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

maravich44's picture

it

will fool  .

tobydaniel's picture

Platinum just got bombed 20 bucks

stackingdownunder's picture

Aus Gov to Seize Unused Bank Accounts

well, there goes what little hope i had that things might not get so bad in Australia... this just in

"HOUSEHOLDS face losing up to $109 million from their family savings as the Federal government moves to seize cash from inactive bank accounts.

After legislation was rushed through parliament, the government will from May 31 be able to transfer all money from accounts that have not been used for three years into their own revenues."

Read more: http://www.news.com.au/money/banking/cash-grab-inactive-bank-accounts-to-be-seized/story-e6frfmcr-1226585867131#ixzz2LysnY4AF"

this situation has come about because our inept government introduced a new mining tax, which only raised in the order of $100 MILLION when it was meant to be in the billions.

Here's the kicker - they've already SPENT the money (cash handouts) they expected to get from the tax and are now clearly in a whole heap of budgetary problems. 

TomMack's picture

99 why not?

emma peel was nice too

barbarafeldon.jpg

Strongsidejedi's picture

Dare you leave out Wonder Woman and the Golden Lasso of Truth?

Wonder Woman - isn't that lasso of truth made of gold?

and what of Charlie's Angels...

That would be gold, silver, and platinum.

philipat's picture

Don't Feed The Trolls

But posters like JohnnyDow make me truly wish there was a "Kick Ass" Button as well as a "Hat Tip"?

Strongsidejedi's picture

80's gold

Going to the 80's

Nurse Brancusi of Trapper John MD -

Buck Rogers - Wilma Deering

Puck T. Smith's picture

Making me pull out the big guns.

My opinion only, buy I say this is the most beautiful woman to have lived in my lifetime.

ivars's picture

GSR continues to play with a

GSR continues to play with a new uptrending (PMs down)  fork but seems also to have found a resistance on a parallel line to the previous downtrending fork. These to form a triangle ( marked by circle) which must be resolved either way - either break upowards along new fork, or down back to the upper line of previous fork- by March 1st.

In the meantime, if break of triangle does not happen earlier, I expect in general sideways trading in the range that in silver has been marked by 29,25 high and 28, 25 low.

Besides, today silver is crossing the death cross- 50 d MA moves below 200 d MA.

Yesterday previous 29,25 support acted as exact resistance, so that seems to be in place now.

Am i wrong ( as I rely on Netdania) that we are seeing significant volume increases in silver over last 3 out of 4 trading days ? What could that mean, such increase in activity in relatively flat and low place? Today with Bernanke speaking, trading can be active as well?  See chart below:

delacroix's picture

kingboo                  I've

kingboo                  I've got a marilyn monroe 1 oz silver round. a JFK too.

philipat's picture

@Puck

She looks like an "Angry Bird" to me....

opticsguy's picture

Julie Christie was pretty hot in Dr. Zhavago

Just saying.  Internet sucks in the former DDR or I'd post a pic.  Spent 4 hours trying to download a Powerpoint file last night.

TFMR loads faster here than it does in the US.  Who is doing your web hosting, again?

Puck T. Smith's picture

@philipat: Blasphemy! 

@philipat: Blasphemy! 

Boswell's picture

FascistBook

Now I see why Turd only get 2 "Likes" on his posts. ;-)

I used my other funny name to sign up just to see a friend's pictures. Immediately six people wanted to be "friends" with the guy with the funny name? Including some guy from Indonesia who doesn't speak (type) english. I posted mainly Ron Paul stuff during the election and now "like" & recommend doom & gloom articles and gold/silver stuff... No responses. More for my own reference. ;-)

atarangi's picture

G.S.R. ratio - - -

jRLfbKk.jpg  that G.s.R. ratio has got me stumped.

Bohemian's picture

@Puck

Now you're talking... cool

Mudsharkbytes's picture

No no no…

You all have bypassed one of the sexiest icons of the century:

08ccb3f1d3173103327462a8cb2146ce.jpg?stmtumblr_lpyz1cOpg71qcktamo1_500.jpg

None of 'em holds a candle to Bettie Page

Bettie-Page-426x504-33kb-media-73-media-

So what if she never starred in any television shows?

philipat's picture

@Puck

Just rattling your cage. I always try to steer my women away from Breakfast, or any other meal, at Tiffany. I'd rather just stack. I'm a cheap bastard!!

