Gold and Silver Backwardation

I am not backing down from this and it is OK for otherwise agreeable people to disagree. No one has all the answers, regardless of their level of expertise and experience, and differing opinions are what make a market.

And I'm expecting a bottom here, too. The charts are looking better...which, admittedly when compared to last week, isn't saying much.

Let's start by revisiting DrC, crude and Sylvia. Ten days ago, they gave us clues that a period of "general commodity weakness" was coming. What are they saying now? Well, all three look poised for a rebound. Will they? And again, why is this important? Because buying interest in these 3 will almost always spark some spillover interest in the PMs, regardless of that day's Bullion Bank intentions or POSX movements.

Let's start with crude. Recall that I urged traders and even those with UCO to consider taking profits at $98. I expected a drop to $93 and we got it. So, now what? It would appear that the $95 level holds the key. Above there and the possibility exists for a jump back to the $98-100 level and a possible breakout. Below $95 and you have to guard against a drop toward $90, maybe even $88.

And what about copper? On the drop last week, it seemed everyone and their brother was mentioning how we all need to keep an eye on "DrC". That is, of course, true but I'm not here to sound any alarm bells...at least not yet. As you can see, after failing to hold the breakout that we were closely monitoring two weeks ago, copper has simply fallen back into the pennant which has contained it for over a year. Until and unless a sustained breakout occurs, it remains rangebound and, within the range, subject to support and a bounce right near these current levels.

And then there's Sylvia. How many times did we discuss that old dame 2-3 weeks ago, closely watching the $1735 level for a breakout? In the end, it's hardly a surprise that it didn't break out and what you see now is what always happens when a breakout fails. Namely, everyone attempts to head for the exits at once! The result is a sharp drop. But look what has happened. Successive attempts to press it even lower and under $1600 failed late last week and now she's likely primed for a sharp, short-covering, snapback rally.

So, in this context, what can we expect this week from the metals? First of all, anything is possible. You should know that by now. However, both charts are clearly oversold in the short-term and look poised for a rebound. We may even be able to generate some momentum and then create a virtuous cycle of short-squeezing. We'll see about that but, at a minimum, I am confident that the lows of last week are going to hold.

Of course, we may not get much today because of the expiration of the March13 silver options. We also need to keep in mind that Thursday will be First Notice Day so expect a lot of volatility. Again, though, I think we've found an end to this latest downdraft and I firmly believe that March is going to be very interesting and very fun. (Ides+7cool)

OK, now onto this backwardation stuff. As mentioned above, this will be a hot topic around here this week as I plan to record a podcast with our pal, Andy, either tomorrow or Wednesday. (It just kind of depends on how busy things are in the markets.) I also hope to visit with the ultimate expert in this topic, Sandeep Jaitly of The Gold Basis Service newsletter. My goal is to give you plenty of information so that you can make your own decision as to the significance of the data. Again, no one has all the answers and we must always be willing to study and learn.

So, what are we looking at when measuring for backwardation in gold and silver? (Particularly gold, which is NOT a commodity, it is a currency. Don't think so? Ask the Turks or the Iranians or the Chinese what they think.) For this purpose, we measure what are called the BASIS and the C0-BASIS. Well, what are those?

BASIS = Front delivery month Comex future bid vs the SPOT ask/offer.

Co-BASIS = SPOT bid vs Front delivery month Comex future ask/offer.

Let's put that in numbers. Let's say that SPOT is currently bid at 1579 and offered at 1580 and that the April13 contract is bid at 1580 and offered at 1581. This gives us a BASIS of 0 and a Co-BASIS of 2. This is fine and this is normal "contango". But when we speak of current backwardation, that's not what we have. When we see backwardation, it begins when the BASIS turns negative and the Co-BASIS moves toward zero. So, now another example:

SPOT is still at 1579 by 1580 but the future is also 1579 by 1580. Now the BASIS is -1 and the Co-BASIS is 1. This is mild backwardation. Nothing crazy and it could simply be caused by front month liquidation as we head toward contract expiration and First Notice Day...kind of like where we are now in March13 silver.

Alarm bells begin to ring when BOTH the BASIS and Co-BASIS move into negative territory. Again, for example, when SPOT is 1579 by 1580 yet the nearby future is 1578 by 1579. This creates measurable and actionable backwardation as the BASIS is now -2 and the Co-BASIS is now zero. Again, this could be just a temporary situation caused by overdone, waterfall declines and other, assorted Cartel shenanigans.

