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

JackPutter's picture

@ Fast Mover re:drones

Just take the base speakers out of the stereo and start playing Springsteen.  I also like the magnetic netting for the doors. 

Bongo Jim's picture

Catwoman

Batman: "Uh, Let me adjust my utility belt..."

DayStar's picture

Harvey's Up!

Harvey:  The total OI for the entire silver complex is 157,030, again a multi year record, and  what is more fascinating, the OI for the upcoming March contract is at a very lofty:  31,947  with three  trading days to go before  first day notice  (this Thursday).   Beni Emmanuel: Radiation is leaking from Iran's nuclear facility at Fordow, which suffered devastating explosions on Jan. 21, and the regime has ordered millions of antidote iodine pills from Russia and Ukraine amid fears the radioactivity will spread.  The head of security at Fordow was summarily executed.  The radiation is threatening the nearby Muslim holy city of Qom.  The Swiss are growing increasingly fearful of IRS sanctions as the US declares its financial sovereignty over the whole world, and - ViaMat - announced it will no longer store metal for "private customers with potential U.S. tax liability.  Andrew McGuire:  Bids in the physical gold market are exponentially increasing.  The result is going to be violent because it is a bubble short position; meaning the market is shorted by weak hands beyond anything I have seen before.  All this and more on...

On the Harvey Report!

http://www.tfmetalsreport.com/comment/276121#comment-276121

DayStar

old tradesman's picture

Trade protectionism looms

Trade protectionism looms next as central banks exhaust QE

Officials at the US Federal Reserve may be more worried than they have let on about the treacherous task of extricating America from quantitative easing. This is an unsettling twist, with global implications.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9891082/Trade-protectionism-looms-next-as-central-banks-exhaust-QE.html

 
JackPutter's picture

I have to go with Emma

All I can say is Wow!!

old tradesman's picture

ok this is cat womans last video

Lamenting Laverne's picture

Holly Molly!

Did you guys see the intraday chart for the US 10 Yr?? Unfortunately I don't have one with precise times on it, but it looks something like this:

Up on open from 1.96ish% - pushing, but held flat until 04:00 (Rally in gold with retreat just before 04.00)

04.00-06.00: Buying (intervention?) wins and yields move down  (Gold resumes rally)

06.00-10.00: "FUBB" strong selling all the way up to precisely 2.00% - then capped decisively. (Gold flattens and retreats, attempt rally at 09.00, but is jammed back down double tapping 1585 before breaking loose at 11.00) (DOW is wiggling up from 9.00-just after 10.00. 

10.00-12.00: Steep decline in yields (buying/intervention?) with small tap upwards at 12.00 (Gold rally 11.00-12.00) (DOW falls from 10.00-11.00, attempts rally from 11.00-11.30, but resumes selloff 11.30 to 12.00)

12.00-14.00: Steep decline in yields (buying/intervention?) with bigger tap upwards at 14.00 (Gold flat 12.00-13.00. Resumes rally just before 14.00) (DOW resumes rally 12.00-13.00 but declines lower 13.00- just after 14.00)

14.00-18.00: Steep decline in yields (buying/intervention?)  (Gold rally until just before 16.00, then capping attempt resumes) (DOW attempts rally but stays flat until 15.15, but turns and decline steepens 15.15-16.00) The bond selloff seems to have been tamed. Yields at 1.87%

A rise in bonds from 1.96% to 2.00% in 4 hours and a subsequent decline from 2.00% to 1.87% in 8 hours. IN ONE DAY!

Lets add the USD/YEN cross to look for "coincidences" - a Turdite on the Argentus thread suggested to look at this: 

Contained selling attempts at 5.00 then at precisely at 6.00 the USD/YEN has a bigger red candle at the same time as the bond sell off kicks in. USD/YEN held steady slightly upwards until 10.30ish (Intervention together with the bonds?). Then it follows the wiggles up and down of the DOW - only delayed 1,5ish hours all the way down to just before 16.00, when a rally kicks in after the closing bell on stocks.  

Are what we are seeing here testimony that the PPT does not have funds/power to control the bond market and the gold market and the stock market simultaneous anymore? Did we see a rally in DOW and Gold, while Bonds were selling off and the USD/YEN was under pressure? 

Did we see PPT say then screw gold management and stocks wealth effect - we cannot allow a bond sell off, when stocks and gold is rallying - ergo take some juice out of stocks and try to contain gold interchanging with bond sell off with priority given to stopping bond sell off? Or was this a case of stocks not listening to credit and being late to the party?

I really don't know, but these movements today seem very interlinked to me, and more important they seem to suggest that the PPT was either taking the juice from stocks, or they were overwhelmed by the decline in stocks - not being able to juice both bonds and stocks and USD at the same time. It seemed very significant to me. 

