The Last Contango –  Basis Report  April 21

The “coordinated smashdown of gold and silver” was on everyone’s mind this week, but is it true? Did the price of paper gold (futures) divorce from the price of physical gold? One thing is for sure, the dollar gained from 21g to over 22g of gold on Friday. A 5% move in the world’s biggest paper currency is a big move.

We have long been predicting volatility as the paper monetary system goes off the rails. Those with their balance sheet in gold can safely watch. Just as most dollar-based investors do not lose sleep if a stock is rising that they don’t own, gold-based investors do not lose sleep if the dollar is rising. But those who borrowed dollars to buy gold are sweating…

Here is the graph showing the prices of the metals in dollar terms.


   Chart 1

    Gold and Silver Price – click to enlarge.



One cannot understand the gold market in terms of the quantity of dollars the Fed “prints”, nor by looking at price charts. One must look at the basis (see here for a basic explanation). Week after week, we have been saying that the positive basis, i.e. contango is disappearing (hence the name of this report). This is a process of gold withdrawing its bid on the dollar. One cannot understand this if one lives in the dollar bubble, looking at the gold “price” as if it were comparable to the wheat price or the Mercedes E500 price. What would a falling gold “price” mean? The gold “bull market” is over? And when it rises, does that mean sell to take “profits”?


In this report, we have been tracking the temporary backwardation in both metals.

The cobasis in the June contract fell below zero; it went out of backwardation. This means that a big part of the price drop was driven by owners of gold metal selling (perhaps to cut their “losses” measured in dollars). After the big plunge, the cobasis began rising along with the price, showing that the price was rising due to buying of physical metal more than futures (more on the futures below).








       Gold Basis and Cobasis – click to enlarge.



In the gold chart, we’ve marked the place where, rumor has it, 500 tons (assuming this is Imperial tons, it would be 16.3M troy ounces or 163K gold futures). According to the rumor, the price of “paper” gold was smashed down but physical gold has strong demand. It’s hard to interpret magical thinking, but if we were to take a stab at it, it should mean that physical gold is still trading for $1600 and only “paper” gold is now $1400.

There is a technical term for this, that some readers may have seen somewhere along the way:backwardation. If the June contract were at $1400 and physical gold were $1600, that would be a $200 profit to decarry (i.e. sell physical and buy a future) which would be 12.5% in about two months, or about 75% annualized.

Back in reality, the cobasis did not rise; it fell. Below zero. Now it has risen above zero again (though the magnitude is still a fraction of 1%, annualized).

Here is the basis chart for silver. We have included both May and July futures, as traders are rapidly closing May and moving to July.




       Silver Basis and Cobasis – click to enlarge.



We marked the points at which the alleged massive “naked” short supposedly knocked the price down. As with gold, the cobasis fell.

Unlike in June gold, in May silver we now have the dynamic of the contract roll. Those who have naked positions must close those positions. Longs must sell. Shorts must buy. If there were a significant short position, this would drive up the ask in the contract.

Cobasis = Spot(bid) – Future(ask)

A rising ask on the future would cause the cobasis to fall during the roll process. Yet we see a rising trend in the red line until the crash and it has begun rising again. Everyone has to make up his mind whether he wants to believe in the tooth fairy, Santa Claus, and the Vampire Squid who shorts gold and silver “naked”. All we can do is provide the evidence. Santa would not fit into the chimney of a wood fireplace nowadays, much that of an oil burner.

Here is an update on the gold:silver price ratio. It ended the week at 60.5.




Gold to Silver Price Ratio – click to enlarge.



Here is the graph of the open interest in the metals. The rumor claims 163,000 gold contracts (and presumably an equivalent number of silver) were sold where the arrows indicate. All in all, we see about a 16K drop in open interest in gold, and about 12K in silver.



chart 5

Open Interest in Gold and Silver futures contracts on COMEX – click to enlarge.



If someone had sold 163,000 futures to cause the price to drop, then wouldn’t the open interest have risen? If Santa went down chimneys, wouldn’t there be soot on his red and white uniform?

This was the Last Contango Gold Basis Report for 21 April. If you found this information to be useful, you can sign up (free) to get automatic notification when new reports are published.


© 2013 Monetary Metals

Charts by: Monetary Metals



Dr. Keith Weiner (keith at monetary dash metals dot com) is the president of the Gold Standard Institute USA, and CEO of Monetary Metals.  Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads.  Keith is a sought after speaker and regularly writes on economics.  He is an Objectivist, and has his PhD from the New Austrian School of Economics.  He lives with his wife near Phoenix, Arizona.





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6 Responses to “The Last Contango – Basis Report April 21”

  • RedQueenRace:

    Keith, this OI versus contracts issue has been rolling around in the back of my mind and I want to attack it from a different angle.

    First off, note that a crash generally indicates an illiquid market (lack of bids and/or offers). But an expansion of OI implies that either new participants have entered the futures market or existing participants were willing to take on an even bigger position. That is the opposite behavior from what one would expect when prices are in a free-fall. So actually I would NOT expect OI to increase much, if at all during this situation and would probably expect it to fall. I would imagine plenty of standing shorts were happy to cover into that debacle and that numerous longs were stopped/blown out or decided to get out when they didn’t understand what was going on.

  • RedQueenRace:

    “If someone had sold 163,000 futures to cause the price to drop, then wouldn’t the open interest have risen? ”

    No, not necessarily.

    1) For open interest to increase both a new buyer AND a new seller must enter the market.

    2) For open interest to decrease both an existing long AND an existing short must exit the market.

    3) Open interest remains unchanged if

    a) A new buyer is sold to by an existing long .

    b) A new seller is bought from by an existing short.

    So if a new market entrant is bought from or sold to by someone who is already in the market the open interest does not change. All that happens is the entity holding that long or short position has changed. The total number of longs and shorts remains the same.

    The ES is my arena so I do not follow gold futures closely. If the 163,000 is a significant percentage of the open interest it seems unlikely that all of the selling would be met through short-covering, but there is no guarantee that it wasn’t. Actually, it would be possible for OI to fall as other longs and shorts not involved in absorbing those contracts closed out their positions. At any rate, changes in OI only tell us what happened on a net basis and not much more than that.

    • RedQueenRace:

      The above said, I am not a fan of the manipulation claims. Panics happen and have throughout history. Gold and the miners have been in a major correction/cyclical bear (choose the term that you like best) and this looked like a puke-em-out event that marks the end or near-end of it.

    • RedQueenRace:

      Didn’t think 1) above through carefully. It is incomplete.

      OI can also increase if an existing long or short increases their position, either with a new market participant or a corresponding increase in the position of a complementary participant. So if a new seller is bought from by an existing long or a new buyer is sold to by an existing short OI will increase.

      However, 2 & 3) still apply. OI can only decrease if both a long and a short exit or reduce their positions together and it is possible for new positions to be taken in the market without OI increasing.

  • worldend666:

    Hi Keith

    What market are the open interest figures you are quoting? I understand the big short came in Asian trading hours. I have no idea if that would show up in US figures for OI?

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