Gold: contango versus backwardation -2-

By Arthur2014 on Tue, Aug 19, 2014 - 4:18am

Dear Dave,

Dear all,

Nine days ago (on Saturday August 09) I posted some questions in the thread

May be that that thread is so old that nobody follows it / reads it anymore. Therefore I send my original post again. Meanwhile I have some additional questions.

I would be glad if anyone might answer.

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Gold: contango versus backwardation

davefairtex wrote:

1) Do you know what a stop is, and how it works?

2) Do you know where stops are generally placed?

3) Do you know who places these stops, and why?

4) Do you know what "stop-gunning" is, who does it, how it works, and why?

5) Do you have a sense of just how long the techniques regarding (4) have been happening in markets?

Some optional questions:

1) do you know what resistance is, what it is caused by, and how it manifests?

2) do you know what support is, what it is caused by, and how it manifests?

3) do you understand what happens when support - or resistance - breaks?

Dear Dave,

I cannot answer any of these questions. Where can I learn about the topic? Could you recommend me any book?

By chance I came across the peakprosperity website and I read some of your daily commentaries which I appreciate very much.

I am not an economist but I am working in analytic philosophy. Among other I am interested in questions about rational decision making under uncertainty / under incomplete information.

Traders are persons regularly taking risk.

Do you pay any attention to the aspects of contango versus backwardation concerning the price of gold?

Is the price of gold currently in backwardation?

For an explication of the two notions I read the following articles:

Do you agree that backwardation indicates scarcity of the physical supply of gold?

There seems to be at least one proponent of a gold standard who takes (potential) backwardation of gold very serious: the 1932 born former professor of mathematics Antal Fekete.


I have no personal opinion about the topic.

As usual, things in the world are a little bit more complicate than one thinks at the beginning they were. Apparently one should not mix up the spot market price of gold in backwardation with a negative Gold Forward Offered Rate (GOFO)

For an explication of GOFO I read:

At least I found an article written by Brad Zigler in November 2008 who states:

“A negative forward rate does not automatically create a backwardation in the Gold Price

His article is available via the following hyperlink:

title: Gold in Backwardation?

published: Wednesday, 11/26/2008

“Did Gold Prices just go into backwardation? What is a gold forward rate anyway...?”

I would like to hint to some non-fiction books for laymen from which I learned quite amazing things about aspects of our world I had never thought about before:

Aaron Brown:

The Poker Face of Wall Street; 2006

ISBN-10: 0471770574

ISBN-13: 978-0471770572

Daniel Kahnemann:

Thinking, Fast and Slow; 2012

ISBN-10: 0374533555

ISBN-13: 978-0374533557

William Poundstone:

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street; 2006

ISBN-10: 0809045990

ISBN-13: 978-0809045990

Didier Sornette:

Why Stock Markets Crash: Critical Events in Complex Financial Systems; 2004

ISBN-10: 0691118507

ISBN-13: 978-0691118505

Nassim Taleb:

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets; 2005

ISBN-10: 0812975219

ISBN-13: 978-0812975215

Nassim Taleb:

Antifragile: Things That Gain from Disorder, 2012

ISBN-10: 0812979680

ISBN-13: 978-0812979688

and finally a rather scientific collection of and papers:

John Smithin (editor):

What is Money? (Routledge International Studies in Money and Banking); 1999

ISBN-10: 0415407079

ISBN-13: 978-0415407076

Please understand my bibliographic hints as an attempt to contribute something to this thread.

Best regards


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Meanwhile I found a website publishing among other statistics updated gold lease rates:

But I don’t really know how to interpret the charts.


The first chart “GLD tons versus COMEX gold [2014-08-14]” plots the price of one ounce of gold in US$ and the GLD gold holdings over the period from 2012 to today.

What does follow from that?

Are we entitled to infer that one parameter is the cause and the other is the effect? (If x happens then y is the effect)

Which one is the cause and which one is the effect?

Normally the so called causal nexus (the linkage between cause and effect) is covered by a law in nature in the realm of nature. A cause inevitably / necessarily brings about its effect.

Or is the relation between tons of gold in the GLD versus the gold price at the COMEX just a correlation? That would be a much weaker relation than a causal nexus. writes:

“There are always rumors surrounding gold. One current one has to do with a drop in the number of tons of gold in GLD indicating a "gold bank run" in progress. First chart is price vs tons in GLD over the past year or so, second chart provides more historical perspective.

Gold Price vs Tons of GLD

Next is the number of tons of gold inside the GLD ETF, compared to the tons inside the SLV ETF. The theory is, GLD has been raided for gold in order to repay central bank gold leases. The counter-argument is, people have lost interest in GLD, so the number of tons have decreased on their own. If the counter-argument is true, then SLV and GLD should see relatively similar moves in their inventory tonnages.

A shortage indicator is the current premium or discount over COMEX of gold sold on the Shanghai Gold Exchange.

Another indicator are gold lease rates as well as the gold forward rates.


Next is the famous Commitment of Traders report; these charts show the net long/short position of the particular group (managed money, producers, swap dealers, other reportables) vs the price of gold. Producers tend to be net short (to hedge production) and managed money tends to be net long.

COMEX Gold COT Report (Net) - vs Gold Price

COMEX Silver COT Report (Net) - vs Silver Price

The gold/silver ratio is one decent indicator of the trend in PM. That's because when PM is climbing, silver is usually doing so faster than gold. Average gold/silver ratio in modern times is about 60; at the 2011 silver peak, it was 30, and at the trough during the 2008 crash, it was 80.

