. And even when those items trade or get sold at auction, the price guide does not usually get updated. It's obviously in "someone's" (ie buyer's) interest to keep those published prices low. And those early buyers have no problem selling them for the large premiums. The SEC/CFTC really could care less about seeing accurate pricing and fully legal trading mechanisms for gold. They do what they are told by TPTB.
As already stated the system is broken and has been for 1-2 years. The FED/Treasury now has an unlimited fiat machine with seemingly no holds barred.
roadrunner
Jan 09 $750
Feb 09 $752
Apr 09 $754
Jun 09 $755
Aug 09 $757
Dec 09 $753
Dec 11 $819
Dec 12 $828
I see no backwardation.
Knowledge is the enemy of fear
First of all, I prefer to use the term backwardation to refer not so much to a negative basis as Antal defines it, but rather to the structure of the particular futures market that is concerned. I do agree with Antal’s use of the terms, “negative and positive basis”. This is really not an attempt to split hairs for me but simply a use of the terms in such a manner that I have learned to use them as a trader.
The normal structure of the majority of futures markets, a few are excepted, is one in which the nearer contracts trade at a discount to the distant month contracts. The reason for the higher price in the distant months is that those prices include the cost of storing the commodity or warehousing it, plus the insurance needed to cover the stored commodity in the event of theft, fire, etc and interest costs. Under normal conditions, the price of those distant commodities converges with the cash price as the time for delivery draws near. That makes sense since if you are no longer storing the stuff, you no longer need to pay for the warehousing nor do you need to insure it, etc.
In backwardation, the front or “nearer” contracts trade at a premium to the distant month contracts. Markets that go into backwardation are markets that are marked by exceptionally strong demand for that particular commodity or exceptionally low supply at current prices. What the market is attempting to do is as Antal states in his piece – that is, to draw out sufficient supply from potential sellers to meet the current levels of demand. If I cannot get you to sell me your scarce apples at $0.25 each, I raise my bid to $0.30. I might be able to make you a bit more willing. If that still did not do the trick, I would have to raise my bid even higher to perhaps $0.35 each in order to entice you to sell that same apple. If you look at the board for “Apple Futures” and see that apples for delivery in June of next year are going for $0.30 but you can sell them now for $0.35, chances are that you will sell those apples to me instead of waiting 6 months, during which anything might happen in the world of apples!
An example of a market that went into backwardation occurred back in the Minneapolis wheat market not all that long ago in which traders bid the price of the front month contract to a never-before-seen price of nearly $25 bushel for wheat! To give you an idea how extreme that was, wheat generally sells for anywhere from $3.50 - $5.50 or so. The market was telling sellers that it wanted hard spring wheat at any price and was willing to pay that price as long as the wheat was delivered RIGHT NOW.
Now as far as backwardation as I define it goes (a structure in the futures market in which the front month gold contract trades at a premium to the distant months), gold is not there yet.
I am linking below a few spread charts that compare the December gold contract to both the April 09 and the June 09 contracts to show you that December is still trading at a discount to both April and June with the notable point that its spread has indeed narrowed. While technically this is not backwardation as I understand the concept, it is a narrowing or a move in that direction and that is something definitely worth paying attention to.
Now let’s go to the term “basis”. That is the difference between the futures market price of a commodity and the spot market or cash price of that same commodity. Antal mentions that gold has exhibited a negative basis, one in which the futures market price is lower than the cash or spot market price. That is, as he points out, very unusual as it would seem to indicate a tightness in the physical market brought about by would-be sellers not willing to part with their gold. Again, Antal is absolutely correct – if spot gold is trading at $750 and the futures market is trading at $745, that is a $5.00 per ounce risk free profit just sitting there waiting for a type of arbitrage. One could immediately sell his physical gold at the $750 price and immediately buy it at $745 in the futures market with the intent of taking delivery to meet his contractual obligations and pocket $5.00 ounce for however many ounces one wished. Buy 5 million ounces of gold at $745 and sell that same amount of gold for $750 and you have gotten yourself a cool $25 million profit less the delivery expenses, etc. Not bad. That is why such a thing does not occur very often nor does it last for long. Too many would jump on the chance for a no-risk trade of such nature. Why then are they not doing so? Antal has answered that question – they are not willing to part with their gold for paper profits! That is what makes this development so noteworthy.
The key is whether or not this sort of thing continues for long so we will definitely have to monitor it
roadrunner
Asset prices must be allowed to correct, and the insolvent must be allowed to fail so the solvent can continue and investors can have confidence in the market pricing mechanism. Thus far we have no investor confidence, and as for the insolvents -well the walking dead are all over the place, and I'm talking some pretty big bodies.
