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

tyberious's picture

First!

First!

agNau's picture

I think.......

We are about to see the Baltic Dry Index plumb new lows. As the economies of the world stagnation deepens. Coming trade wars will appear different this time.

Sandiaman's picture

Turd

Third

squib's picture

wasnt me

"Meanwhile, Jon Corzine steals $1.6 billion dollars of (allegedly) sacrosanct customer segregated funds, and remains a free man today."

The Watchman's picture

True

obamanomics+barack+obama+fiscal+policy+c

Dr. Fix's picture

Fix is six

I'm slipping.surprise

Katie Rose's picture

Thank You Turd

for all you do!

Without this wonderful heart Blog, I would be lost when it comes to PM's.

And Thank You! regular posters. Your wealth of information adds to my life greatly!

tyberious's picture

Jim Willie (Hat Trick

Jim Willie (Hat Trick Letter)
 

GOLD PRICE OBFUSCATION

SPROTT REPORTS THAT GOLD SCRAP IS DOWN 50% IN SUPPLY THIS YEAR, AS 850 TONS IS REMOVED THIS YEAR FROM THE SUPPLY LINE. HE DESCRIBES A PANORAMA OF CRISES, WITH NO POSITIVE ECONOMIC RESPONSE TO MASSIVE MONETARY EXPANSION. THE ABSENT PRICE MOVE UP IN PRECIOUS METALS IS DIRECTLY DUE TO CENTRAL BANKS PROVIDING THE SUPPLY. HE FULLY EXPECTS A DEFAULT AT C.O.M.E.X. OR BY SOME INDUSTRIAL PLAYER, FROM LACK OF SUPPLY. AT THAT TIME, THE PRICE WILL MAKE UP FOR THE LAST TWO YEARS OF FLAT PRICE ACTION.

Eric Sprott reports that the massive plunge in gold scrap recycling might be removing as much as a staggering 850 tons of gold from world supplies each year. Sprott also anticipates in the not too distant future, a default will come to the COMEX, since it has almost no Gold and Silver in inventory. It is constantly shuffling supply, even raiding the GLD & SLV inventory. Information from refiners indicates that the secondary market (scrap) business is down almost 50% year over year, with the previous year in decline also. The only precious metal supply comes from the miners, and they increasingly avoid COMEX as destination for sale. Data on recycled gold is woefully lacking. In general, the supply has essentially dried up. So recycling is down 50%, which normally adds about 1700 tons to the gold supply above mining output. Hence, it would imply a reduction of a substantial 850 tons of gold supply. Conclude that people are holding their heirlooms, or else already sold them a few years ago (with regret).  The big picture indicates fast growing Gold demand on a sustainable basis. The Chinese imports in December at 114 tons was again huge. The world only produces 200 tons per month of gold excluding China, which buys all its own output. Given extremely strong coin sales, it is hard to see where the Gold supply is to come from. Lastly, Kyle Bass, Ray Dalio, and Bill Gross at PIMCO all suggest they should be investing in Gold.

Sprott commented on the official German request for a portion of their Gold account. He regards the eight-year plan for its return a bit of a joke. The Gold market is therefore extremely tight, with investment demand, coin demand, and official accounts to be returned. The central banks are dealing with chaos at all times, solutions not working, new money being printed in huge volume, and big banks going bust. The monetary inflation remedy and heavy doses of inflation have caused nasty threats. Clearly the Gold & Silver prices are being controlled with force and corrupt actions. With growing demand, yet no price movement, the signature is obvious that prices are under control and Western central banks are supplying the physical quantities in demand. The staggering monetary expansion by the central banks in unison, against a background of bond crisis, bank crisis, and political stalemate, has not resulted in any typical economic response. The system is out of control. Sprott firmly believes that someday a default will occur. It could be a default on the COMEX, or some industrial user announces a production shutdown, like because of no Silver in supply. A time of euphoria is near for the precious metals. It is hard to predict when a default event would occur, but it could be the next 12 to 24 months in his view. When it happens, a substantial move in the price of Gold & Silver will arrive, making up for these last two years in no time. See the King World News article (CLICK HERE).

