Gold Backwardation – The Real Story

[rexmerdinus]

"Backwardation in this case is not indicative of any shortage whatsoever or a collapse in “trust” of the dollar. The dollar has been rising! Just look at German interest rates on short-term paper went negative by 0.6%. This has NOTHING to do with fiat and people losing faith in paper money –yada, yada, yada. If that were true, interest rates would not COLLAPSE, they would SOAR because people would not trust government bonds and they would have to pay up. The flight to quality would reverse into PRIVATE assets as it did even during the German Hyperinflation."

http://armstrongeconomics.com/2013/03/0 ... eal-story/

I stumbled across this article as I was trying to get a grasp on the concept of backwardation. Just interested in hearing y'all's thoughts on it (the article, not necessarily just the backwardation concept).

[InfleXion]

Thanks for sharing the link, good read.

This is a hot topic among Fekete Research who specialize in the modern day school of Austrian economics. Both Professor Antal E. Fekete and his understudy Sandeep Jaitly have discussed this on multiple Keiser Report episodes (all well worth the watch). Fekete has recently said that the price of gold is on its way to extinction, essentially that the time is approaching when gold will be the valuation method, and the price of an oz of gold will simply be an oz of gold.

Here is a link to a short write-up from Fekete that goes into some detail on gold backwardation.
http://www.feketeresearch.com/upload/Wh ... Fekete.pdf

Gold backwardation has been the case for a while now, and as long as people are willing to pay more for gold in hand than for a future promise of gold it showcases the market's inability to reflect fair value.

[cupronickel]

It is not about losing faith in the fiat dollar, it is about losing faith in the paper gold futures market. If I sell my physical gold for $1400 right now, and at the same time buy a Novenber futures contract for $1300, then when I take delivery of the gold in the future, I'm $100 dollars better off. But who would sell his gold in six months for $1300, when he could sell it now for $1400 ? The backwardation implies a physical shortage in the product right now (hence the higher spot price). It may be normal for wheat to be in short supply before the harvest, but gold should never be in short supply. People just don't trust that the futures market will be able to deliver on its promises. To the extent that these are too big to fail institutions, I guess it says something about a lack of faith in the whole system.

[cupronickel]

The armstrong link is quite bad. I'm not even sure it makes sense or that its author understands what backwardation is. The Fekete article is much better. Remeber the story about the grain elevator operator. He buys grain at a low price ($10), stores it, then sell it on the futures market ($12). As long as his storage cost are less than the (futures price - current price, or $2) he makes a profit. This is called contango. If the wheat was in backwardation, he would sell whatever wheat he had in storage right away.

[ZenOps]

It's pretty simple to me.

If they can confiscate Billionaires deposits from the bank of Cyprus, then they can easily, easily confiscate any paper silver or gold holdings (including simply not paying back any principle amounts on contracts with MF Global) Meaning that paper gold is worth less than nothing.

And since many have stated that the paper gold market (which drives spot) is anywhere between 10:1 and 100:1, the spot price is naturally falling as paper gold is sold.

Has nothing to do with backwardation this time.

[InfleXion]

Here is a lengthy interview with Professor Fekete by The Daily Bell that goes into more detail than you may ever want to know about gold backwardation.

http://www.thedailybell.com/29047/Antho ... oma-Bridge

[SoFa]

A couple years ago when silver was shooting up and got into backwardation, there were two schools of thought. One school (the bullion bloggers) asserted that it was a result of shortage. The other side suggested that it represented an expectation that the price would decline in the future (thus there was an unwillingness to pay more for it now).

Looking back, we know there was no shortage and the prices did decline.

[theo]

I've often thought that at least part of the 2011 run-up (perhaps from $40 - $49) was allowed to happen, enticing the speculative longs to over-extend. This made it that much easier to crash the the spot price while stripping the paper silver investors of much of their capital. Remember how they piled on with those margin increases? The next time silver (and perhaps gold) appears poised for a break out, paper investors will be a lot more cautious about jumping on the bandwagon.

I also think that now investors are showing more of a preference for physical PMs rather than a futures contract that is subject to manipulation. From what I understand, backwardation appears to be a manifestation of that distrust.