It is not as if asset prices are not going to fall anyway. You cannot legislate, or administrate high risky prices in a market based economy (that is, if we still have a market based economy - the socialism is creeping). Yes, the government buys everything risky from everybody else, but what about the 2nd transaction? In order for prices to maintain that level or rise higher, someone must make a purchase at an equal or higher price. It ain't gonna happen for at least a decade, and that may be optimistic.
roadrunner
<< <i>Lower prices in futures contracts which are further out normally means that market expectations are for lower gold prices in future months. Normally, the further out month prices also incorporate interest and carrying charges, so even if the market were flat you would still expect future months to be priced slightly higher than spot.
I don't quite understand how "backwardation" is different than falling market expectations. Then again, I don't quite understand how the dollar is rising and gold is falling while interest rates are being pushed down and money is being created faster than any time in U.S. history.
My conclusion is, like many others, that the monetary system is broken, period. In my view, it all boils down to:
WHO DO YOU TRUST?
The bankers, who are so corrupt and inept that they trashed the economy with bogus financial instruments, collecting high sales commissions all along the way?
Or government, who hands our money to those very bankers with virtually NO STRINGS attached?
Or foreigners, who sell us cheap crap that's contaminated with ethylene glycol and lead, or counterfeit products that destroy our own markets, and then "re-invest" their profits into T-Bills, making our own government beholden to these foreigners who have no love for anything about our country?
If you think that the new social order is going to save you from your own bad decisions when the going gets tough, good luck with all that. I'll keep buying metals - at least I know what I've got. >>
Great post .
I would add however to Diversify-Diversify-Diversify and cover your as s !
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Sure that can happen in agricultural commodities where there are crop failures or shortages. It also happens in ag commodities in the spot market. For example, at the start of the cherry season prices sometimes get bid sky high by demand in Japan. But growers never really see those prices because they have no cherries yet since the fruit is not ready to harvest, which why the price is so high. Then the crop comes in and of course by then the price has plummeted since all of the growers now have product to sell.
But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates.
CG
so if china moves into gold as the reports are saying would this change your mind
For the past two months or so we have been selling at one price for live delivery right now, and a lesser price for delivery in 4-8 weeks, when we can get more product in.
This may explain the futures markets.
TD
Don’t any of your customers kind of scratch their head and say “Lets see, I want to own gold as an investment but the price is cheaper if I allow 4-8 weeks for delivery because a whole bunch of supply is going to be available then. Maybe it ain’t such a good investment right now after all.”
so if china moves into gold as the reports are saying would this change your mind
If the market belived this the futures prices would be way higher. By the way, China is struggling to keep its own economy afloat.
CG
who's money do you think china is using in the struggling in their economy
and do you think we'll quit buying from them
look at walmarts sales or earnings lately [mostly chinese goods]
and where do you think their china's new money is going to go
us bonds
huh
<< <i> For the past two months or so we have been selling at one price for live delivery right now, and a lesser price for delivery in 4-8 weeks, when we can get more product in.
Don’t any of your customers kind of scratch their head and say “Lets see, I want to own gold as an investment but the price is cheaper if I allow 4-8 weeks for delivery because a whole bunch of supply is going to be available then. Maybe it ain’t such a good investment right now after all.”
CG >>
People want the stuff NOW, and are willing to pay a premium to get it now. They don't want to wait two months because they don't know if they will be able to get it then.
If you buy a February gold contract, will the COMEX be able to deliver it in February?
TD
<< <i>Cal gold
who's money do you think china is using in the struggling in their economy
and do you think we'll quit buying from them
look at walmarts sales or earnings lately [mostly chinese goods]
and where do you think their china's new money is going to go
us bonds
huh >>
We have basically already stopped buying from China, as has Europe. Of course we will still buy stuff from China, but not to the extent of the past. I know the people will counter with "they are still growing at 7% per year", but after 30 years of constant and steady 10% growth, their slowdown will be horrendous. Already 1000s of factories have closed and people are moving back to the country. China is now overbuilt and will suffer from the policies of a pseudo-capitalistism.
And the lower wages that will be prevelant in the USA will encourage more manufacturing right here at home.
They may have $2 trillion in currency reserves but I believe the vast majority of this will be used trying to maintain a stabile currency and economy. I believe they have no more than a 50-50 chance of succeding. Russia had a $500 billion currency reserve cushion, most of which is now gone--in only 6 months.
