Gold and Silver Backwardation

273
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 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+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.

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

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

TF

About the Author

Founder
turd [at] tfmetalsreport [dot] com ()

  273 Comments

Mickey
Feb 25, 2013 - 1:24pm

5 min to comex close

small take down in metals but right now miners showing an uptick and now metals too.

Mickey
Feb 25, 2013 - 1:26pm

but we have bernanke tomorrow, first notice thursday

there always seems to be something on tap--no Govt jobs report this friday--but next friday

Horst
Feb 25, 2013 - 1:26pm

Funny, I was wondering what

Funny, I was wondering what became of backwardation. I can still remember the furthest out futures month trading 2-3$ lower than spot silver in 2011. Also the LBMA lease rates moving significantly into negative territory. That was all gone when I last checked half a year ago or so. Probably around the time they stopped publishing them (wise move on their part).

Interesting piece by Mr. Fekete, I especially like his numbered items 1-8 at the end, out-of-the-box thinking even within the gold community.

Looking forward to the podcasts. Lots of inside info in Andrew's latest interview on KWN. Though he came exactly to the same conclusions regarding the open interest structure that I did. Btw if we move towards 28$ again, I am into buy mode on my paper trades for the first time in many months.

Lastly, I welcome the return of the POSX. Really, "The Pig" was a way too friendly description for that POS.

¤
Feb 25, 2013 - 1:27pm

Ides +7

H'mmm.... 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.

hammerman
Feb 25, 2013 - 1:27pm

You should email Paul Coghlan

You should email Paul Coghlan and ask.

https://www.coghlancapital.com/

القراع عصفور Pining 4 the Fjords
Feb 25, 2013 - 1:29pm

Pining - more clues

My favourite scene from trouble with tribbles star trek
Feb 25, 2013 - 1:31pm

And just because I love sharing these

Just wrapped up about 45 minutes of returning emails. Within the bunch was this one. Apparently his "account" wasn't approved fast enough or he has an axe to grind. Sent anonymously with no valid return email address. Anyway, indicative of the Joy of Being Turd...

"Maybe if you stopped deleting commentators with whom you disagree your
site would be something other than a circle jerk. How's the fee splitting
with Andy going btw? hope you have your RIA license, cuz when all those losses start pouring in, people are gonna start asking questions, asshole."

Btw, I don't "split fees" with Andy. I get a small override on subscriptions but that's it. And the service is specifically set up as a "following" service. Andy is not directly advising trades. He simply allows subscribers to monitor and follow, if they so choose, his trades.

Wizard
Feb 25, 2013 - 1:33pm

Just a Heads Up, Rumor around the web

My son approached me today worried about something that he read on some web site about everyone being required to be microchipped in the US in 2013 under Obamacare, Well I tracked down the actual Bill that the language was inserted in and was absolutely amazed that there was actual a Bill with that language in it H.R. 3200 July 14, 2009

"Buried deep within the over 1,000 pages of the massive US Health Care Bill (PDF) in a “non-discussed” section titled: Subtitle C-11 Sec. 2521— National Medical Device Registry, and which states its purpose as........ He quotes that part of the law and then goes on to say: "In “real world speak”, according to this report, this new law, when fully implemented, provides the framework for making the United States the first Nation in the World to require each and every one of its citizens to have implanted in them a radio-frequency identification microchip for the purpose of controlling who is, or isn’t, allowed medical care in their country".

https://beforeitsnews.com/alternative/2011/05/hidden-obamacare-secret-rfid-chip-implants-mandatory-for-all-by-march-23-2013-665502.html

Here is the language they used

https://en.wikisource.org/wiki/H.R._3200/Division_C/Title_V/Subtitle_C

Thank God it did not pass and is obsolete, But the fact that language of that type was in there in the first place was more than a little disturbing

https://www.opencongress.org/bill/111-h3200/text

W

OC15
Feb 25, 2013 - 1:35pm

It's worth noting

The skull and bones number 322. The insane Luciferians have historically done things on or around this date (notablly engaged in war). So it's worth keeping your eyes peeled that weekend. March 22nd is a Friday.

Mickey
Feb 25, 2013 - 1:37pm

You can please some of the people some of the time...

but never all of the people all of the time.

Business management 101

If you do not have thick skin, don't do any of what we all here are doing.

serious whining is for losers-sarcastic whining is something else.

Subscribe or login to read all comments.

Contribute

Donate Shop

Get Your Subscriber Benefits

Private iTunes feed for all TF Metals Report podcasts, and access to Vault member forum discussions!

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

Key Economic Events Week of 8/12

8/13 8:30 ET Consumer Price Index
8/14 8:30 ET Retail Sales
8/14 8:30 ET Productivity & Labor Costs
8/14 8:30 ET Philly Fed
8/14 9:15 ET Ind Prod and Cap Ute
8/14 10:00 ET Business Inventories
8/15 8:30 ET Housing Starts & Bldg Permits

Key Economic Events Week of 8/5

8/5 9:45 ET Markit services PMI
8/5 10:00 ET ISM services PMI
8/6 10:00 ET Job Openings
8/8 10:00 ET Wholesale Inventories
8/9 8:30 ET Producer Price Index

Key Economic Events Week of 7/29

7/30 8:30 ET Personal Inc/Spending & Core Inflation
7/30 10:00 ET Consumer Confidence
7/31 8:15 ET ADP employment
7/31 2:00 pm ET FOMC Fedlines
7/31 2:30 pm ET CGP presser
8/1 9:45 ET Markit Manu PMI
8/1 10:00 ET ISM Manu PMI
8/2 8:30 ET BLSBS
8/2 10:00 ET Factory Orders

Key Economic Events Week of 7/22

7/23 10:00 ET Existing home sales
7/23 10:00 ET Richmond Fed Manu Idx
7/24 9:45 ET flash Markit PMIs
7/25 8:00 ET Count Draghi/ECB policy meeting
7/25 8:30 ET Durable Goods
7/25 8:30 ET Wholesale Inventories
7/26 8:30 ET Q2 GDP first guess

Key Economic Events Week of 7/15

7/15 8:30 ET Empire State Fed Index
7/16 8:30 ET Retail Sales and Import Price Index
7/16 9:15 ET Cap Ute and Ind Prod
7/16 10:00 ET Business Inventories
7/17 8:30 ET Housing Starts and Building Permits
7/18 8:30 ET Philly Fed
7/19 10:00 ET Consumer Sentiment

Recent Comments

Forum Discussion

by james r, 1 hour 10 min ago
by Scarecrow, 3 hours 43 min ago
by Scarecrow, 5 hours 43 min ago
by Scarecrow, 5 hours 51 min ago
randomness