I would love to hear the opinion of those of you who are experienced in looking at these markets over time....
when everyone is done with posting lovely ladies..... (I am just jealous off course ;-)
 
 
Hondo's picture

The proper term for Mrs. Howell

Would actually be " snow leopard" ,

not cougar 

that is all...

maravich44's picture

our own..

.

hi 57!.

johnnydow's picture

Future Headlines

Dow soars 400 to all time historic high ???....

Gold plunges 100-200 same day...

Its that simple.

old tradesman's picture

@ jack putter

Nope mary ann wins!  But she does place second..Im sorry  marry ann got the gold, riggs gets the silver and catwoman gets the bronze.  It is a metal site!!  sorry dph started it!!!

ClinkinKY's picture

Damn, have these people ever taken an economics class?...

...other than from Paul Krugman of course.

And yes, that's SENATOR Tom Harkin. Sheesh.

------------------------------------------------------------------------------

 

$9 an hour is not enough: Opposing view

Tom Harkin6:48p.m. EST February 24, 2013
 

Increasing the minimum wage is a simple way to help working families.

Every morning, millions of Americans drop their children off at day care, grab a cup of coffee from the corner shop, and drop their car keys off with a parking garage attendant before arriving at an office that has been cleaned overnight by a janitor.

In the morning rush, few of us probably stop to think about the workers who are making our routine possible — and we are certainly not thinking about how much they earn.

OUR VIEW: Index wage increase to inflation

Many minimum-wage workers — who serve in important and often difficult jobs, but earn just $7.25 an hour — do not earn enough to pay the bills, much less achieve the American Dream. Since its peak in 1968, the minimum wage has lost 31% of its purchasing power, while the prices of basic necessities such as food and rent have continued to climb.

This means that American workers are falling behind. If we are truly going to rebuild the middle class, we must start by helping these workers.

While I was heartened to hear President Obama make the minimum wage a centerpiece of his State of the Union Address, I believe that his proposal of $9 per hour does not go far enough to ensure that working families can make ends meet.

Soon, Rep. George Miller, D-Calif., and I will introduce legislation that would gradually increase the minimum wage to $10.10 per hour, and raise the minimum wage for tipped workers for the first time in more than 20 years. Our proposal, like President Obama's, would also provide for automatic increases linked to changes in the cost of living.

Read more:http://www.usatoday.com/story/opinion/2013/02/24/minimum-wage-sen-tom-harkin/1943745/

Lamenting Laverne's picture

@ Pining and Dudestacker

@ Pining: I saw on the news today that there will be a vote on the Basel III rules in Europe on 22 March. Failure to vote will delay the rules until 2015. When we consider the reallocation of the SDR basket by January 2015, which I think the race to redistribute Gold from west to east is preparing for - a delay into 2015 could be quite significant, because if the banks are not allowed to count gold as a tier 1 asset, they will not have the incentive to accumulate and they will not benefit from a revaluation, which could help them stay solvent - as far as I understand anyway.

@Dudestacker: I'm with ya on being curious! http://www.tfmetalsreport.com/comment/275321#comment-275321

dudestacker's picture

Big Brother can track your whereabouts from facebook, twitter,

other social media or smartphone. Do you post pictures of yourself, or have your friends posted your picture? They know who you are, what you look like, and where you are or are likely to be at a given time. What I'd like to know is who commissioned Raytheon to develop this. You know it is our tax dollars hard at work. Shit like this will never be "sequestered".

ClinkinKY's picture

"Hey Joe":)

old tradesman's picture

Thats the third time today

Ive read the date  March 22   Is the basel III.  The turning point,  or just more mope? 

Texas Sandman's picture

johnny dow

Don't think so.

In the big picture, inflation is not good at all for stocks.

Expect more days like today.

For those who are TA cognoscenti we had what is known as a "key reversal day" today in both dow & S&P (perhaps naz, haven't checked it).

And bearish engulfings, which is the japanese candlestick version.

Sort of like a 2-fer.

Edit: same thing in the naz.  just checked.  all 3 major averages.  not good.  if you're in stocks, time to start thinking about hedging with things like sds and qid.

ClinkinKY's picture

One from the best cartoonist in the biz, before bed

Michael Ramirez Cartoon

waxybilldupp's picture

Yes, Sandman

Today was a fine day.  Recently short SPX in my 403b (gotta do something with it).  Long gold and silver (stacked).

johnnydow is just a less than clever troll.  I'll stick with my long term plan.   I expect more days like today. 

Can't wait for the Fool on the Hill (Bernank) coming soon to a hearing near you.  Wish RP was still involved.  "Is this money?"

The beauty of most of the trolls on this blog is that they are so transparent.  Do these knuckleheads get paid or do they think they are doing "God's work"?  The other thing that makes me smile is that Turdites are merciless with trolls.  I hesitate to ignore any of them lest I miss their inane posts.  The lashing they get wouldn't always make sense if one misses the original troll-a-gram.

wax off

57Goldtop's picture

Hello there Pistol Pete

Right back at ya. Just home from a funeral, and there was an absolutely beautiful version of this with acoustic and violin.