Knowledge is the enemy of fear
<< <i>An example of a market that went into backwardation occurred back in the Minneapolis wheat market not all that long ago in which traders bid the price of the front month contract to a never-before-seen price of nearly $25 bushel for wheat! To give you an idea how extreme that was, wheat generally sells for anywhere from $3.50 - $5.50 or so. The market was telling sellers that it wanted hard spring wheat at any price and was willing to pay that price as long as the wheat was delivered RIGHT NOW.
Sure that can happen in agricultural commodities where there are crop failures or shortages. It also happens in ag commodities in the spot market. For example, at the start of the cherry season prices sometimes get bid sky high by demand in Japan. But growers never really see those prices because they have no cherries yet since the fruit is not ready to harvest, which why the price is so high. Then the crop comes in and of course by then the price has plummeted since all of the growers now have product to sell.
But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates.
CG >>
We also had severe backwardation in oil this spring and summer. And we have seen what happens when backwardation ends.
Knowledge is the enemy of fear
<< <i>cal gold
so if china moves into gold as the reports are saying would this change your mind >>
I think I read that China wants to go from 400 tonnes to 2,000 tonnes of gold.
I read three years ago China purchases gold at the equivalent of 1% GDP.
I wonder if that is higher now.
<< <i>But in gold the price has been trending downward. The mines are not reporting production problems or labor strife. Consumers are not running to the jewlery store. The vaults are not empty. What is going on is a dismal economic outlook and price deflation. If you think that prices will trend down in the future, there is no sense locking in supply for future delivery now at current rates. CG >>
You contradict yourself. If today's buyers think the price is going to go down in the future, then either a) there's a shortage of material RIGHT NOW or b) they're going to wait for lower prices in the future. Which is it? How else do you explain today's price being higher than tomorrow's price?
In a NORMAL market, future prices must ALWAYS be higher than today's prices except when there's an immediate shortage that is not expected to extend into the future. As others have pointed out NO ONE is going to buy anything today that they can get cheaper tomorrow unless they absolutely need to have/consume it today and prices will reflect this.
Clearly in this backwardation scenario, people are anxious to get gold in hand hand NOW. Clearly, there are doubts about the ability to acquire material in the future.
Also the futures market reflects in large measure hedge transactions. The producers would love to sell their output now at current spot in a declining market, as well as in the future at prices that appear reasonable in relation to the risk. If futures prices are lower than spot, it means that consumers who normally hedge their forward needs are less inclined to do so at current spot and/or expect their future need to be less, and by the same token the speculators are not bullish either and are not stepping up to bid up the price.
If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze.
As to consumers of gold being concerned that they wont be able to obtain supply in future--why would that be? Are the mines about to run dry?
Edited to add: Regarding China, why would they increase their gold purchases at a time when their economy is hurting and they are trying to implement an economic stimulus plan? How would using their cash to import gold help them stave off the recession?
CG
<< <i>The market is not made up 100% consensus. Some will buy at today’s spot both for need and as speculation that the price will go up. But the price has trended down over the past several months as the world economies have continued to deteriorate. Meaning that, on the average over time, there have been fewer and fewer buyers at what ever the current spot has been. >>
To be specific, the price in US Dollars has gone done, but in other currencies prices are at near records. If you factor in the fact that the USD index has gone from low 70's to high 80's while gold has declined about $250 from its peak, you realize that gold hasn't really dropped that much... the USD has just made incredible gains - and, compared to other commodities, has held its ground quite well considering.
<< <i>Also the futures market reflects in large measure hedge transactions. The producers would love to sell their output now at current spot in a declining market, as well as in the future at prices that appear reasonable in relation to the risk. >>
If producer see that the price in the future is less, they will flood the market with current supplies - if they have them, thus causing current prices to go down.
<< <i>If futures prices are lower than spot, it means that consumers who normally hedge their forward needs are less inclined to do so at current spot and/or expect their future need to be less, and by the same token the speculators are not bullish either and are not stepping up to bid up the price. >>
Yes, and if this was the case, current prices would be lower than future prices because of the lack of demand. If consumers thought the price was headed lower, they'd even sell their current inventories and buy it back in the future at a lower price. This selling would cause weakness in the current price relative to the future price.
<< <i>If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze. >>
Not if they had no faith in COMEX to actually deliver.
<< <i>As to consumers of gold being concerned that they wont be able to obtain supply in future--why would that be? Are the mines about to run dry? >>
The US Mint is having a hell of a time locating gold for the UHR Eagles for next year. And other mints are having the same problems.
