Gold Futures Contracts — Backwardation

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  • Mon, Dec 08, 2008 - 03:31am

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    Caasi

    Caasi

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    Re: Gold Futures Contracts — Backwardation

jdownie,

You’d only use the settlement prices, ie the numbers under "Last". The OHL are not proper. I don’t know why the actual values for the day are not there. If I could have easily deleted the OHL columns without destroying the formatting, I’d have done so. The "last" is in agreement with Kitco however.

To show what I meant, consider Feb 2010. Dec 09 Settlement 760.8 April 2010 Settlement 764.8 so the value for Feb 2010 is set at 762.8.

All of this, of course, misses the point, that each succeeding month is higher in value than the preceding, hence no backwardation in the contracts. Any backwardation was between the spot and the front month. The idea that this was due to manipulation, conspiracy or inability to deliver seemed unlikely.

To be correct about the end result, say the ultimate destruction of fiat currencies, sometimes makes us succeptible to a suggested path that will be taken to get there. That’s why it was probably wise to leave Chapter 20 off the DVD, the path may meander, and what we need to do day-to-day and month-to-month may be variable.

In that light I thought it good to think about other simpler explanations for the situation with the spot price. That is, we are nearing the end of the contract, when spot and futures converge. Interest rates are low and dropping, so the spread is narrower than normal. It takes much less in fluctuation to temporarily push the spot and front into backwardation.

In fact for a time CPI inflation adjusted interest rates were negative in November. One way to look at that is that in a time of turmoil, people were willing to pay to be sure they could get back at least most of their principal ("safe from default" treasures as a store of value) rather than demanding that they be paid for the use of their money. If you look at gold as a store of value, would you be willing to pay more for it today than you could get next week with a Futures contract delivery? An odd situation for sure, but there might be many explanations for what happened re backwardation which don’t involve manipulation and conspiracy. We haven’t experienced deflation for a long time, nor any of the extraordinary actions of the treasury and Fed. I thought interest rates were a key to this, that’s why I said (treasury rates are "down") using the quotes for empasis.

-Caasi

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