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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+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.

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

Stack'em High · Feb 25, 2013 - 7:54pm
Grublux · Feb 25, 2013 - 7:57pm

Thanks for that!

@Puck

keeping in touch with family has been my main use. I just don't like voluntarily signing up for the all seeing eye. I figure I kept in touch before Facebook, I can figure out how again. 

¤ · Feb 25, 2013 - 8:03pm

Dramatic amateur video uploaded by Syrian activists on Monday claims to show a regime helicopter being shot down by rebels near Mennegh Air Base, close to the border with Turkey. (Feb. 25)

Raw: Rebels Down Syrian Chopper
Grublux · Feb 25, 2013 - 8:03pm

Way easier than I thought!

SteveW · Feb 25, 2013 - 8:04pm

is benefitting from the flight to safety. As the GBP has been downgraded, the Yen is in freefall money and Euro is a mess liquidity is sloshing into the US $ and T-bills. The PIG is nearing 82!

The demand for US T-bills is the last bubble before total collapse, according to some commentators.

Zol Tan · Feb 25, 2013 - 8:18pm

Man she is soooooo much hotter!!!!

JK Not trying to re-open old wounds. Just a joke for the old timers.

Z

P4TF This one is dedicated to you.

Andrew Hunstiger · Feb 25, 2013 - 8:22pm
Bongo Jim · Feb 25, 2013 - 8:23pm

NO NO NO, Mrs. Howell... she's a cougar baby, yeah!

SteveW douglas leavitt · Feb 25, 2013 - 8:24pm

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.

theBuckWheat · Feb 25, 2013 - 8:26pm

eBay Gold Prices

The purpose of eBay Gold Prices is to provide a true or real gold price indicator for physical gold bullion available for delivery today and to show the premium above the spot gold price for physical gold bullion. Gold coin prices are provided for the American Gold Eagle, Krugerrand, British Sovereign and Candian Gold Maple Leaf Coins based on sales data taken from the US eBay site.

Prices are published every other day around 2AM Pacific Standard Time (GMT -7).

link: https://goldprice.org/ebay-gold-prices/

· Feb 25, 2013 - 8:32pm

What ya need is some drone proof clothes. A drone hoodie. Some guy from brooklyn opening a new retail line of clothing. I saw it reported on RT News. 

No prep is complete with out some good anti-drone fashioncheeky Good to hide those gold and silver coins that were confiscated and you are trying to take to market to buy some grub.

How is this for a fashion statement. 'Anti-Drone' Burqa

And for you lovely ladies

‘Anti-Drone’ Wear

Thermal-signature reduction fashion

The ‘Anti-Drone’ garments are designed with a metallized fabric that protects against thermal imaging surveillance, a technology used widely by UAVs/drones. The enhanced garments are lightweight, breathable, and safe to wear. They work by using highly metallized fibers to reflect heat, thereby masking the wearer’s thermal signature.

Of the three ‘Anti-Drone’ pieces, two are inspired by Muslim dress: the burqa and the scarf. Conceptually, these garments align themselves with the rationale behind the traditional hijab and burqa: to act as “the veil which separates man or the world from God,” replacing God with drone.

The third piece, the hoodie, is intended to thwart overhead thermal surveillance from drones.

https://rt.com/usa/drone-artist-harvey-surveillance-665/

https://ahprojects.com/projects/stealth-wear

j a · Feb 25, 2013 - 8:45pm

· Feb 25, 2013 - 8:45pm

Hey, with the use of "thermal-signature reduction fashion" and drones we could have determined who was truly hottest, Mary-Ann, Ginger, Ms Howell, or the Minnow (ships always being female for some reason).

Looking at the Minnow, I wonder if the Captain was a stacker:

Howell, portrayed by veteran character actor Jim Backus, is so wealthy that he took tens of thousands of dollars in cash and several changes of clothing with him for what was intended to be only a three-hour boat tour in Hawaii, one of the sillier premises of the show. Howell is a stereotypical member of the New England Yankee elite — a resident of Newport, Rhode Island and a graduate of Harvard University.... One of the implied humorous points of the show is that Thurston continually fails to realize that all of the Howells' money is essentially useless to them on the island.

https://en.wikipedia.org/wiki/Thurston_Howell,_III

One day ...

Strongsidejedi · Feb 25, 2013 - 8:48pm

Anti-drone wear looks like a burqua

E H · Feb 25, 2013 - 8:54pm

here's one for the socialistas!

Jacques Brel - Seasons in the sun ( Le moribond )

nice to see you back Xty.

Maryann · Feb 25, 2013 - 8:56pm

Some one call? smiley

Just read this story about a kid walking 10 miles in the snow to a job interview that got picked up by a restaurant owner....heartwarming story that has left me in tears.

https://www.theblaze.com/stories/2013/02/25/restaurant-owner-finds-dedic...

We often lament the younger generation...there is hope with a few kids like this around. Maybe a Turdite in the Indy area will leave him a Silver tip....as they give this awesome owner some business. yes

Strongsidejedi · Feb 25, 2013 - 9:04pm

From wiki

Ginger or Mary Ann?

The question of which one men prefer has endured long after the end of the series. The question has inspired commercials, essays, videos, etc. By most accounts, the wholesome down–to–earth Mary Ann has outpolled Ginger by a sizable vote. Bob Denver (aka Gilligan), admitted he was a Mary Ann fan, and that when producers did polls, Mary Ann always beat Ginger, usually three to one. It has been cited that this angered Tina Louise (aka Ginger) greatly, who received only half the amount of fan mail that Dawn Wells (aka Mary Ann) received weekly. According to Bob Denver in a 2001 interview, Wells received 3–5,000 fan letters weekly, whereas, Ginger may have got 1,500 or 2,000.[29][30][31][32]

j a · Feb 25, 2013 - 9:07pm

she was at a art for charity event in id. falls last year and I can tell you shes just as lovely

Strongsidejedi · Feb 25, 2013 - 9:10pm

I told ya' so...didn't I?

