Mish says backwardation of gold is irrelevant

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switters's picture
switters
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Mish says backwardation of gold is irrelevant

Mish challenged the notion that the recent backwardation of gold has any real significance in his blog post this morning.  Frankly, I don't know enough about the PM/commodities market to determine who is right or wrong on this subject.

However, I do think that Mish missed an important point.  He goes on in the article to dispute the allegations being made that physical gold and silver are in short supply by suggesting that 400 oz. gold bars and 1000 oz. silver bars are still readily available.

That may be true, but the fact is that the average investor does not have $300,000 to buy precious metals with.  The average investor buys one ounce coins and perhaps 90% junk silver.  These are very difficult to obtain right now without paying a significant premium.

Mish does speculate that the reason government mints aren't producing more small coins for these investors is simply incompetence.  They're overwhelmed by demand and can't keep up.  That may be true, but it doesn't change anything for the small investor who wants to get into gold and silver.

 

 

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Re: Mish says backwardation of gold is irrelevant

Mish makes a habit out of critiqueing those who parent "outrageous claims", by making his own.

Gold backwardation is "irrelevant", just like the explosive rate of socialization of American banking and finance is "irrelevant", or just like the National Debt is "irrelevant", just like the explosion in Fed Reserve activity is "irrelevant", or the YOY loss of 500,000 jobs in November is "irrelevant", or on and on....

In a realm where human activity has repeated circumstances innumerable times over history, new and unprecendented events are of course, absolutely relevant.

What is less clear, is the set of conclusions which can be drawn from the unprecendented event(s).

In the case of the article which Mish refers to, one by Antal Fekete, which can be found here http://financialsense.com/editorials/fekete/2008/1205.html   , Mish dismisses Fekete's hypothesis (that gold backwardation is essentially a signal of fiat-currency demise), by quoting an "anonymous trader friend", so that he can thereby label Fekete's editorial and the event as "irrelevant".

Ok - that's not analysis, Mish.

Fekete cetainly has a refined ability to offer analytical treatise from the oblique, that's for sure.  However, his historical and academic background in the subject is substantial.

IMO, the number of unprecendented events is following the "exponential change" environment which Chris' Crash Course sets as a theme, and gold backwardation is one of them.

What it means, no one can claim certainty on.

However, one thing is known - gold has been the optimum form of money for the extent of recorded human history - portable, scarce, divisble and durable.

To label it a "barbarous relic" was an attempt to discredit it by opinion, and not by fact.   You don't see any of the world's nations and their Central Banks giving the stuff away, despite their addendums to the "barbarous relic" status.

Could we state with confidence that human behavior is absolutely different in the 21st century than the 2nd, perhaps we might be able to ascribe to it's barbarity. 

But human beings continue to behave essentially in the same manner as they did during ancient Rome, albiet with digital calculation speed and more effective weapons.

Until it gets proved otherwise, my bet is that 10,000 years of empirical evidence hasn't disappeared, and that gold remains a symbol of earned wealth, for value-trading (i.e., money), for some time to come, and perhaps even more so in times of distress.

switters's picture
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Re: Mish says backwardation of gold is irrelevant

Thanks for the great post, GDon.  For the record, Mish is long on gold so I don't think he'd disagree with your comments on the historical (and present) value of gold.

I read Feteke's paper and it made a lot of sense to me.  But I don't claim to know enough about the commodities market to have a very informed opinion.

In any event, I agree that nobody - not Mish, Feteke or anyone else - can predict with certainty what will unfold.  

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Re: Mish says backwardation of gold is irrelevant

GDon: I'm with you on this.

 I think you touch on one very key point: human nature is pretty much static over the milleniums. Oil, airplanes, and computers seem to be completely irrelevant when considering human nature.

It is NOT different this time. Eventually, gold will win out. The real question in my mind is whether we will directly transition to gold or whether we will have some newer, uglier form of faith-based fiat in a lame attempt by the Central Bankers to maintain power and control.

I don't know if I'd confidently say that gold backwardation certainly heralds a new regime, but at the same time, I don't think Mish is very balanced as he says that it is all a bunch of nonsense. There is clearly a lot of attention being paid to gold, by the investment community and the Banksters. I feel the atmosphere is ripe for a spark, but it is hard to predict what the spark will be.

Mike

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Re: Mish says backwardation of gold is irrelevant

GDon makes several good points.   Just add volatility in numerous areas will continue if not increase as accepted assumptions, valuations and beliefs are tested by the 3 E's in CC. 

 

Put metaphorically...the aircraft engines are sputtering and convulsing because its running out of fuel.   We the passengers are all debating why the aircraft is shuttering and lurching basd on how much we know about what could be causing the problem.

 

Nichoman

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Re: Mish says backwardation of gold is irrelevant

"but the fact is that the average investor does not have $300,000 to buy
precious metals with.  The average investor buys one ounce coins and
perhaps 90% junk silver.  These are very difficult to obtain right now
without paying a significant premium."

 Switters, it's true that bullion ounce coins are high in demand and difficult to get. But they also make gold one ounce bars and gram bars which are not so hard to get. You don't need to be a millionare to buy gold or silver bars at this time

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Re: Mish says backwardation of gold is irrelevant

I would actually agree with the assumption that China will begin to look to it's domestic markets and those of it's trading partners in the same hemispere.  Being a pupil of the Schiff, Faber, Rogers school of thought, I would have to say that as the dollar tips over, off of this deleveraging orgy, the American market will become less and less appealling.  When will this happen?  I don't know, and if I did I wouldn't be scrounging around up here in chilly western New York looking for gold and silver.

