Gold Futures Contracts -- Backwardation

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Lemonyellowschwin's picture
Lemonyellowschwin
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Posts: 561
Gold Futures Contracts -- Backwardation

I need a second opinion about whether there is anything to this article by Antal Fekete.  I can't decide whether this is something to get worked up about.

http://www.safehaven.com/article-12012.htm

Thanks.

mred's picture
mred
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Re: Gold Futures Contracts -- Backwardation

Cheers Lemonyellowschwin,

It is a serious thing. But then again, I have stated that I find Fekete's views trustworthy. A lot is hanging on the December deliveries for gold at the COMEX. The longs want to call the bluff of the shorts by taking delivery and uncovering the problems with the paper gold price. Backwardation indeed means that, in principle, risk-free profits could be pocketed instantly by selling the spot and buying the futures contract, and repeating this process upon delivery. Markets don't allow these conditions for long. Thus the risk is a futures contract default.  The basis is a measure of this risk. If this condition persists and the basis goes more negative, it is an indication, as Fekete says, that sellers of gold are withdrawing and that gold may not be for sale at any price. This would be a clear vote of no confidence for the debt-based fiat currency system, and such a vote doesn't come up for no reason. Backwardation in gold and silver is considered an early-warning sign of monetary disaster. Anyone that presently holds monetary precious metals has already showed lack of confidence in paper; backwardation means that this attitude is in the process of "becoming official". We need to see how many longs actually take delivery later this month and see if the negative basis condition continues.

jdownie's picture
jdownie
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Re: Gold Futures Contracts -- Backwardation

RED ALERT!

Gold and silver backwardation means the bank vaults are empty, promises to pay gold and silver (futures), are no longer accepted as equivalent of gold and silver, as there is no guarantee that promises will be fulfilled. If promises to pay gold and silver on a government run exchange are worthless, what value has a promise to pay nothing i.e. dollar, issued by the government? Supply of gold and silver to the banks and other warehouses in exchange for promises to pay gold (futures) or dollars, is drying up.

Supply to the mints is also drying up, they can no longer take orders as supply is not guaranteed. They (at least try to) swap dollars for gold with their suppliers. The gold market (on a dollar basis) is becoming illiquid.

If there is no liquidity in the gold market, the most liquid market of all (there is always a buyer for gold), then there is no liquidity in any market. Seizure! see also www.globalresearch.ca/index.php?context=va&aid=11206

That's my reading of it anyway. I've been following Antal Fekete for some time now and believe he has, at the very least, a very strong case. For more see www.professorfekete.com, before it's too late.

And for a slightly different perspective go to www.jsmineset.com, scroll down to Trader Dan Comments On Antal Fekete's Recent Article.

Caasi's picture
Caasi
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Re: Gold Futures Contracts -- Backwardation

LYS,

It has been a long time since I traded commodities, and I never traded gold. With that disclaimer, here are the prices I copied from a site I like. They have lots of commodity data on the site. What backwardation? If the spread between the current contract and the forward has narrowed, well, treasury rates are "down"

http://quotes.ino.com/exchanges/?r=NYMEX_GC

From INO.COM

New York Mercantile Exchange (NYMEX)
Metals
GOLD (GC)

Download data | Analyze Chart

Market

 