So far 5% of outstanding Dec futures contracts have called for delivery, which is up from a typical 0.5 to 1%. Why are they suddenly seeing the ned to buy from COMEX?
The prices on US $20 gold keep climbing despite falling spot price.
Reports of auctions for physical gold in large quantities at $1075/oz.
Sounds to me like there's a shortage. Are the etra 4.5% of futures contract holders just crazy?
How can they flood the market? At any point in time, the producers stand ready to sell you all that they have available.
Not if they had no faith in COMEX to actually deliver
Isn't the whole point of a short squeeze that the shorts can't deliver and have bid up the price through the roof to get the physical for delivery or have to buy back their contracts from the longs at a big big premium?
CG
This is obviously a point the anti-gold crowd does not get because they are so enveloped with charts, TA, and the constant fluctuation of news media reports...which by the way are typically inaccurate. Nor do they understand how well spot gold has actually done considering the amount of deleveraging into dollars that has occured by default, not by investor's choice. I've already read from one source (but still rumor) that London has already been sending gold to the Comex. We'll see if that pans out.
If the market players believed that there really was a shortage they would be way long in futures just as they would in a short squeeze.
Considering that the largest part of the gold "market" is the cartel (JPM, GS, Barrick) who have no real interest in seeing gold prices go up yet, even if a true shortage is around the corner. It's no surprise that the actual short term direction of the market can by completely opposite of the fundamentals that will ultimately drive the market.
As to consumers of gold being concerned that they won't be able to obtain supply in future--why would that be? Are the mines about to run dry?
Essentially, yes. The contractions in business and geo-political/environmental risks are reducing mining output further. Central banks don't want to sell any gold, but are looking to buy as a whole. Gold production has already been in a deficit to demand for several years. It's only going to get worse. I guess as long as you don't mind stocking 100 oz bars in your safe deposit box, you can still buy some off the Comex.
Edited to add: Regarding China, why would they increase their gold purchases at a time when their economy is hurting and they are trying to implement an economic stimulus plan? How would using their cash to import gold help them stave off the recession?
With this mindset then all the central banks would be selling gold, which is obviously not occuring. The Chinese have longer range plans as well and not buying gold today when it's relatively cheap to paper currency values would be a mistake for them. Recessions happen. We've had a number of them since 1945. We didn't sell off the gold stocks to weather through them. If anything, the gold stocks got whittled down during times of inflation to help reduce the descent of the fiat currency.
Fekete replies to his initial Red Alert article
The 2nd article explains Fekete's concerns a bit better. Still, Mish and others do no buy the concept. Oddly, Mish and Fekete both concur on the deflation end-result.
Odd backwardation twist: deflation is caused by gold prices "kept" low
roadrunner
Backwardation has continued through today. This is a one off event according to Fekete who has some critical words for Mish and his minions concerning the concept of backwardation. The first step is gold owners becoming unwilling to part with their gold. His brief list of steps that will follow backwardation are rather shocking. But only for those with a rugged disposition.
roadrunner
We do not have backwardation at this time.
PERIOD.
Knowledge is the enemy of fear
Did we not have lower gold and a falling dollar and falling interest rates in the 80's and 90's? If the dollar was falling those years, was gold "kept" low then? If so, then where was the deflation during that time?
These guys really have to get off their backwardation kick.
Knowledge is the enemy of fear
In short, 1982-2000 was a commodity down cycle. The down half of a supercycle.
Gold was "kept" low by having a fairly high interest rate to offer a better alternative...at least until 2000. As those interest rates have slowly dropped over approx 20 yrs the situation has changed. This is the situation Fekete is discussing....an overly low interest rate environment and the distortions and misallocations it forces on the economy. There was no deflation during the 80's as the money supply never contracted though a recession began right around 1990-1992. The 80's were a time of general inflation with the gold price staying up and hard assets performing at the end of the cycle. I would label most of the 1990's as a deflationary cycle for commodities, which it was, while equities and paper assets performed well in a moderate to low inflationary environment with a never-ending increase in the money supply, that went much higher starting in 1996. Not a deflationary environment by any means.
The dollar can't be described as "falling" throughout the 1980's and 1990's. That is too simplistic. The dollar had a huge boom from 1980 to 1985 then fell off towards the end of the decade to once again rise up in 1988. From 1988-1994 the dollar moved up and down in a trading range. Other than the large spike from 1980-1985 as well as another smaller spike from 1995-1998 the dollar traded in a reasonably small range during the 80's and 90's. This is compared to a basket of 18 world currencies. If you used another subset the results would vary somewhat.
