Gold and Silver Backwardation

Mon, Feb 25, 2013 - 12:12pm

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 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+7)

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.

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


About the Author

turd [at] tfmetalsreport [dot] com ()


Missiondweller Bagholder
Feb 25, 2013 - 2:31pm

Thanks Bagholder

Its my understanding that backwardation is in essence a bifurcation in prices between physical and paper, so that would make sense.

Feb 25, 2013 - 2:32pm

Low to mid 1400s coming in gold?

No, I don't expect any hat tips.

Feb 25, 2013 - 2:41pm

"No, I don't expect any hat tips. "

You might get some if you explained why you said that, rather than just blurting it out without any reasoning.

Feb 25, 2013 - 2:41pm

good stuff turd. i don't

good stuff turd. i don't understand enough about backwardation to offer any insight, so i can't trade off of it. will have to study up on the links you provided. price action; however, looks good so far to me too. hoping to add to my long PSLV position in the Roth if we're lucky enough to get another push down to lower-mid $28. mmaaayyy consider AGQ in the same area assuming any volatility from fed stuff and FND doesn't do any major chart damage...might be safer to stay away from the leveraged ETF's all together this week though...we'll see...good luck to everyone this week.

Feb 25, 2013 - 2:48pm

I suggest to immerse oneself

I suggest to immerse oneself a bit in the modern monetary theory. An interesting and clarifying stuff, to understand fiat system based on government debt:

Feb 25, 2013 - 2:49pm

micro-chip implantation

I've personally never given that term or possibility any thought previously so reading was one of those things you hope is an internet hoax. It sounds crazy to consider the concept however "if" it's actually true and a effort was made to actually enact such an idea it doesn't crazy at all, does it?

There's a saying that goes...'resistance is futile' but in this instance can anyone imagine ever allowing themselves to let that happen to them or their family?

No freakin' way! Resistance would be intense.

It's not hard to see a time though where some type of minute medical marker is purposefully implanted in a newborn (belly button?) that is acceptable to future generations who will be brainwashed slowly into accepting the medical reasoning for it being a beneficial thing for the future of their children.

At that point the well intentioned parental guilt will kick-in and the newscycle associated with the microchip idea will be deemed a no brainer as the advancements in medical technology cloud the line between being beneficial and acceptable vs. intrusive and not acceptable. I see the real possibly that at some point in the future they'll make a marker/chip mandatory if you want to be eligible for Govt. subsidized health care.

For many impoverished people though "resistance being futile" won't be an option. It might make sense and be necessary and mandatory. Orwellian or just a matter of 20-30 years?

Whatever the case might be (if true), it would be interesting to know what Govt. entity or person/politician specifically wrote that portion of the language containing that wording. It reads like a sci-fi movie.

Feb 25, 2013 - 2:58pm

@ Punk-Assets

It like your crazy uncle sitting on the couch just blurting shit out because it pops in to his feeble brain. Get off my lawn!

I do expect hat tips!

Feb 25, 2013 - 2:58pm
Feb 25, 2013 - 3:02pm


"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."

My problem would be that to give up possession and have the 6-week wait without the physical is a risk. That the actual delivery of new physical might fail ala. PFGBest, MFGlobal is a risk. That we might be witnessing the end to the paper game, here and now, is a risk.

What if bankers knew about a policy jubilee in advance? How would they act? I could bet that promises and lies would fly!

As the promises of the Constitution, and the rule of law erodes, so too do all risk-free environments.

Feb 25, 2013 - 3:17pm


The dollar is starting to turn north just as everyone screamed it was dead. The zombie is dead! I dont think PMs are going to like it at all. After this bounce in PMs we're headed lower IMO. Still a PM bull for the long haul but we're in for more pain in the near term.

Feb 25, 2013 - 3:19pm

Maund is Gartmans twin brother

otherwise known as Flip and Flop

The Vet
Feb 25, 2013 - 3:29pm

The US dollar can't collapse....

The Yen, Pound and Euro are weakening at an ever increasing rate. The USD measured against those shrinking fiats looks strong, but in truth it is simply weakening at a slightly slower rate. When measured against all of the other fiats, gold is holding its own and appreciating as it should be as the only true money that isn't being printed like there will be no tomorrow.

Don't confuse ratios with absolute values; that's something that the MSM in the US do on a daily basis....