Open

High

Low

Last

Change

Pct

Time

GC.Z08

Dec 2008

782.0

782.0

782.0

750.5

-13.3

-1.74%

set 13:48

GC.F09

Jan 2009

750.9

750.9

750.9

750.9

-13.3

-1.74%

set 13:48

GC.G09

Feb 2009

763.0

765.0

742.0

752.2

-13.3

-1.74%

set 13:29

GC.J09

Apr 2009

749.0

749.0

749.0

753.7

-13.2

-1.72%

set 10:41

GC.M09

Jun 2009

813.5

813.5

813.5

755.2

-13.2

-1.72%

set 13:48

GC.Q09

Aug 2009

790.5

790.5

790.5

756.8

-13.2

-1.71%

set 13:48

GC.V09

Oct 2009

783.5

783.5

783.5

758.7

-13.1

-1.70%

set 13:48

GC.Z09

Dec 2009

753.0

753.0

753.0

760.8

-13.0

-1.68%

set 10:49

GC.G10

Feb 2010

932.0

932.0

932.0

762.8

-13.0

-1.68%

set 13:48

GC.J10

Apr 2010

764.8

764.8

764.8

764.8

-13.0

-1.67%

set 13:48

GC.M10

Jun 2010

937.0

937.0

937.0

766.9

-13.0

-1.67%

set 13:48

GC.Q10

Aug 2010

769.2

769.2

769.2

769.2

-13.0

-1.66%

set 13:48

GC.V10

Oct 2010

771.6

771.6

771.6

771.6

-13.0

-1.66%

set 13:48

GC.Z10

Dec 2010

840

856

840

774

-13

-1.65%

set 13:48

GC.M11

Jun 2011

1055.0

1055.0

1055.0

782.2

-13.0

-1.63%

set 13:48

GC.Z11

Dec 2011

759.0

759.0

759.0

791.8

-13.0

-1.62%

set 13:48

GC.M12

Jun 2012

801.8

801.8

801.8

801.8

-13.8

-1.69%

set 13:48

GC.Z12

Dec 2012

952.0

961.0

952.0

813.3

-14.7

-1.78%

set 13:48

GC.M13

Jun 2013

827.4

827.4

827.4

827.4

-15.2

-1.80%

set 13:48

Oh, if some contracts have a high Open High Low they didn't trade, but the last fix should be OK.

-Caasi

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Re: Gold Futures Contracts -- Backwardation

mred,

Thank you for this excellent response.  For a moment, while reading your post and re-reading Fekete's, I had a moment of clarity and understood. . . . wait, it's gone now. . . . back to the drawing board.  More study needed.

Seriously, I've been reserving judgment about how much credence to give to Fekete's views.  I find each sentence of his to be a stuggle . . . .but I sense that he may have some valuable opinions.

Later, LYS

jdownie's picture
jdownie
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Posts: 58
Re: Gold Futures Contracts -- Backwardation

A question for you Caasi.

If contracts do not trade, so the price doesn't change, then how can they have a last fix for the day that is different to the open, high and low values? that does not seem logical to me, unless someone just writes in a value at the end of the day that 'fits in' between the last fixes of the shorter and longer contracts.

 

mred's picture
mred
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Posts: 96
Re: Gold Futures Contracts -- Backwardation

I think that the claim was not for "full backwardation" (i.e. sustained and for all futures contract periods), but as Norcini says, for a particular 2-day period at the beginning of this month. Full backwardation, when/if it comes should be preceded by events such as this. Think of a monitor of a particular disease on a seriously ill patient. The machine, after being quiet since it was connected, all of a sudden goes "bleep!", then nothing... some time later: "bleep!-bleep!", and then nothing again. But the bleeps become more frequent and may last longer: "bleeeeep!" By the time that the thing goes "bleeeeeeeeeeeeeeeeeeeeeeeeeeeee........!" we are in full backwardation and it is up to anyone's imagination what happens to a monetary system that has lost all credibility. The basis (nearest futures contract price minus spot) of gold and silver has been getting smaller over the years. A continuation of the trend ought to make it a matter of time for the basis to turn negative permanently. But the trend is not a straight line, so...(and as Norcini says, tracking down that parameter is difficult.)

Indeed Fekete's style is a little awkward sometimes. He has that Hungarian flare... The credibility you assign to him ought to be highly and positively correlated with your judgement on other theorists of classical economics, from Adam Smith to the Austrians: von Mises et al. Their views are totally consistent even though Fekete puts many of those ideas in a more relevant "present" context, and has different interpretations on a couple of things, for instance the time-preference hypothesis of interest. But all of those guys come from the same tradition. It is after all, difficult to find theorists (or any two people for that matter) who would agree on everything.

mred's picture
mred
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Posts: 96
Re: Gold Futures Contracts -- Backwardation

And while we are at it, here is a friendly criticism of the backwardation call. It includes commentary on the influence of interest rates, as mentioned in passing by Caasi:

http://silveraxis.com/todayinsilver/

(look for the post dated December 6, 08)

Caasi's picture
Caasi
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Posts: 23
Re: Gold Futures Contracts -- Backwardation

jdownie,

I always thought it was just an interpolation between traded prices, but I'm not certain. They might add in interest rates, which could have an effect, since that must play a notable role in the contract spreads. Inflation hedge etc now in a deflationary situation. Maybe someone who actively trades this would know definitively.

-Caasi

jdownie's picture
jdownie
Status: Bronze Member (Offline)
Joined: Apr 7 2008
Posts: 58
Re: Gold Futures Contracts -- Backwardation

Caasi

I'm thinking that if that last fix for the Dec 08 contract was just an interpolation (an estimate of the value of a function between values already known; according to Collins English Dictionary) in actual reality the price should be the same as the open, high and low prices which would make it 782. This would put the Dec 08 contract at a premium out until April 09.

There is your backwardation.

In fact, if the last fixes are interpolations then they don't bear much resemblance to reality at all; see the Feb 2010 contract.

Caasi's picture
Caasi
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Joined: Aug 17 2008
Posts: 23
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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