Gold "backwardation"

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Veritas's picture
Veritas
Status: Martenson Brigade Member (Offline)
Joined: Dec 7 2008
Posts: 1
Gold "backwardation"

Hello,

I am no expert on the subject, but this development sounds possibly very significant.  It could be that the gold market is reaching a critical point.  I do know that James Turk is known as an international expert on the gold market:

 http://www.kitco.com/ind/Turk/turk_dec122008.html

Have a nice weekend,

Veritas

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Gold "backwardation"

Hello Veritas,

Like you, this matter concerns me. My concerns are slightly tempered by a few factors.

1. The amount of hype generated over the backwardation makes it appear to be a bubble in its own right. Then again, this is the first time ever that backwardation has lasted more than a few hours, I believe.

2. I've been told that a large part of the explanation for the backwardation is that short term T Bills have been pushed to 0% yield and so many of the big banks have simply flocked to gold in that environmnet. Of course have 0% or even negative yields on bonds is a big problem, so while this might explain why banks invested in gold, it doesn't make the situation appear any less extreme.

I've been hearing more and more demands for physical delivery of the gold, by both smaller investors and by big banks. I don't know if COMEX will break or not, but clearly this is putting immense pressure on the spot price, even as some institutions liquidate gold just raise survival cash.

I'd like to hear some other comments in this area if anyone else has some insights.

 Thanks,

Mike

 

dbrenaissance's picture
dbrenaissance
Status: Member (Offline)
Joined: Dec 20 2008
Posts: 2
Re: Gold "backwardation"

Have you read Professor Antal Fekete's articles on backwardation?  He has two or three recent articles which discuss this in some depth.  A word of warning, professor Fekete is a bit of a gold bug, but very interesting. This is the first article in the recent series: http://www.professorfekete.com/articles%5CAEFRedAlert.pdf

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Gold "backwardation"

First, as a disclaimer, I should say that of all the facets of investing, futures trading is an area where my knowledge is least complete. That said, I read Prof. Fekete's article (link above - thanks, dbrenaissance), and I don't buy it.

Fekete repeatedly makes the assertion that gold backwardation "means" that investors have lost faith in the paper money system, yet he never supports this assertion with a rational explanation for why that is or should be true. I find it to be a specious argument, and in the absence of further elaboration or justification, I am inclined to reject it.

The futures market is full of speculators. They choose futures primarily for the leverage afforded by low margin requirements when compared with equity markets. Contango occurs when the consensus view is that the price of something is likely to go up between now and contract expiration. Backwardation occurs when the consensus view of speculators is that the price of something is likely to go down between now and contract expiration. It's that simple.

Fekete seems to be implying that backwardation is occuring because investors have lost faith in the ability of sellers to deliver the physical gold. While that's a plausible scenario, I think a more likely scenario is that speculators are aware of the strong deflationary pressure in the market, and believe (as I do) that while gold may be due for a very large upward price movement in the long run, it's probably going to see some downward movement first.

Perhaps I'm missing something, but it sounds to me like Fekete is reading a whole lot of complexity and "default theory" into a situation that is more likely just a case of speculators being weary of further deflationary pressure on the price of this commodity.

Erik

 

Brainless's picture
Brainless
Status: Silver Member (Offline)
Joined: Dec 9 2008
Posts: 150
Re: Gold "backwardation"

Edit: 

Oops that was in the wrong topic.

RSLCOUNSEL's picture
RSLCOUNSEL
Status: Bronze Member (Offline)
Joined: Sep 26 2008
Posts: 41
Re: Gold "backwardation"

If you enjoyed the US Situation Comedy "Barney Miller" in the 1970's, you may enjoy this brief 6 minute clip from 1978....

http://tedbits.blogspot.com/2009/01/it-didnt-happen-30-years-ago-so-why-now.html

 

All things come to those who wait....

 

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