Sprott believes the USFed campaign to print money with abandon, to grow its balance sheet, to redeem toxic bonds, to manage the switcharoo on long-term versus short-term bonds, to jar the door open for big banks in USTBond carry trade, and to maintain the zero bound on interest rates, HAS ACCOMPLISHED NOTHING. USGovt liabilities continue to explode. The labor market is deteriorating, hardly the slow recovery we are told. Food Stamp usage is at record levels. Income inequality for wealthy versus poor is widening. He regards the amplified USFed activity to be nothing more than subtle USGovt financing of deficits, with absent USTBond buyers. While Sprott notices the surplus in the labor force, which cuts down on risk of wage inflation, he does not appear to give adequate stress to the rising cost structure that has resulted from the USFed monetary inflation and zero bound rate offering. He concludes no inflation risk, when the bigger factor is a cost structure that threatens all working capital in the USEconomy. He implies the reduced inflation risk permits the USFed a green light to continue its destruction. See the Zero Hedge article (CLICK HERE).

 

 

THE G.L.D. EXCHANGE TRADED FUND IS UNDERGOING BIG CHANGES, WITH SUDDEN REDUCTION IN ITS GOLD INVENTORY. GIANT RAIDS ARE BEING EXECUTED BY THE BIG US-BANKS, TO MEET DEMAND AND TO PREVENT A PRICE SPIKE.

The news story is simple, but the meaning is enormously significant. The Gold holdings in the SPDR Gold Trust, with trading symbol GLD, remains the biggest Exchange Traded Fund backed by bullion in the world. It is also the most corrupt, whose custodians designed it for easy gold bar inventory raids by the big US banks. The GLD gold bar inventory decreased 3.02 metric tons to 1323 tons as of February 14th, the lowest level since early October. The mainstream news story stops short of asking the natural follow-up question of where the physical gold bars are going, and who is the buyer might be. No buyer is involved. It is a basic high volume raid. The big US banks short the GLD shares and arrive to pick up the three tons of physical gold bars in armored trucks. The dopey sheep nitwits who invest in the GLD fund have their gold leased and borrowed like stock certificates right under their ignorant noses. Someday the ETFund will be drained dry of gold, its investors dumbfounded. My hope is soon a GLD discount to spot Gold price is posted. The big raid of gold bars, easily enabled, makes possible the defense of the Gold price. The massive rise in investment demand is met by massive raids of the corrupted GLD gold fund, in balance. In the process, the gold price looks tame, calm, and unaltered. The financial news talking heads and supposed expert guests talk about Gold being the trade on fear. What utter nonsense! Gold is the trade against monetary inflation gone out of control, the plethora of toxic sovereign AAA bonds, the broken insolvent banks, and the economies subjected to fierce attack on capital.

-$$$ RECORD SILVER EAGLE COINS WERE SOLD IN JANUARY. A RATIONING PROGRAM HAS BEGUN IN RESPONSE TO METAL SHORTAGE. A MUCH HIGHER SILVER PRICE WOULD SOLVE THE SHORTAGE, NOT PERMITTED. MEANWHILE, THE USMINT RAISED PRICES ON SILVER FOR COINS WITH A PREMIUM OVER THE SPOT SILVER PRICE. THE IMPLICATION IS AN ADMITTED HIGHER SILVER PRICE. $$$

Despite two production shutdowns in January, the USMint sold a record breaking 7.13 million Silver Eagles in only ten business days in January, shattering the previous monthly record set in 2011. As a result, the USMint has resumed rationed Silver Eagle sales. The prized coins can be obtained from allocation and rationing. In the following few days, the mint sold another 300 thousand coins, to make a 7.42 million count for the partial January month. The public has bought almost half a $billion in Gold & Silver coins in January. Their distrust of money is patently clear. See the Silver Doctor article (CLICK HERE and HERE).