The key word, though, is TEMPORARY. When the Co-BASIS reaches into negative territory, arbitrage should almost immediately turn it back positive. WHY? Because at a negative C0-BASIS, you should be able to sell your physical on the spot market and then immediately purchase, with the intent of taking delivery, a front month futures contract. By doing so, you are locking in a RISK-FREE PROFIT. Again, you might be asking why and how?

Look at the numbers in the backwardation scenario above. You can sell 100 ounces of physical at $1579. You can then guarantee the return purchase of your physical in 2-6 weeks by buying a futures contract for $1578. You just made $100. Do that with 100 contracts and you make $10,000. Do that with 1000 contracts and you make $100,000. Do it every day for a week and you make $500,000. Because people are willing and able to do that, the backwardation closes and the market flips back into contango.

But here's the deal...April13 gold, which will expire in about 5 weeks, is now consistently in backwardation, not just on the BASIS but on the Co-BASIS, too. WHY??? Why aren't the arbitrageurs jumping at the free money? THAT is the question.

Later this week, when I speak with Andy, we'll attempt to definitively answer this question and provide a further explanation as to what this signals for future price. For now, though, I'm going to leave this right here for your discussion. If you want to do some of your own homework on this subject, I strongly suggest you start with this excellent piece from Dr. Antal Fekete. It's worth your time and very informative.

http://www.professorfekete.com/articles/AEFGoldFever.pdf

Have a great day. I look forward to a very interesting and exciting week.

TF

273 Comments

¤'s picture

Grand Funk Railroad (2)

Stack'em High's picture

How to Delete FB Account

Grublux's picture

@Stack

Thanks for that!

@Puck

keeping in touch with family has been my main use.  I just don't like voluntarily signing up for the all seeing eye.  I figure I kept in touch before Facebook, I can figure out how again. 

¤'s picture

Raw: Life Unfiltered / Syria

Dramatic amateur video uploaded by Syrian activists on Monday claims to show a regime helicopter being shot down by rebels near Mennegh Air Base, close to the border with Turkey. (Feb. 25)

Grublux's picture

I think I'm all deleted!

Way easier than I thought!

SteveW's picture

T-bill market

is benefitting from the flight to safety. As the GBP has been downgraded, the Yen is in freefall money and Euro is a mess liquidity is sloshing into the US $ and T-bills. The PIG is nearing 82!

The demand for US T-bills is the last bubble before total collapse, according to some commentators.

Zoltan's picture

Ginger Versus Mary Anne

Man she is soooooo much hotter!!!!

JK  Not trying to re-open old wounds.  Just a joke for the old timers.

Z

P4TF This one is dedicated to you.

Kuchek's picture

Ron Paul: Federal Agents Should Be Disarmed

Bongo Jim's picture

Ginger vs MaryAnne

NO NO NO, Mrs. Howell... she's a cougar baby, yeah!

theBuckWheat's picture

eBay Gold Prices The purpose

eBay Gold Prices

The purpose of eBay Gold Prices is to provide a true or real gold price indicator for physical gold bullion available for delivery today and to show the premium above the spot gold price for physical gold bullion. Gold coin prices are provided for the American Gold Eagle, Krugerrand, British Sovereign and Candian Gold Maple Leaf Coins based on sales data taken from the US eBay site.

Prices are published every other day around 2AM Pacific Standard Time (GMT -7).

link: http://goldprice.org/ebay-gold-prices/

Green Lantern's picture

Re: These Darn Drones

What ya need is some drone proof clothes.   A drone hoodie.  Some guy from brooklyn opening a new retail line of clothing.  I saw it reported on RT News. 

No prep is complete with out some good anti-drone fashioncheeky   Good to hide those gold and silver coins that were confiscated and you are trying to take to market to buy some grub.

How is this for a fashion statement.  'Anti-Drone' Burqa

And for you lovely ladies

‘Anti-Drone’ Wear

Thermal-signature reduction fashion

The ‘Anti-Drone’ garments are designed with a metallized fabric that protects against thermal imaging surveillance, a technology used widely by UAVs/drones. The enhanced garments are lightweight, breathable, and safe to wear. They work by using highly metallized fibers to reflect heat, thereby masking the wearer’s thermal signature.

Of the three ‘Anti-Drone’ pieces, two are inspired by Muslim dress: the burqa and the scarf. Conceptually, these garments align themselves with the rationale behind the traditional hijab and burqa: to act as “the veil which separates man or the world from God,” replacing God with drone.

The third piece, the hoodie, is intended to thwart overhead thermal surveillance from drones.

http://rt.com/usa/drone-artist-harvey-surveillance-665/

http://ahprojects.com/projects/stealth-wear

old tradesman's picture

(No subject)

Xty's picture

two birds with one stone

Hey, with the use of "thermal-signature reduction fashion" and drones we could have determined who was truly hottest, Mary-Ann, Ginger, Ms Howell, or the Minnow (ships always being female for some reason).  