Feb 25, 2013 - 3:30pm

I know this pondering/dots

I know this pondering/dots connecting will have been done by many here already (if my understanding isn't flawed!) but thought it worth throwing out:

1. Santa talked of a straddle trade strategy the cartel have employed before in the metals (knowing which, he played them to make his money decades ago) i.e. they first amass an equal amount of long/shorts.

1b. Turd's COT analysis - instead of solely covering shorts the cartel are adding longs. Did I interpret correctly they potentially have a similar amount of longs/shorts at present i.e. the straddle is potentially in place?

2. Santa says the straddle ends with the shorts being dumped - burning all other shorts in the process and letting their longs fly.

2b. Santa believes something good cometh in the next few days/weeks...

ancientmoney Punk-Assets
Feb 25, 2013 - 3:39pm

@P-A re: Gartman's twin bro . . .

Actually, Maund has pretty much nailed things recently.

Feb 25, 2013 - 3:41pm


I agree. For now he'll be right - until he isn't.

The Watchman
Feb 25, 2013 - 3:41pm
Ilya Repin
Feb 25, 2013 - 3:44pm

Anonymous have hacked Capitol

Anonymous have hacked Capitol One and Bank of America BOA -3.33%

Feb 25, 2013 - 3:48pm

Overnight, watch the fight at

Overnight, watch the fight at 1595-1600.

Feb 25, 2013 - 3:50pm

Those LS don't like the sign of things to come...

going to be an interesting few weeks...

Feb 25, 2013 - 3:51pm

Maund likes silver going forward too . . .

Although not as bullish as gold, at least through last COT . . . undoubtedly even better since then, as we saw.

paulindoon TF
Feb 25, 2013 - 3:53pm

Overnight, watch the fight at

Now Turd; some of us (in EST zone) HAVE to get some sleep sometime!!!!!

Feb 25, 2013 - 4:01pm


It's interesting to see how silver is no longer reactive to golds movement for the most part in a consistent or meaningful way unless an across the board sell off happens like we saw last week.

For awhile gold and the USD weren't tracking each other and now it seems were tied together again. It seems like a long time ago when there was a period where it seemed silver was dragging gold higher pre May 2011 and at some point one of the two metals will drag the other higher. But who will lead the way?

What metal or market instrument breakdown (equities, bonds,FX, derivatives etc) or political event starts the gold or silver train rolling again?

My primary guess is a derivatives based problem with gold also playing a part in that equation. After reading that Feb. 2013 BIS Document post I put out this weekend the picture I got was that the OTC derivatives problem and gold are tied at the hip in a big way and the mention of haircuts to the extent they were discussing them as inevitable perked my ears a little higher. Gold as acceptable margin collateral was mentioned as well.

Derivatives might quickly become a newscycle buzzword.

Feb 25, 2013 - 4:03pm

And this-quite open

And this-quite open collection of views on gold, silver and miners:

Feb 25, 2013 - 4:03pm

@ Rico

Probably not, who really cares, aside from those on this board and some other random people out there?


Feb 25, 2013 - 4:05pm

Dow smashed 200 pts, the

Dow smashed 200 pts, the Dow/Gold ratio peaked a few days ago, the ratio is currently at 8.6, and should be headed much lower in the days and weeks ahead.

The Dow/Gold ratio rallied hard for 4 straight months, it's over, sorry stock bulls, it's gold's turn now!

Feb 25, 2013 - 4:14pm

With the right crises

people will beg to be chipped.

Edit: Or the right scapegoat for that matter...

Feb 25, 2013 - 4:17pm

US Mint ASE sales update

3,031,500 ASE sold in February, so far. That's 17 out of 20 business days. If the pace holds, it will reach 3,566,000 or so. Highest February to date was 2011, at 3,240,000.

The Watchman
Feb 25, 2013 - 4:18pm
Feb 25, 2013 - 4:19pm

@punk assets

Dollar screaming north could bring metals with it. It did in 2010/2011 at one point. Then it decouples, and metals go on. Dollar north, means stocks south. Metals are about as low as they are gonna go.....


Feb 25, 2013 - 4:29pm


I've been stacking since 2005 so I've seen it before. I'd love to see gold get to $1805 in a hurry. I'm still stacking. Just got an order from goldmart with a MEX 50 pesos. That's a big boy! But I just don't see this as the bottom. We'll see, and I'd be glad to be wrong.


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