Proof that the true Silver price is higher than the posted paper price on COMEX comes straight from the USMint itself. They raised the premium over spot for the 2013 American Silver Eagle. One week ago, the coin cost was $39.95 (for 1 to 4 coins) and $38.45 (for over 20 coins) with a limit of 40 coins. Availability is not until February 5th. The clear implication is that the actual Silver price is much higher. In nasty sarcasm, conclude that the USMint must be the most profitable branch of USGovt except for the USFed, which just prints profits willy nilly but is a private syndicate firm anyway. Witness a huge spread over the spot price. It would be interesting to see a Profit-Loss statement from the mint operations, if it were available. See the Gov. Mint news release (CLICK HERE).

 

Subscribe to the Hat Trick Letter for the full article.

Turd Ferguson's picture

And here's the latest from Jim Quinn

MODERATOR
¤'s picture

todays close

I think it'll be a telling thing if they don't make any real attempt at all to bang the metals lower around 1:15.
A token feeble attempt might happen with no real short term significance (or chart painting) but I'm kind of thinking they'll leave it alone at this point.

Surprisingly it appears the UK/BOE downgrade was of little impact after Fridays close. Seems a little odd to me and it suggests that last weeks sell off in part had to due with it leaking out first. No surprise there.

Kudos to anyone who bought MGN on Friday. It crossed my mind and is one of the small stocks I follow that ranges significantly from a % standpoint that serves as one of my small weathervanes which way miner sentiment is headed.

I've been out of the miners for awhile except for those SLW calls I mentioned on Friday. But if I were all in like I've been at times I normally had 2-3K shares of MGN when I felt sentiment was turning.
MGN is a small indicator to me but it seems consistent.
One good day doesn't make a trend at all but fwiw I think we left the gate slowly around 12:45 on Friday.

Ilya Repin's picture

Agreed.Most ignore the fact

Agreed.

Most ignore the fact that both Gold and Silver are traded in the FX market. No one can argue they are not currencies. I don’t know of any other “commodity” traded as FX pairs.

Look forward to these interviews as although I understand the concept of backwardation I only have basic understanding of it and have never learnt about it in depth.

Rock on.

I also feel a bottom is in but I do expect a notable drop to complete wave D. I expect it to form the right shoulder of an IHS that will appear in the charts by then.  Then the big up to September time... pull back.. Then rocket to Q1 next year when I see major peak and troughs occurring in all markets. Expecting Turbulence.

in Gold I still want my two down days and one more down month (after this one?) to confirm new cycle

 

dropout's picture

Hold Your Horse! Not So Fast.

A very old saying goes;

Don't count your chickens until they're hatched.

Just when everything looks 'rosyest' for a rebound, the bottom drops out.

Gold for the past 6 months has been range bound, marked by a low at 1530 and resistance at 1800, with a low of 1554 this past week. The 10-week RSI is oversold below 30 for the first time since August of 2008.

Crunch time approaches. This is where things REALLY start to get interesting. One CAVEAT that I would warn about; Even though, the last time the RSI fell below 30 in August of 2008, gold did not bottom until 2 months later in October of 2008 and 100 points lower.

I smell a rat on the loose. The EE are setting up a major false bottom here. Don't get sucked in on the long side if trading here. A majority will fall for this play at this low level and the EE will give the sheep herd one more REALLY good shearing! Just IMHO.

Hellfish's picture

Why aren't the arbitrageurs jumping at the free money?

Why aren't the arbitrageurs jumping at the free money?

I'll take Counter party Risk for $500 Alex.

Road_Scholar's picture

Backwardation

always makes me get a visual of moon walking...

images?q=tbn:ANd9GcRUTIplhitNjHebA196Tva

Dr. Fix's picture

I didn't have a chance to weigh in,

After this weekend's discussion on the COT report, despite its obvious bullishness,

I am still quite pessimistic, and still believe that if they were to do anything as obvious as it appears, it's a trap.