Looking at the Minnow, I wonder if the Captain was a stacker:

Howell, portrayed by veteran character actor Jim Backus, is so wealthy that he took tens of thousands of dollars in cash and several changes of clothing with him for what was intended to be only a three-hour boat tour in Hawaii, one of the sillier premises of the show. Howell is a stereotypical member of the New England Yankee elite — a resident of Newport, Rhode Island and a graduate of Harvard University.... One of the implied humorous points of the show is that Thurston continually fails to realize that all of the Howells' money is essentially useless to them on the island.

http://en.wikipedia.org/wiki/Thurston_Howell,_III

One day ...

Strongsidejedi's picture

Antidrone wear looks like a burqua

Anti-drone wear looks like a burqua

القراع عصفور's picture

well, since this thread is hopelessly off topic

here's one for the socialistas!

nice to see you back Xty.

Maryann's picture

My ears were burning....

Some one call?  smiley

Just read this story about a kid walking 10 miles in the snow to a job interview that got picked up by a restaurant owner....heartwarming story that has left me in tears.

http://www.theblaze.com/stories/2013/02/25/restaurant-owner-finds-dedicated-teen-walking-10-snowy-miles-for-job-interview-guess-where-hes-working-now/

We often lament the younger generation...there is hope with a few kids like this around.  Maybe a Turdite in the Indy area will leave him a Silver tip....as they give this awesome owner some business. yes

Strongsidejedi's picture

@gilligan's island crowd

From wiki

Ginger or Mary Ann?

The question of which one men prefer has endured long after the end of the series. The question has inspired commercials, essays, videos, etc. By most accounts, the wholesome down–to–earth Mary Ann has outpolled Ginger by a sizable vote. Bob Denver (aka Gilligan), admitted he was a Mary Ann fan, and that when producers did polls, Mary Ann always beat Ginger, usually three to one. It has been cited that this angered Tina Louise (aka Ginger) greatly, who received only half the amount of fan mail that Dawn Wells (aka Mary Ann) received weekly. According to Bob Denver in a 2001 interview, Wells received 3–5,000 fan letters weekly, whereas, Ginger may have got 1,500 or 2,000.[29][30][31][32]

old tradesman's picture

Mary ann

she was at a art for charity event in id. falls last year and I can tell you shes just as lovely

Strongsidejedi's picture

OK BACK ON TOPIC

I told ya' so...didn't I?

I said one week ago that when China opens Sunday night, the market will be different.
Was I right?

You're darn right I was.

The only reason the PM prices went submarining was that the Asian buyers weren't in the market.

Well, they're back.  And, guess what, the idiots in the West just gave them a 10% discount.

Stupid!

¤'s picture

I Dream of Jeannie

My apologies to Mary Ann & Ginger but I had a young crush on  Jeannie.

It was probably her the outfit and the belly dancing she did and some of my middle eastern heritage showing itself early on.

Jeannie.jpg

Speaking of golden pillows, looks like the asian market is being kind to us tonight so far.yes

Strongsidejedi's picture

There's no fricking end to the easing!

OK?

Can stop with the mindless chatter about the easing stopping?

How the hell is the fed going to stop printing?

Does anyone really think the fed is going to stop printing when we have 8-9% unemployment?

SteveW's picture

@DPH: Syria

For a look behind rebel lines CBC recently sent a TV crew. Worth a look to get a sense of the devastation.

http://www.cbc.ca/player/Shows/ID/2338110132/

old tradesman's picture

There's no fricking end to the easing!

yes I see alot of end of  easing ssi, welfare ect ect  The banks will get theres but your not in the club!!

Puck T. Smith's picture

Julie Newmar: Catwoman

End of story.

philipat's picture

@Au

If we get the usual smackdown today at the usual time (Which, normally would happen especially with Au approaching 1600) then all is the same. If not, that might indeed indicate that something new is afoot. If so, I hope it isn't a big new EE Bear trap for a final leg down??

opticsguy's picture

Missed opportunity

I had to change trains in Weimar, Germany yesterday.  Should have snapped a pic of the "train to Weimar" for an avatar.

All aboard!

Texas Sandman's picture

Tomorrow

Watch Bernanke backpedal on the easing rap.  He watched the stock market today & got religion.

Tomorrow it will be "helicopter ben goes to congress!!".

Should be PM friendly unless the vicious algos take over.

old tradesman's picture

Ill take mary ann Puck

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