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Re: Mish says backwardation of gold is irrelevant

G Don,

I couldn't agree with you more!  Further to that, what about the premiums?  The premiums being charged on gold/silver coinage right now are outrageously high.  In Japan, for example you can’t get silver coins for under $20.00 USD per oz, even though the spot price hasn’t been above $10.00 USD for weeks now.  With the demand and the premiums going up and the supply going down, coupled with the knowledge of the Crash Course (fiat currency to collapse), it doesn’t take an economist to speculate what is going to happen with gold.  It’s just a matter of when.   SHAMELESS PLUG:  Go to   http://www.savingsingold.sponsordaddy.com/myopportunity.html     to find out how to easily buy gold coinage or learn how to get involved in running your own gold store.

 

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Re: Mish says backwardation of gold is irrelevant

Mish is an idiot.

Gold and silver are not just commodities, they are money. 

The point has been reached where owners of money are no longer willing to exchange it for promises to pay money (futures), even at a discount i.e. backwardation. This will soon enough move to owners of money no longer being willing to exchange it for promises to pay nothing i.e. dollars.

THE DOLLAR IS NOT MONEY PEOPLE, it is a bastardised promissory note of the government. 

switters's picture
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Re: Mish says backwardation of gold is irrelevant

Easy there jdownie.

You might not agree with Mish's analysis, but he's hardly an idiot.  He actually writes some of the most clear-headed analysis of the economic situation I've seen.

Maybe you should read his posts a bit more carefully before you go calling him names on a public forum.  Mish would probably agree with your statement about the dollar, and here's what he recently had to say about gold in another article:

Quote:

"Finally, gold itself is now free to rise in deflation given its true
role as money, even as those in gold for the wrong reason (as an
inflation hedge), bail."

 

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Re: Mish says backwardation of gold is irrelevant

What many "gurus" are saying and "implying" about he extremely small fabricated coin and small oz

market is disinformation at its best, lies, self-interest and  fraud at its worst.

There really is not a "business model" that would allow the few mints to hire the people, buy the added

equipment, add the space to supply the current ramp-up in demand. The demand can change in a heartbeat

and all that ramp-up could look silly.

 

If any one is interested in taking that bet, buy yourself  1000 OZ to 50,000,000 oz and have fun (some are)

The investment retail fabricated market is about 8% of the TOTAL market. I have not heard any JEWERY fabricaters

complaining about lack of TONNAGE for their needs!

Gold could rise but to base an investment decision on the small "retail market" supply could be a major mistake! 

 

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Re: Mish says backwardation of gold is irrelevant

No switters, I'll stick by my assertion that Mish is in fact, an idiot.

In one article he claims that gold in backwardation is no big deal because many commodities can be in backwardation i.e.gold is just a commodity like any other.

But then in another he claims that gold will rise in deflation because it is money i.e. gold is different to any other commodity.

He clearly does not know what he is talking about.

And ras777, while it is true that the mints are working at full capacity and literally cannot produce any more than they are currently, I have heard it straight from the horses mouth so to speak, from someone at the Perth Mint, that supply of gold into the mint is lower than it has ever been, from retail investors at least.

Maybe Central Banks are making up the difference? the same Central Banks who hold gold to back back their currency liabilities?

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Today's update on Backwardation

There's no fever like Gold Fever .. Antal E. Fekete

EXCERPT:

Mish Shedlock published a disdainful criticism of my theory on
the worsening backwardation in gold, calling it “nonsense” (see
References below). A friend of his owns a seat on Nymex
(a branch of Comex) who had this to say:

 I
have seen countless commodities go into backwardation for numerous reasons,
the most frequent being a radical temporary divergence between immediate and
overall demand. I have seen backwardations that have lasted years. The
article is based on the assumption that a backwardation will necessarily lead
to a breakdown of the delivery mechanism. But for every breakdown of the
delivery

mechanism there have been thousands of
backwardations without a breakdown. Only if and when an actual breakdown
occurred would the conclusions that the author drew make sense.

 

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Re: Mish says backwardation of gold is irrelevant

Antal E. Fekete, a professor at Intermountain Institute of Science and Applied Mathematics, and frequent writer on precious metals, answers a timely question:

Q: People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for.

A: My answer invariably is: ‘watch for the last contango in silver’.

It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount.

When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists.

Silver price hike

Thank you professor! This is really an extension of the argument on this website dating back to before the summer rout of precious metal prices.

Physical stocks are low and the futures price has been distorted by big hedge fund forced-sales - now we are coming to the day of reckoning when the physical shortage starts to determine the spot price, and not the futures market.

The upside - which should have been there all along - will now come back with a vengeance and smash the few remaining shorts. This is likely to be spectacular - but after the culling of bulls recently not all precious metal fans will be there to benefit.

http://seekingalpha.com/article/110294-what-does-backwardisation-mean-for-silver-prices

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Re: Mish says backwardation of gold is irrelevant

Backwardation That Shook The World

Antal Fekete - Today

EXCERPT :

I warn the world
again that the futures market would not go to backwardation in gold if the
house of paper money were not on fire. There is just no prima facie
reason for a shortage in physical gold. A very large part of all the gold
produced throughout history still exists in monetary form, sitting in vaults
doing nothing. (Under the gold standard it used to be doing heavy-duty work
in financing production and world trade.) Unlike all other commodities with
the exception of silver, for gold the stocks-to-flows ratio is a high
multiple (by contrast, the stocks-to-flows ratio of copper is a small
fraction). And, on the top of privately held gold, there is central bank gold
amounting to one quarter of all the gold ever produced since the dawn of
history. Why are central banks unwilling to take advantage of risk-free
profits by releasing gold? Could it be that, in possession of inside
information, they have reason to be afraid that the regime of irredeemable
currency may soon collapse and, with their gold gone, they don't want to be
left holding the bag? Could it be that the Babeldom
of the debt tower is already crumbling, but the fact is being covered up?

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