As far as this morning's deep discussion on a potential silver shortage,

I enjoyed both sides of the discussion, but I firmly believe there is a serious and increasing shortage of supply.

And still, I do not believe this will be reflected in the price in any significant manner  untill current supplies are exhausted.

Keep stacking, it shouldn't be much longer.

Also, the upcoming   crisis that we have come to known as  the sequester, may be used to create a crisis that does not really exist.

Only because what can not be sustained won't be, at some point our beloved government is going to have to change course in a major way, either through currency devaluations, or additional printing, but it still looks like they are on a trajectory since going over the cliff, to have a very public splatter on the canyon floor.

And there's your cup of cheer for your Monday afternoon.wink

agNau's picture

@ OLI,

We have yet to wade through the manufactured sequester, and the shenanigans possible. As well FED SPEEK soon.
Bottom line still remains.......the PRINT SHOW will go on.
If trading I would think a well defined, certain turn would be best. If volatile market trade is your forte, trade away.

Ten_of_Swords's picture

Reposted from the last thread.

Two points.

1. The silver shortage is about perspective to me.  With a billion or so above ground ounces(That is a common theory of current above ground supply), and seven billion or so people, that is 1/7 of an ounce of Ag per person.

Or-

th?id=H.4670146447083520&pid=1.7&w=221&h

For the conspiracy minded to ponder: It is 2 whole ounces per person when there are only 500 million of us left after the purge! In either scenario, that is a shortage if you ask me.

2. The talk about QE ending has got me to thinking.  If I understand correctly, were QE to end, interest rates would skyrocket.  The result of that being the collapse of the economy and the end of the US dollar.  The debasement of the world's currencies has transitioned from a marathon to a sprint.

Here is my question: What if this is the plan? Stay with me, please.

There are an unprecedented number of longs that have been building, rumors of QE ending from the FMOC, every country in the world trying to kill their currency without panicking the population, and domestic infringement of liberty, the likes of which have not been seen in centuries. All of which are happening with the consent of our government. What if all of the pieces are now set? 

Please feel free to punch this full of holes.  It is looking dark, and I would love to have a little light shine in.

Edit: Thanks AncientMoney, I saw your reply!

Pining 4 the Fjords's picture

The devil is in the details...

Not to make too big a deal of this, but our good friend Turd has signaled now at least twice (that I've seen) that he believes there is something noteworthy about the date March 22-  once in this post, once in a reply to ReachWest a few weeks ago.  Methinks there is more significance to this date than just celebrating the birthday of William Shatner.  Just throwing it out there... 

Dr. Fix's picture

@Ten_of_Swords

Actually, I think you laid all the pieces out fairly well.

No need to punch holes in your theory, it is all about to unravel as planned.

Sorry I couldn't be more cheerful.frown

Sneed Hearn's picture

They may be fools but they're not idiots

TPTB have some kind of plan for when TSHTF and of that I'm certain. They will not simply let the system collapse so what happens when they can no longer sustain what is going on and has been for a long, long time? When the bond market at all durations has no bid but the fed or the primary dealers? Beats me but I have no doubt at all that what seems obvious to us is equally obvious to them and they will not simply continue down the current path. So what will the new path be? Is the Amero real? There just has to be something coming our way that is not a gold standard as that would be the ultimate poison pill for the vampires who run things. No, it will be something extremely unpleasant, dishonest, probably steeped in fraud and otherwise unpalatable. But it is on the menu written in invisible ink. Interesting times indeed.

agNau's picture

"To boldly go....

where no man has gone before."

hammerman's picture

great job turd...

do you know if andy is planning to run his introductory $100 for the first month of following him on trading the yellla relic again?   thanks and may god bless turdvillle ....................

dudestacker's picture

Pining- more deviltry

Significance of 3/17/2013?

Hat Tip!
4

Coincidence that poster on fridge behind Cueball is for St Pat"s Day and what about that pot of gold, huh Turd?