FRB Atlanta dollar index charts
roadrunner
Agreed that we probably had a deflationary cycle in commodities during the 90s as the dollar rose. So it should also be of no surprise that the commodities have suffered as the dollar rose during the last 9 months.
The US dollar is still in a 25 yr downtrend and the magnitude of the current situation will determine whether that downtrend continues. If it is not as bad then the dollar will probably fall, if it as bad as many think, then it will probably rise. Some are calling for a devaluation of the dollar. I believe if that were to happen then it would also happen with every other major currency, so the net effect on global currencies would be nil. Perhaps it would help PM's, but dont look for the dollar to fall against the basket, as the basket would be similairly devalued.
Knowledge is the enemy of fear
Here's another view with more common sense and less analysis applied. Turk notes that he's only aware of 3X prior to Dec 2008 where gold traded in backwardation and each of those other than Nov 2008 were very unique situations that did not last long. Turk also notes that because of gold acting as "money" it very rarely (essentially never) trades in backwardation as other commodities often do. Worth a read.
roadrunner
He totally ignores the impact of the expectation of price deflation on futures prices. Why?
He says that no one will sell gold and take dollars if they fear the collapse of the dollar but he ignores the fact that investors are not required to hold dollars and instead can hold other currencies. Why?
He ignores the fact that instead of a flight from the dollar there has been an influx of investment into dollars on such a large scale that the T-Bill the rates even went negative briefly and are now at unprecedented lows, despite higher rates availabe in Europe (which has probably contributed to the rise in the Euro). Why?
Gold has risen in conjunction with declining interest rates, which is to be expected as the opportunity cost of holding gold fell along with interest rates. There is something alluring about owning gold when three month T-Billl are 0.01% and three month CD rates are 1.5% or less. But the flight to the dollar also tempered the rise in the price of gold as those “scared” dollars seeking a safe haven did not choose gold. Why?
CG
My Adolph A. Weinman signature
About a penny difference!
<< <i>Gold is in Backwardation Again, Boys >>
I thought we had already established that it is not backwardation unless it is all the way along the curve. There is no backwardation. Why is this so hard to understand?
Nymex futures quotes
Knowledge is the enemy of fear
My Adolph A. Weinman signature
Formally, backwardation means a downward sloping forward curve (as in an inverted yield curve). A backwardation starts when the difference between the future price and the cash price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase.
The opposite market condition to backwardation is known as contango, in which the spot price is lower than the futures price. Different from contango, in backwardation the difference between the cash price and the future price is unlimited. There have been situations in metal markets in the last 30 years where there was a contango in nearby quotes and a backwardation in two different futures quotes.[citation needed]
Backwardation very seldom arises in money commodities like gold or silver. In the early 1980s, there was a one-day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses[citation needed]. Gold has historically been postive with exception for momentary barkwardations (hours) since gold futures started trading on the Winnipeg Commodity Exchange in 1972. .[2]
The term is sometimes applied to forward prices other than those of futures contracts, when analogous price patterns arise. For example, if it costs more to lease silver for 30 days than for 60 days, it might be said that the silver lease rates are "in backwardation."
Trade at your own risk as I am done with this topic.
Knowledge is the enemy of fear
could backwardation indicate that there is an expectation that prices for a commodity are going to go down in the future?
thanks
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The reasoning is usually
a) For some reason they need the commodity NOW vs a few months from now
or
b) There is no confidence or there is uncertainty that the commodity will actually be delivered in the future
several years ago when I sold a house, I had this discussion with my realtor:
Me: Let's price the house at 100X today (x = any number)
Realtor: I think you will have trouble selling it at that, Alan. So next month why don't we be ready to cut the price to 98X ?
Me: Okay. If it doesnt sell for 100X this month, we can try 98X next month. But I really need the sale for my new home purchase. Should we consider 95X a month later?
My question is, is this backwardation or just cutting prices to find a point where price will meet what a buyer will pay?
thanks.
www.AlanBestBuys.com
www.VegasBestBuys.com
The gold markets are almost perfect. Tens of thousands of contracts (if not more) are transacted daily. The price paid in those markets is the going price - I don't know how you can say or suggest otherwise.
roadrunner
<< <i>That is not true backwardation. Trade at your own risk as I am done with this topic.
I'm sorry to frustrate you on this, cohodk, but perhaps there is another name for this Futures Pricing situation that does not need a "curve" to define it.
I like 'Inverted'
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