Sheetrocker's picture

1600

We have 1600! Gold moving better than silver.

Hammer's picture

(No subject)

here is another one if you didn't get the first one.

ivars's picture

@boatman- MMT

I understand they do not take debt seriously at all, based on USG based monetary system as it is , mostly, though they apply it to any country, but then of course exchange rate question comes into spotlight if country is not enough self sufficient. USA is an exemption.

On other hand, to get clear picture on debt based monetary systems principal functioning, they are much better than anyone as they spell it as it is. That is why i suggest to read there analysis part.

Now as to suggestions part... I read it because I am sure USA will engage in increased fiscal spending for one reason (war)  or another ( unemployment) rather sooner than later, my guess is before 2014 elections definitely, and I would like to understand both the mechanics ( which MMT describes perfectly) and inflation risk ( which is obvious at some level ) as well as corresponding loss of trust in the USG treasury based monetary system. One thing is important to understand that high powered (US government debt + bank notes) is the basis of ALL money supply in the world. It is the bottom of the pyramid, and only it matters as far as gold prices as monetary metal are concerned.. but on other side there is the real economy ability to be dragged along that monetary expansion. As soon as it appears that real economy kind of drags along, gold price stagnates or drops in quite wide rabge since trust in the system is a bit restored despite the continuous increase in accumulated USG debt.

Of course, I do not agree- partly also given the strength of financial capital in politics, legislation, enforcement, tradition- that deficit spending will be allowed to debase USD continuously, inflating the USD denominated debts away. Hence I am all the time looking for mechanisms of reset where after brief period of plunging in NEW Japan style inflation hunting the USG will tie the USD to gold ( or the whole world CBs and governments together will do it).  I think the political climate as well as inflation pressure for that might be ready after 2016 elections, not earlier. May be later, as we have seen things taking more time than we expect.

There are 3 things that need to happen to engineer reset that favours financial capital after fiscal spending erodes trust in USG treasury debt based world money:

1) The FED /USG or all CBs/banking system must collect enough monetary gold ( 60% of world above ground monetary metal at least, I think about 70-100 000 tons) .

2) If its done by withdrawing money supply by cancelling part of USG debt, then the gold will be lured to banks due to firesale drop in gold prices from highest level ( e.g. 10 000 USD) by around 50% or more

3) The banks will buy this gold with the USD accumulated in the reserves due to QE , so that will be inflationary as trillions of USD will be released in the market

4) There needs to be a windfall tax on gold capital profit as people and institutions sell it that both inflation from released old USD and other currencies is at check, AND USG gets the old  dollars back, however, its still potentially profitable for people to sell gold at these prices. Of course, legislation putting a time window on gold sales, dropping prices or once again barring the private stocking might be used to extricate as much as possible gold from population/institutions. The windfall tax might be backdated as well.

5) The USG needs to pay down its debt to foreigners /private to a manageable level before moving onto gold standard, as huge debt in gold backed USD would be unbearable as it will immediately draw the gold reserves out of US control to the creditors. USG can use the old USD gained from windfall tax on gold sales to pay down the debt, thus moving via this loop QE generated reserves into covering of USG debt. The amount of reserves that FED has the ability to generate via QE is in principle unlimited, it is not necessary to buy only USG treasuries or mortgage backed assets- it can by anything- as congress decides. So the amount of excess reserves generated by QE could be larger than USG debt owned by FED.

6) This is still lousy, but after all this FED can set a price at which it will buy gold from banks, thus issuing a new gold backed USD. Whatever the ratio of this new USD to gold, this process in whole will ensure that economy starts to deflate, and the debts in USD which has lost some value during inflationary period, regain part of their value, but most importantly, the deflation leads to bankruptcy of overleveraged companies and individuals, ensuring that banks and creditors acquire real assets at foreclosure or firesale prices, which will give them the final netting out of PRE inflation debts- a loss on inflation will be matched by gain on real asset prices.

I think , more details will appear if this scenario is possible at all, but this is the one banks could accept- keep their petty politicians in place in 2016, then tell them to  engage in deflation under the new slogan of correcting the asset bubbles and runaway inflation. This would tell me that the US might get a Republican or even Tea Party if needed President in 2016. There has to be inflation before that. And in no way that will give back freedoms to the people the state is taking away now- the only freedom they will get will be to part with their assets to feed the creditors.