From Cueball and Thunderlips vid, no one else seemed to notice, but it stood out for me.

Irene's picture

@10 of Swords

"every country in the world trying to kill their currency without panicking the population, and domestic infringement of liberty, the likes of which have not been seen in centuries"

Actually, didn't we see exactly this a little less than a century ago?

Mad5Hatter's picture

backasswardation

it does get weirder all the time DPH.

But lets mark 2/20 as the start of a rebirth of freedom. 

Submitted on February 17, 2013
now lets see  O.O
Fundamentals in place?   Check
Apparent washout .... Check
Been Accumulating in the low 30s? ..... Check
Raging PM Bears galore?   .... Check
Star Aligning again .... Check
Long Consolidation Pattern? .... Check

Been nearly 2 years for silver in the making, with many many typical bull-chit head fakes, buckin many a young and old off the hunt, but you stacking bullion coins, RIGHT? You bet you did, as we all have. sitting tight, accumulating in the low 30s,  

The really-big-shoe Starts Wednesday

===

2/20/13 ..... ;)

tyberious's picture

From Silver Doctors

No, the crisis dates way back before the last century, and the United States neither inspired nor led the moves against monetary metals—the British get that credit, and the Americans, though militarily stronger, are junior partners financially. Will this correction to Fekete be posted by all the sites that linked his article? Absolutely not; ask them why! Fekete says after the dollar and paper currencies fail, China will run the world. Not a bad thesis; however, I believe the Anglo-Americans are conspiring to draw China and Russia into head on conflict over Middle East petro and other resources including the entire Caspian Sea region, after which the New World Order of the Anglo-Americans could again leap forward. Maneuvring nations to fight each other has been a hallmark of international finance since the Rothschilds perfected it centuries past; but don’t kid yourself, they aren’t the only major private financial power and are in league with the others via The Pilgrims Society!

I present you here with 50+ references to back up my case, not including links to any of my original work nor to those of one brief similar issue to this; Fekete supplied no references. What kind of learned professor is he? Here’s one I won’t include on the scoreboard but it’s of interest http://www.silverinstitute.org/site/supply-demand/silver-production/ in 2011 China was the world’s third largest silver producer at 103.9 million ounces. Are they exporting most silver mined on their territory anymore? Not a chance! Any miners sending concentrate or dore to China for smelting into three niner could abruptly find their metal has been seized if wartime returns. Meantime some business is as usual, from June 21, 2012, we find “Rothschilds and Rockefellers team up, target rich Chinese at http://www.morningwhistle.com/html/2012

Is China actually the “big silver short?” I dearly doubt it; more likely, it’s The Pilgrims Society and the banking entities it operates. How nice for our megabankers if blame could be shifted elsewhere! And as with the flow of silver to China over a multi-century span, the camarilla of Anglo American power plans to recoup gold and silver that has shifted to China and Russia in recent years. I worry much less about Brazil, Russia, India and China (“BRIC” countries) than our own leadership who, with the British, remain the main threat to our metals ownership, to our sovereign individual liberties as expressed in the Bill of Rights, and are the world’s leading warmongers. They have to warmonger; for you see, this is intimately connected to synthetic money creation. But with the Internet’s many uncensored sites, risk to the Anglo American bankers is revving up! They marched all over silver for centuries like General Sherman marching through Georgia; now the General is ready to march all over them!

http://www.silverdoctors.com/correcting-antal-feketes-historical-silver-errors/

Prize Fighter's picture

5-minute gap chart update

Ten_of_Swords's picture

@ Irene

You may be right, but with the technological wonder that is the internet, I believe that it has never been out there for domestic consumption at these levels.  Not that the masses can see past the punch and judy show.  Something about leading a horse to water...

(not you Steven B :D)

¤'s picture

Ides +7

H'mmm....enlightened     I'm guessing that's Santa's B-Day and he knows something.

He's pretty much put himself on a ledge with his confident tone regarding golds short term direction.

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