Gold Leaps Into Backwardation!

Since late January, the February gold contract has been in backwardation.  This means that one could make a profit by simultaneously selling a gold bar and buying a February contract.  One would still have one’s gold plus a little extra.  I coined the term “temporary backwardation”, to describe this curious and very recent phenomenon.  In our “new normal”, most gold and silver contracts go into backwardation as they get close to expiry.

When the Feb contract first jumped into backwardation, it was well within the “contract roll” period.  The roll is when naked longs sell the expiring contract and buy a contract for a more distant month.  Thisheavy selling of the expiring contractpushes down its price.  Since cobasisis Spot minus Future (oversimplified slightly), the cobasis rises purely due to the mechanics of this selling.

But today something more serious occurred.  The April contract, which is not yet being “rolled”, fell into backwardation. 

 


 

Gold cobases

The April contract, which is not yet being “rolled”, fell into backwardation – click for better resolution.

 


 

The market is offering a free profit to anyone who will sell a gold bar and buy an April contract.  For whatever reason, no one is either able or willing to take the bait.  This is proof that the market for physical gold metal is drying up.  Speculators in the futures markets may believe that the gold price “should” fall because the central banks say they are not going to competitively devalue their irredeemable paper currencies.  Owners of real metal are increasingly reluctant to part with it at the current price.

 

We don’t recommend that anyone ever naked short the monetary metals.   Instead, we always advise to use an arbitrage position such as long gold / short silver.

Using the basis theory, we have been bearish on silver this year, against the consensus: http://monetary-metals.com/is-silver-a-good-trade-right-now/ and http://monetary-metals.com/the-coming-silver-correction/.

Using the basis theory on gold today, we would suggest that now is a great time and a great price to buy gold.

And to those who may be shorting gold due to downward momentum, we would say this.  Caveat venditor.

 

 

 


 

 

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3 Responses to “Gold Leaps Into Backwardation!”

  • Keith Weiner:

    uneasy: I agree. Taking a freeze frame wouldn’t work, doubly so with February which is now quite illiquid. You must look at bid and ask, not to average them but to use them precisely.

    Cobasis = Spot(bid) – Future(ask)

    That is what is shown in the graph, though in the text I said was oversimplifying to call it Spot – Future. I apologize if this made it less clear.

    For February it has been true for a while, for April since Friday, that the bid on spot has been greater than the ask on the future contract. Gold is indeed in backwardation by this strict definition.

  • uneasy:

    Jim Sinclair and Trader Dan Norcini has a different opinion about backwardation of gold.

    “The futures market is not in backwardation. The structure for gold futures contract is normal.

    Plus – when calculating the basis, one has to take a “freeze frame” shot in time because as the front month goes into delivery and open interest falls off, so too does liquidity. This means that oftentimes very few trades are occurring at the Comex. One can see the bids and offers but no trades are occurring.

    So when guys talk about the price that the February gold contract is trading, they are taking a price that is already dated because so few trades are actually occurring in that delivery month as the contract winds down.

    What you can sometimes try to do, is to take the difference between the bid and the ask and average it and then get an instant quote on the spot price to gold and compare the two.

    Most of these guys pushing the gold backwardation story fail to take into account the actual structure of the futures market contracts. Gold is not in backwardation.

    Trader Dan”

    Can you explain?
    Thank you.

  • SavvyGuy:

    Markets in Asia were closed this past week for the Lunar New Year holidays.

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