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

Bollocks's picture

Jim Grant on Bloomberg

"What would be the end result of this fed's irresponsibilities?"

JG: "A gold standard would be the end result"

"Why, because the currency crashes?"

JG: "That's... " (sound seems to be cut for a moment?).

http://bloom.bg/125Hc6m

The Watchman's picture

TRUTH

Mad5Hatter's picture

Maund on Punk Assets

There is now such an overwhelming array of technical evidence that the Precious Metals sector is forming a major bottom, that by the end of reading this update you will, or should unless you are stupid, understand why we now have no choice but to turn strongly and unequivocally bullish on the sector. Up until now we have had some reservations, but these have been swept away by the latest truly extraordinary data.

fast mover's picture

Responses to random blog topics

for trading AM's or Paul C's reco's I use IB (Interactive Brokers)

as far as FB, I've never had and refuse to join this social medium

the only silver shortage that i know of is my stack...I'm working hard at remedying

these teenage boys that crash my home everyday at lunch drink all the milk and eat all the cereal

that is all, continue with cleaning up Stalag 13

FM

kn33bar's picture

Hello Turd

I listened to A.M. on KWN and he spoke about the COMEX "casino" and compliance departments that forbid trading there.

In your upcoming podcast can you ask him to update us on NASE? 

You can tell him kn33bar has been pestering you.

Thanks

The Watchman's picture

Does Anyone Else Find This SCARY?

fast mover's picture

These darn drones

So, when is someone going to produce a small E M P device or electro magnetic whatchacallit that will interrupt personal/living quarter drone invasion and make the tech affordable? Wearable scrambling tech?

boatman's picture

MMT is basically Keynesianism, IVARS

ModernMonetaryTheory

they both say fiat government spending when things are tough can stimulate the economy, which is true.

they both also say debt is bad, at a point, and when things are rolling again, go to low as government spending as possible and pay down the debt incurred from spending thru the 'tough' times.

like communism, they both ignore basic human nature ------maximizing your environment[greed].

in a collective of spoiled homo sapiens and politicians elected BY THEM, there is no paying down debt when u can----its run up more ......why not?----things are rolling after all. 

there is no 'saving the last keg of beer' for tomorrow night......at midnight at  the frat party.

and Keynes never considered the demographic entitlement bubble dilemma, he lived before that.  

Grublux's picture

How many people here have a Facebook account

They are to lazy to cancel.  I know I've been meaning to cancel mine.  I only kept it to contact a few family members. The majority of my "friends" are people who I haven't seen since high school and nobody seems to "get it". We all have TFM.  We should all cancel our FB accounts

jackinrichmond's picture

bond rates

the treasury rates sure got whacked today !
 
2 Year 0.23% -0.02 (-8.00%)
5 Year 0.76% -0.08 (-9.52%)
10 Year 1.86% -0.13 (-6.53%)
30 Year 3.07% -0.13 (-4.06%)
 
any ideas what is happening in the tbill markets ?
boatman's picture

knavechild

"stupid's in the water these days........they're gonna drink it anyway...........til they don't know right from wrong"

this could be our theme song.

SteveW's picture

DR J

Your home purchase and mortgage papers are legal documents and should have below your signature: E & OE.

¤'s picture

The true inwardness of it ~ 1896

28852v.jpg

        Title: The true inwardness of it

  • Creator(s): , Udo J., 1872-1956, artist
  • Date Created/Published: N.Y. : Published by Keppler & Schwarzmann, 1896 October 28.
  •  
  • Summary: Print shows Puck drawing back a curtain to show a "Laborer, Farmer, [and a] Business Man" what is going on behind, with the Bryan campaign's support of the "Silver Trust", as a man shows a paper to a bloated silver mine owner that states "To Silver Mine Owners: If Bryan is elected we shall make the people pay you an increase of 64 cts. on every ounce of your silver. This means a profit to you of $36,000,000 a year. We ask you to contribute one month's profit of $3,000,000 to elect Bryan. Merrill's Popocratic Circular".
  •  
  • Caption: Puck Now you can see, gentlemen, that the Bryan campaign is not in the interest of the people, but simply and solely in the interest of the Silver Trust.
Xty's picture

re analogy between government and farms

not strong.  Without farms there would be far fewer animals.  It is an omnivore's moral dilemma and salvation: if I didn't eat beef, that cow would never have been alive.  Now maybe she/he would have preferred to never chew cud, given that a bolt to the head was the sudden tragic end, but I am happy to believe otherwise.  But the government is not both breeding us and preparing to slaughter us for meat, and many farm animals would never be bred and would certainly die without the farmer. 

Just sayin'.  I have a thing for romanticizing nature.  

ag1969's picture

Grublux

I am on neither twitter nor facebook.  Tweeting and friending were never for me.  I have a twitter account but only because I was able to snag a name that an adversary of mine wanted and I got it first.  I have never tweeted, but I still have that twitter account just to be a dick.  I have had it for four years.  I am a stacker/prepper not a tweeter/friender.

Beastly Stack's picture

Turd

Thanks for your effort and I have always believed in your conviction. Great post this morning!

Grublux's picture

Yeah. I opened my FB account

Mainly to scope out marketing opportunity and see what it was about.  Once on there people came outta the woodwork with friend requests.  I haven't logged on in over a year. I heard they are hard to cancel.  But I am thinking it may be worth it to rid myself of it.  