Last is Central Bank buying, mostly Russia and Turkey. This information comes from the IMF, and does not include China. …“

Best regards


hammer6166's picture
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Posts: 25
Answers to questions

Hello Arthur,

Dave provided answers for most/all of the questions in this comment (which is in the same thread you quoted):

Have fun,


davefairtex's picture
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Posts: 5072
backwardation & gold

I'm not a huge fan of looking at contango/backwardation as a way of indicating scarcity.  I prefer looking at premiums instead.  The reason: I haven't been able to establish any sort of causal linkage between times when GOFO rates go negative and subsequent price action in gold.  (JimH might have more information on this - perhaps he's been able to use GOFO rates to help his trading).

Premiums, on the other hand, seem to operate as relatively decent "bottom detectors" - when premiums in Shanghai go very positive, its often a sign that gold is due for a bounce.  Likewise, when they go very negative, that is a sign that we may see a local top.

I'm neutral on the whole "does GOFO indicate scarcity" debate.  I'm honestly not sure what negative GOFO indicates, at least not with LIBOR so low.

I've read Fekete's theories - they seem interesting, but I have trouble using them to inform my trading.  In other words, if something doesn't seem to work as a "trend change or price change detector" I end up dropping it into the box of "interesting, but not immediately useful to me."


Arthur2014's picture
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Posts: 56
I overlooked Dave’s explanations

Dear hammer6166,

Thank you for your prompt answer and help!

Indeed, I completely overlooked Dave’s explanations in the very same thread. It is hard to believe how blind I am sometimes.

Best regards

Arthur2014's picture
Status: Bronze Member (Offline)
Joined: Jul 17 2014
Posts: 56
Antal Fekete’s predictions and timing

Dear Dave,

Thank you for your detailed answer!

At least one of Antal Fekete’s books was translated into French in October 2011:

“Le Retour au standard Or.   Les raisons pour lesquelles le standard or va remplacer l’argent-papier, et pourquoi l’économie  mondiale est condamnée à exploser”.    Translated by Pierre Jovanovic and Yves Ross

Unfortunately, the original title is not mentioned.

My translation: “The return to the gold standard. The reason why the gold standard will replace paper money…”

The text is followed by an interview Fekete gave to his translators in Paris in September 2011 updating his expectations concerning a  / the coming severe worldwide crisis.

“S‘il écrit  dans ce livre qu’il s’attend à un effondrement économique d’ici dix ans au grand maximum, cette fois il nous l’annonce précisement pour les deux prochaines années, …”“(page 221)

My translation: “When he writes in this book that he expects an economic collapse in maximally ten years, this time he precisely announces the collapse for the next two years, …”

“… Je pense maintenant que effondrement se passera dans les deux prochaines années, sans doute en 2012.” (page 223)

My translation:“… Now I think that the collapse will take place in the next two years, doubtlessly in 2012.”

“Je ne suis pas de ceux qui croient que le dénouement prendra la forme d’une hyperinflation. …, plus comme une deflation ou bien une depression, ce qui sera bien plus douloureux.” (page 226)

My translation: “I am not among those thinking that the unwinding will take the form of a hyperinflation. … rather like a deflation or likely a quite more painful depression.”

At least his timing is falsified.

Best regards

davefairtex's picture
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Joined: Sep 3 2008
Posts: 5072
predictions & timing


At least his timing is falsified.

One thing I have noticed after reading a whole bunch of predictions is, the timing of predictions is falsified quite often.  :-)

The Peak Oil crowd, of which I am one, were all pretty sure oil production would have peaked by now.  But now we talk about Peak Cheap Oil.  Sometimes things don't unfold quite the way we think they will.

For what its worth, I think Mr Fekete has a decent chance of being right about the outcome (in terms of it being a deflation, and/or a "more painful depression").  But I am not so bold as to quote timeframes, since I have seen so many of them not come to pass.

My method: have in mind various scenarios, and then look for confirming/nullifying signposts along the way that narrows down which scenario seems to be in play at the moment.

My current favorite scenario is a deflationary accident caused (most likely) by a banking issue in the Eurozone.

Michael_Rudmin's picture
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Joined: Jun 25 2014
Posts: 772
Falsification and the learning curve

Arguably, peak cheap oil is EXACTLY what peak oil is.  So in that sense, it wasn't falsified.  Peak oil *did* come.  But what was falsified, perhaps, was our understanding of the implications.

One thing that came out of that change is the understanding that if oil goes above, for example, $400 a gallon, we'll be able to get out that oil under the arctic ocean.  Somehow. 

Peak is another thing that came out of that change in understanding. 

Okay... now on to another prediction.  I had predicted that gold would go down, as gold bugs realized, "oh no, they did it AGAIN".  I'm wondering, the FOMC meeting notes, and then the rising dollar, and your analysis of what it all meant, is it starting to look like an "oh no, they did it again" moment?  And big, or little?


 - Michael Rudmin


davefairtex's picture
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5072
predictions & ego

I try not to do predictions.  They smack too much of ego ("Lookie there, I was oh so right, I'm so smart, time for my victory lap", etc) which makes for disagreeable company in the best of cases, and for me they actively get in the way of reading what the market is actually saying.  My ego is enough of a problem without setting myself up in that way.

If the buck continues going up, likely gold will suffer.  How long the dollar will rise is anyone's guess.  The continued strength in the (senior) mining shares is pretty much all that keeps me bullish at the moment - miners led gold downhill for several years, and now (hopefully) miners will lead gold back up too.

Then again, maybe they won't.

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