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 ()


Feb 25, 2013 - 1:57pm

Fekete article

The author certainly lays out a nice case for the coming explosion in gold. Unfortunately, he wrote it five years ago. Taken in the context of that timeframe, his prognostication turns out to be false, and his premises fall apart with the benefit of 20/20 hindsight.

Feb 25, 2013 - 1:59pm

I can't stand people....

......who begrudge a business making a profit. In all seriousness, what is the point of a business?

Turd, I am sure you are not "swimming" in money from this site. I sure hope you do someday. You deserve to make lots of money to put up with the likes of me and the trolls. I guess anyone whom has never produced anything of value, doesn't understand the hard work that goes along with said something of value. I do not run my business for charity, and I don't expect you to either. Maybe you should consider a troll booth to collect a stipend from the non-producers. I'm just sayin'.........

Feb 25, 2013 - 2:00pm

Deeply Disturbing.

@Wizard Re: RFID CHIP implantation.

Agreed. VERY disturbing that this made its way into a bill before our "Dear Leaders".

This is not the end of it. Just because it failed to pass, does not mean they stop trying.

History repeats here for sure. If its something "they" want - and "they" don't succeed the first time?

The old saying - 'try, try again!'

Feb 25, 2013 - 2:19pm

Katie Rose- Interesting Prepper Comment at ZH

Wonder if Katie has legal problems with her RAW goat milk products? Can you sell or trade them Katie? Ron Paul wonders why SWAT is used to enforce these raids? Stupid (liberal)Californians hardly seem to care, one way or the udder.


"I milk a Guernsey cow every day. She produces enough wholesome milk to raise a massive beef calf and share about ½ gallon to 1 gallon for my family a day. We drink the milk raw and make nearly 15 different milk products from this milk: butter, sour cream, ice cream, yogurt, etc. It’s real food and really delicious.

"Prior to switching over, 2 of my 3 sons had asthma and Excema. I don’t remember the last asthma outbreak in my boys. The Excema has improved dramatically, too. We don’t need the inhalers or creams like we used to have prescribed to us.

"I realize this experience is likely an outlier: but I am experiencing it first hand. I suggest that real food, raised in sanitary conditions, would cure many of the ills that modern Americans suffer today.

"It’s illegal for me to sell raw milk in the state I currently live in. So, I don’t, despite having many good friends and neighbors ask about it. It would be a very helpful income, selling her milk, and would easily surpass her costs....but, I have no desire for armed agents descending upon my little farm. So, instead of selling her excess milk, we use it. Once my family takes the cream (the next morning), excess milk is fed to the chickens and will soon go to the two hogs we’ll be raising for bacon. Raw milk is also a fantastic fertilizer that helps adds nutrients, minerals and probiotics into the ground.

"Our milk cow is the heart of my hobby farm and a massive step toward food independence. Raising your own real food requires work, but from my perspective, it’s worth every ounce of sweat I’ve had to put into it. I started down this path because of a lifelong dream and was finally moved to action because of documentaries including Food Inc. Watch at your own risk...."

Ron Paul: "When They Came For The Raw Milk Drinkers…"

Feb 25, 2013 - 2:20pm

RFID chip is highly

RFID chip is highly improbable. They should know quite well that that will instantly turn ~90% of Christians into armed rebels. Not to mention anyone with a damn brain.

Feb 25, 2013 - 2:22pm

Brass Balls, these folks

DC wishes this whole Second Amendment would just go away - But it won't.

Feb 25, 2013 - 2:24pm

  The negative co-basis can

The negative co-basis can exist indefinitely. Arbitraguers can step in and pickup a theoretically risk-free return. The problem is in order to do so those engaging in arbitrage must be (1) a physical long and (2) willing to expose themselves & their stack to the paper charade. I would argue that most physical longs are long because they dont want any part of the paper game. So, even with a negative co-basis there simply are not enough folks who match BOTH criteria above to capture the "risk free return", thereby flipping the basis to a positive number.

The fact the basis is perpetually negative is the clearest indication possible that physical Gold is in Strong hands. There is no better proof the 21st century Gold bull is alive and well!! The big physical longs have no interest in picking up a few FRN's if it means jeopardizing their stack. Most of the longs i know are playing for $$ prices multiples higher than todays paltry $$ price of Gold - which is why they wouldn't get out of bed to Arb the paper markets...

Keep Stacking!!!

The Watchman
Feb 25, 2013 - 2:29pm
Feb 25, 2013 - 2:30pm

The Fed Has Set Us Up For the

The Fed Has Set Us Up For the Crash of 2013 / By Graham Summers / February 25, 2013

Having pumped the system with liquidity non-stop since the Crash of 2008, the Fed now realizes it’s in big trouble and needs to manage down expectations of further stimulus.

As we noted earlier this year, the Fed, while attempting to appear committed to endless money printing via its QE 3 and QE 4 programs, was in fact decidedly split on whether to commit to more as well as the risks inherent to additional QE. Indeed, the Fed FOMC minutes indicate that some Fed members were concerned about whether QE even worked as a monetary policy.

Below are the notes from the Fed’s December 2012 FOMC minutes (the meeting during which the Fed announced QE 4). I’ve added highlights to emphasize the shift in tone.

With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy.

Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization.

Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.


Feb 25, 2013 - 2:31pm

IMF: ‘World Economy Could End

IMF: ‘World Economy Could End as We Know It …’

Christine Lagarde / By Staff Report / February 25, 2013

Christine Lagarde : “2013 Will Be Make or Break” Christine Lagarde, managing director of the International Monetary Fund , cautioned at the World Economic Forum in Davos that Europe must continue to guard against a relapse in 2013. Speaking at an event honoring women leaders hosted by Credit Suisse in partnership with Newsweek and The Daily Beast, Lagarde was joined by Egyptian human rights activist Dalia Ziada, who discussed the challenges women face in the Middle East. ”2013 will be a make or break year,” Lagarde said. ”2012 was tough. A lot happened in Europe, a lot happened in the U.S. and there is clearly a lot happening in Asia.” - The Financialist

Dominant Social Theme: If we do not make it in 2013, the world as we know it will disappear.

Free-Market Analysis: While this speech was made ​​a while ago at Davos, we think it is worth noting as Ms. Christine Lagarde is enunciating a significant dominant social theme - that the West is surely destined to perish if savvy officials do not make the proper decisions.

The West is in terrible trouble anyway economically,, most from the decisions of this self-appointed elite that has used central banking as a weapon of creative destruction. Having Obtained the awesome power of money printing, printed elites too much of it, probably on purpose, and Malthus first crashed economies in the U.S. and then in Europe.

Now, Ms. Lagarde INDICATES (and surely she will repeat this meme ) that the same mechanism and leadership that brought us to our current situation are to be Entrusted with critical decisions in 2013. Here’s more from the article:

Policymakers have to stay focused on the medium-term plan to reduce debt. The same goes for Japan, “Lagarde said in Europe, although 2012 saw many policy actions seeking as the institution of the European Stability Mechanism, more work remains..” We need to make sure we guard against relapse – which will happen if we don ‘t keep at it. More importantly, it’s not time to relax. “”

Ingredients for a Stable Economy Trust and con? Dence are crucial to avoiding a relapse and seeing the course for global economic stability, Lagarde explained. . “Trust is a crucial factor for the economy It has been eroded, and in order to rebuild it you need to face reality constantly You need to tell people the truth -. That’s what they want.”

If Ms. Lagarde wanted to tell the truth, she would explain to people how the fiat-money business cycle works.Monopoly central banks over print money and cause first a boom and then a bust. By increasing or decreasing money printing, a handful of people can shake the economic world.


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