Beastly Stack's picture

What a Day

Did you have fun today, we have lots more going on this week. I really hope you read my weekend post. I just posted more of what I see to look for tomorrow. Please check if interested in trading currencies.

http://tradermartinstake.blogspot.com/2013/02/paying-attention.html

Thanks,

TraderMartin

Puck T. Smith's picture

@ancientmoney: I don't know which is more depressing

@ancientmoney: I don't know which is more depressing, the scenario portrayed in that article or the fact that is seems so plausible. 

Punk-Assets's picture

Uncle (says from the couch)

To da moon!

Bollocks's picture

We Want You Big Brother

US Internet providers start spy program to stop file-sharing

February 25, 2013 22:18
Reuters

Starting this week, Internet Service Providers will start throttling connection speeds for customers alleged to be pirating copyright-protected materials.

Months after a controversial “six-strike” program was slated to be rolled out by the biggest ISPs in the United States, the Copyright Alert System (CAS) confirmed on Monday that the initiative has gone live.

The program, critiqued by Internet freedom activists and privacy advocates alike, will let ISPs take six steps of escalating severity in handling incidents where customers are believed to be illegally sharing material. Through the “graduate response” approach, suspected copyright criminals could be issued a series of warnings for illegally downloading protected content.

With the first strike caught by the CAS, a customer could be issued a warning. As strikes increase, however, “mitigation measures,” connection speed throttling and termination of service are all possible options.

“Practically speaking, this means our content partners will begin sending notices of alleged P2P [peer-to-peer] copyright infringement to ISPs, and the ISPs will begin forwarding those notices in the form of Copyright Alerts to consumers,” Jill Lesser of the Center for Copyright Information rights in a blog post on Monday.

“Consumers whose accounts have been used to share copyrighted content over P2P networks illegally (or without authority) will receive Alerts that are meant to educate rather than punish, and direct them to legal alternatives. And for those consumers who believe they received Alerts in error, an easy to use process will be in place for them to seek independent review of the Alerts they received,” she adds — neglecting to mention that the appeals process costs customers $35 a pop.

http://rt.com/usa/six-strikes-program-begins-434/

SteveW's picture

@Knavechild An educated person

"Moving to New Zealand was probably the best thing I've ever done...otherwise I'd still be ruining dinner parties."

I'll agree with that. If I were at the other end of my life I would surely have done the same. Now an educated person is one who can hold within their mind two totally incompatible ideas simultaneously. Its good training for dealing with the cognitive dissonance.

Its probably the Facebook and TV that is causing some concern but you can't spend all your time worrying about the coming collapse of civilization. For me the Patriot Act 2001 was a wake up call but I didn't start to learn about the economy until the 2008 crash, although I've been aware of peak oil since 1973. I suspect that we will become more dependent upon local communities and TPTB will eventually lose influence.

¤'s picture

QE forever or until the 4th qtr.?

Feb. 25, 2013, 7:03 p.m. EST

Fed's Lockhart backs QE at least into second half

By Greg Robb

WASHINGTON (MarketWatch) -- The Federal Reserve should stick with its current $85 billion per month bond-buying program, at least into the second half of the year, said Dennis Lockhart, the president of the Atlanta Federal Reserve Bank, on Monday. "All things considered, I do not think that monetary policy has yet crossed the line where the benefits of the current policy -- specifically the quantitative easing element -- are swamped by serious concerns over problems the policy might be creating for the longer term," Lockhart said in a speech at the University of Tennessee. Markets have been worried that the Fed will scale back the bond-buying program after the minutes of the central bank's last meeting in January showed some officials are nervous about making the balance sheet bigger.

B. Bernanke: "QE is necessary....the benefits outweigh the costs." Jackson Hole ~ 8/31/12
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SpeakEasy,NewsTicker,iCandy-Vids http://www.tfmetalsreport.com/forums/frivolity-forum
 

Turd Ferguson's picture

If in the U.S.

MODERATOR

I would contact Jim Comiskey at ADM Investor Services in Chicago

Response to: A mcguire trading
Puck T. Smith's picture

@fast mover: knock yourself out.

@fast mover: knock yourself out.

This has been my answer to the drone issue since I first heard about it.  I don't have the facilities to build any of these and my electronic skill set is decades out of place.

atomic180's picture

The second half...

of the CENTURY... that is...

SteveW's picture

@likeliberty: Andrew Maguire's service

Near the top of this page on the right hand side is one of those annoying flashy thingys that says "CLICK HERE NOW TO LEARN MORE".

I suspect it leads to AM's service.

EDIT: Ignore, TF replied.

Bollocks's picture

@ag1969

"Tweeting and friending were never for me."

Oh dear, oh dear. It's like fresh chum to a great white.

I'll be kind and resist this time. surprise.

Puck T. Smith's picture

@Grublux: Facebook. I had an

@Grublux: Facebook.

I had an account as Puck T. Smith.  Somehow I managed to get nearly 1,000 friends.  I was focused on political issues and agorist/anarchist alternatives to the current paradigm.  It became too much of a timesink.  I eventually closed it out.  I still have an account under my real name.  I use it to stay in touch with a few friends and family.  I visit maybe once a day.  Life is much more sedate now.

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