Short term, until mid 2020 - ies this could be a solution until global depression transforms into military aggression of some form.

Or, something has to be done with usury as such, and dethroning of financial capital worldwide.

ivars's picture

Just curios- if Sprott trust

Just curios- if Sprott trust shares are gold silver backed, are they used as safe  currency? If that would be so, their value would be above gold/silver content into them.

Hammer's picture

and a replay from November

and a replay from November related to my post above.

ivars's picture

@boatman- MMT

And one more thing- tying USD to gold in scenario I wrote about above, might mean some totally crushing consequences for debt laden countries that do not have enough gold- Japan and UK- they will have no choice but to peg to the USD or adopt USD. That would be like an economic occupation in a way, which has happened to many debtor countries in the third world as they are forced to repay USA "aid" loans in the USD while their exports do not generate enough hard currency to do this.

About fiscal spending in the USA in tandem with FED ( ala Japan is now going to ) - may be there is a need to confirm the new ( or leave the old) FED chairman before the green light can be given? Otherwise it started too early someone might not get the job who needs to get it - by being too dovish. Congress at least must make a face that they are hawks, they can not reelect/elect a Chairman that is supportive of fiscal relaxation as a RECORD in his CV. So perhaps, if not war, fiscal spending will not kick start (like double the yearly deficit by eliminating taxes and spending more) in 2013. More likely 2014.

Ircsum's picture

Doomberg are at it again....same old, same old..

Gold’s Cycle Seen Turned by Goldman as ETP Holdings Collapse

 
 
 
 
Gold’s price cycle has probably turned as the recovery in the U.S. economy gathers momentum and investment holdings collapse, according to Goldman Sachs Group Inc., which reduced forecasts for the metal.

The bank cut its three-month target to $1,615 an ounce from $1,825 and lowered the six- and 12-month forecasts to $1,600 and $1,550 from $1,805 and $1,800. Goldman reversed an assumption exchange-traded products holdings will expand in 2013, analysts Damien Courvalin and Jeffrey Currie wrote in a Feb. 25 report.

---------

The real tell is further down:

"Russia and Kazakhstan expanded their gold reserves for a fourth straight month in January, according to International Monetary Fund data. Central banks will again be strong buyers this year after boosting purchases 17 percent to 534.6 tons last year, the most since 1964, according to the World Gold Council. "

http://www.bloomberg.com/news/2013-02-26/gold-s-cycle-seen-as-turned-by-goldman-as-etp-holdings-collapse.html

Keg's picture

Off topic thread

I will admit that if you guys get way off topic, I much prefer the argument to be Ginger vs Mary Ann and the rest than for some inane discussion about chemtrails.

boatman's picture

well that all makes perfect sense if

one believes government can act almost as one individual could....... a dictator.

i believe they usually cannot.

a lot of what you have laid out, however, will happen....especially the big points...... because to a degree it will be their only way out, collectively.........

MMT does not believe in unlimited debt, just as Keynes did not, tho printing the world reserve currency enables much more of it.....warren mosler and cullen roche are disciples.......if have read and argued with them alot.

govmint policy is a blunt un-prescient club because all interests are never benefited by a specific action at the same time and there are many interests and competing groups.......me not being a big conspiracy guy ever sense the secret relationship me and my girlfriends sister  was a secret for about 6 hours [long time ago, XTY]

life and history is more like an avalanche than a game of billiards.....but rocks do fall into holes.

this is the most interesting thing of ALL that we do here IMO.............macroeco-extrapolating.

C-OT......SMEE- OT

do not ever think that any of your words are wasted on me.........i have a file saved with all your extrapolating in it.

it's going to take a lot more than fuzzy pictures of supposed 'WMDs' in Iraq to drag the US into a war anytime soon, however.

Iran will have to vaporize something first..........but they probably will at some point.

**************************

I VOTE WITH KEGGER!!

Just A Regular Guy's picture

@Keg

Chemtrails, where......where dammit!!11????

Sorry smiley

Peace

Groaner's picture

I put a sell in at 1602.2 just missed it.

they say it and laughed at me.

Oh well, we hit $1600 and now what? Will we make another shot at it today? doubt it. market is bidding up..

Groaner's picture

Buy signal on. GS just lowered gold forcast..

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