I said one week ago that when China opens Sunday night, the market will be different.
Was I right?

You're darn right I was.

The only reason the PM prices went submarining was that the Asian buyers weren't in the market.

Well, they're back. And, guess what, the idiots in the West just gave them a 10% discount.

Stupid!

¤ · Feb 25, 2013 - 9:11pm

My apologies to Mary Ann & Ginger but I had a young crush on Jeannie.

It was probably her the outfit and the belly dancing she did and some of my middle eastern heritage showing itself early on.

Speaking of golden pillows, looks like the asian market is being kind to us tonight so far.yes

Strongsidejedi · Feb 25, 2013 - 9:15pm

OK?

Can stop with the mindless chatter about the easing stopping?

How the hell is the fed going to stop printing?

Does anyone really think the fed is going to stop printing when we have 8-9% unemployment?

SteveW ¤ · Feb 25, 2013 - 9:17pm

For a look behind rebel lines CBC recently sent a TV crew. Worth a look to get a sense of the devastation.

https://www.cbc.ca/player/Shows/ID/2338110132/

j a · Feb 25, 2013 - 9:18pm

yes I see alot of end of easing ssi, welfare ect ect The banks will get theres but your not in the club!!

· Feb 25, 2013 - 9:20pm

End of story.

Philip In Sanur, Bali · Feb 25, 2013 - 9:21pm

If we get the usual smackdown today at the usual time (Which, normally would happen especially with Au approaching 1600) then all is the same. If not, that might indeed indicate that something new is afoot. If so, I hope it isn't a big new EE Bear trap for a final leg down??

s dewald · Feb 25, 2013 - 9:21pm

I had to change trains in Weimar, Germany yesterday. Should have snapped a pic of the "train to Weimar" for an avatar.

All aboard!

Texas Sandman · Feb 25, 2013 - 9:25pm

Watch Bernanke backpedal on the easing rap. He watched the stock market today & got religion.

Tomorrow it will be "helicopter ben goes to congress!!".

Should be PM friendly unless the vicious algos take over.

j a · Feb 25, 2013 - 9:27pm

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Key Economic Events week of 6/11:
6/12 Trump-Kim summit
6/12 8:30 ET CPI
6/13 8:30 ET PPI
6/13 2:00 ET June Fedlines
6/13 2:30 ET CGP presser
6/14 8:00 ET Count Draghi presser
6/14 8:30 ET Retail Sales
6/14 10:00 ET Busi.Inv.
6/15 9:15 ET Ind. Prod

Key Economic Events week of 6/4:
6/4 10:00 ET Factory Orders
6/5 9:45 ET PMI Svcs
6/5 10:00 ET ISM Svcs
6/6 8:30 ET Intl Trade and Productivity
6/8 10:00 ET Wholesale Trade

Key Economic Events week of 5/28:
5/30 8:30 ET Q2 GDP 2nd guess
5/31 8:30 ET Personal Income
5/31 9:45 ET Chicago PMI
5/31 10:00 ET Pending Home Sales
6/1 8:30 ET BLSBS
6/1 9:45 ET PMI Manu Index
6/1 10:00 ET ISM Manu Index
6/1 10:00 ET Const Spend

Key Economic Events week of 5/21:
5/22 10:00 ET Richmond Fed
5/23 9:45 ET PMI Composite
5/23 10:00 ET New Home Sales
5/23 2:00 ET May FOMC minutes
5/24 10:00 ET Existing Home Sales
5/25 8:30 ET Durable Goods
5/25 9:20 ET Chief Goon Powell speech

Key Economic Events week of 5/14:
5/15 8:30 ET Retail Sales and Empire State Fed
5/15 10:00 ET Business Inv.
5/16 8:30 ET Housing Starts
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5/17 8:30 ET Philly Fed

Key Economic Events week of 5/7:
5/9 8:30 ET PPI
5/9 10:00 ET Wholesale Trade
5/10 8:30 ET CPI
5/11 8:30 ET Import/Export Prices

Key Economic Events week of 4/30:
4/30 9:45 ET Chicago PMI
4/30 10:00 ET Pend Home Sales
5/1 9:45 ET PMI and ISM Mau Idx.
5/1 10:00 ET Const. Spending
5/2 2:00 ET FOMC fedlines
5/3 9:45 ET PMI/ISM Svcs.
5/3 10:00 ET Factory Orders
5/4 8:30 ET BLSBS

Key Economic Events week of 4/16:
4/16 8:30 ET Retail Sales, One Fed Goon speech
4/16 10:00 ET Business Invt.
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4/18 Two Goon speeches
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4/20 Two Goon speeches

Key Economic Events week of 4/9:
4/10 8:30 ET PPI
4/10 10:00 ET Wholesale Trade
4/11 8:30 ET CPI
4/11 2:00 ET March FOMC minutes
4/12 8:30 ET Imp/Exp Prices
4/13 Fed Goon Speeches...Rosengren 7:30 ET, Bullard 9:00 ET, Kaplan 1:00 ET

Key Economic Events week of 4/2:
4/2 9:45 ET PMI Mfg Idx
4/2 10:00 ET ISM Mfg Idx and Construction Spending
4/4 9:45 ET PMI Svcs Idx
4/4 10:00 ET ISM Svcs Idx and Factory Orders
4/5 8:30 ET Intl Trade
4/6 8:30 ET BLSBS

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