RIP Ed.

Hondo's picture

Minimum wage vs. fair wage

This past week I did a lot of brush clearing, wood chipping and, stump removal.

To  get the job done in a shorter time frame I hired two legal " day labor" workers, told them up front I'd pay $10 an hour, I'd buy lunch, and what the job was. They agreed, no problem.

Five hours later 2pm they decided to leave and I still had another four hours work for them.  I had been working along side them and am quite capable so it's not like they had it that rough.

To settle up four hours actual work and paid them the lunch hour they didn't work instead of their lunch.  They seemed dismayed.  Then went on and on on how they were worth more and people see how good they work and pay them extra.  I said I paid them to feed wood in a chipper  and operate a shovel, not build me a house.

Then I find out a few days before my father (71) hired some workers and sent them home in three hours.  He said he was out working them!  First time he has ever had to  "fire" day labor.

My point is... What is the point?  When you can't even hire day labor that is/ used to be hungry for work at $10 and hour and get decent work out of them. I think we are more screwed than even I realized.  And I think we're fecked to begin with.  I just now realize how deep this "entitlement disease" reaches.  The whole " a man's wage for a man's labor" has been trashed.

And as to why I hired day labor, it is hard to find high schoolers that 

a: have or will make the time to work

b: actual know what to do with a shovel

c: no way I am letting them around a 9"  wood chipper!

good luck out there,

Hondo

old tradesman's picture

REMinimum wage vs. fair wage

My right hand mans 65!   And my left hand mans 57!   I hire and fire 10 to 20 youngsters a year.  Not much worth the time!   So I came up with this!   40 hours 12$ an hour 32 hrs 10$ an hr 24 hrs 8$ an hour 16 hrs 6$ an hr.  8hrs or less GO HOME!    This has weeded them out quick. 

On a day labor I would tell them 12$ if you stay till finished.  6 per hr if you quit!

Hondo's picture

Tradesman

Nice!

maravich44's picture

57..

gold.

old tradesman's picture

Nothing to see here move on

Mary Jo White As Head Of SEC Puts Fox In Charge of Hen House

By Matt Taibbi

I was shocked when I heard that Mary Jo White, a former U.S. Attorney and a partner for the white-shoe Wall Street defense firm Debevoise and Plimpton, had been named the new head of the SEC.

I thought to myself: Couldn't they have found someone who wasn't a key figure in one of the most notorious scandals to hit the SEC in the past two decades? And couldn't they have found someone who isn't a perfect symbol of the revolving-door culture under which regulators go soft on suspected Wall Street criminals, knowing they have million-dollar jobs waiting for them at hotshot defense firms as long as they play nice with the banks while still in office?

I'll leave it to others to chronicle the other highlights and lowlights of Mary Jo White's career, and focus only on the one incident I know very well: her role in the squelching of then-SEC investigator Gary Aguirre's investigation into an insider trading incident involving future Morgan Stanley CEO John Mack. While representing Morgan Stanley at Debevoise and Plimpton, White played a key role in this inexcusable episode.

Continue reading at Rolling Stone...

***

kingboo's picture

Come on.......even JFK (and RFK) knows there's only one

and the best part is she's dead......so we don't have the fantasy ruined by some old hag with too much plastic surgery.......aka Joan Rivers....

Marilyn-Monroe.jpg

momac's picture

Coghlan Capital webinar

does anyone have the email link for the webinar.  I didn't find out about it until it was already over

thanks

kingboo's picture

Basel 3

you don't and won't hear anything about Basel in the MSM........that's one of those Boy's Club rulings.......

that is to say: you won't hear that stone hit the water......but it will make one hell of a splash once it does.....

i happen to think it will be a total game-changer.

Only time will tell.......  

The way they dance around the gold weighting language in the Basel 3 outline leads me to believe that only the boy's club will know how it will "be interpreted"........as in:   "didn't you know that is what the Basel 3 ruling meant? No?......oh, sorry about that.....but, yeah.....gold is now weighted as a tier 1 asset.....sorry, we thought everyone understood that from our language in the new draft......oh well......hope you have enough to bolster your balance sheet......heck, we've been buying right along......we thought everyone knew......so sorry!"

Lamenting Laverne's picture

Wowsers!

From Santa's mailbox:

My CIGA Friends,

Debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their WRONG direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms!

CIGA FOA

Did we just see FOA resurface with this post? I have thought for a long time that Santa himself might be FOA, but this post suggests that FOA is also a Friend of Santa. I cannot think that any other CIGA would take the name FOA, and if he is back, we can only guess what that means.... Have any of you guys seen CIGA FOA post before?   

And now I really have to hit the hay... Night Y'all.

maravich44's picture

it

will fool  .

Syndicate contentComments for "Gold and Silver Backwardation"