[TwoPenniesEarned]

I've been "dollar cost averaging" all the way down from $49, at which point I remember looking at an Eagle and thinking "Man I can't believe this is worth almost fifty bucks". I should have sold it all right then

Oh well, why stop dollar cost averaging now? I can buy more than twice what I could at $49

[Jonflyfish]

Gold futures are NOT in backwardation. Forward curve strips are ALL in contango from June 2013 to Dec 2018.
I know that isn't what some want to read but it is the truth.
Will be interesting to see if this post gets deleted under the guise of "being inflamatory" with fact based information, not unlike the committments of traders (COT) related post that was deleted.

Cheers!

[Engineer]

[Jonflyfish]

A lot of wild guesses and incorrect assumptions on this thread. IMVHO very worthwhile market basics to get a proper understanding of before misinforming others or making bad investing decisions.
GLGT And always DYOD.

Cheers!

[Thogey]

Gold futures are NOT in backwardation. Forward curve strips are ALL in contango from June 2013 to Dec 2018.
I know that isn't what some want to read but it is the truth.
Will be interesting to see if this post gets deleted under the guise of "being inflamatory" with fact based information, not unlike the committments of traders (COT) related post that was deleted.

Cheers!

You're a high speed trader.

I write this with all sincerity:

Your experience and knowledge dwarfs the collective experience here, and you are not going to change anyone's minds.

You make tons of money in the market.

We sell/ stack and trade physical metal, that's why this forum exists.

You don't like Realcent.

Why do you continue to post here?

[Jonflyfish]

Gold futures are NOT in backwardation. Forward curve strips are ALL in contango from June 2013 to Dec 2018.
I know that isn't what some want to read but it is the truth.
Will be interesting to see if this post gets deleted under the guise of "being inflamatory" with fact based information, not unlike the committments of traders (COT) related post that was deleted.

Cheers!

You're a high speed trader.

I write this with all sincerity:

Your experience and knowledge dwarfs the collective experience here, and you are not going to change anyone's minds.

You make tons of money in the market.

We sell/ stack and trade physical metal, that's why this forum exists.

You don't like Realcent.

Why do you continue to post here?

My goal isn't to change anyone's mind.
Sharing knowledge, like anyone else, might be of value to someone.
Stack and trade physical is how I found this forum.
I DO and always have liked Realcent.
However, many seem to engineer and enjoy ways of taunting and antagonizing me because of the different perspective that I can bring to the table.
Why does anyone continue to post here?
I continue to post because several folks here have sent PM's asking that I do so.

Cheers!

[bgretz1989]

Good for you then PM them and stop being a troll

[InfleXion]

A couple years ago when silver was shooting up and got into backwardation, there were two schools of thought. One school (the bullion bloggers) asserted that it was a result of shortage. The other side suggested that it represented an expectation that the price would decline in the future (thus there was an unwillingness to pay more for it now).

Looking back, we know there was no shortage and the prices did decline.

Time is money, so futures should be more expensive, not cheaper as is the case with backwardation. If there was an expectation the price would decline it doesn't make any sense why people would pay more in the present if they could wait and get it cheaper when their expectation of lower prices was validated. An unwillingness to pay more now is the opposite of backwardation (forwardation?).

Gold futures are NOT in backwardation. Forward curve strips are ALL in contango from June 2013 to Dec 2018.
I know that isn't what some want to read but it is the truth.
Will be interesting to see if this post gets deleted under the guise of "being inflamatory" with fact based information, not unlike the committments of traders (COT) related post that was deleted.

Cheers!

Backwardation is when "right now" costs more than any future price. Comparing two future dates that have yet to pass doesn't involve the present, and by definition backwardation is when a future price is cheaper than the current price. Comparing two future dates is not pertinent to backwardation. Aside from that, any futures contract that doesn't reach fruition in the upcoming month is even less pertinent because it can be rolled out further into the future indefinitely.

[Engineer]

Thanks InfleXion. That was a very concise and well thought out post.

[Jonflyfish]

Gold futures are NOT in backwardation. Forward curve strips are ALL in contango from June 2013 to Dec 2018.
I know that isn't what some want to read but it is the truth.
Will be interesting to see if this post gets deleted under the guise of "being inflamatory" with fact based information, not unlike the committments of traders (COT) related post that was deleted.

Cheers!

Backwardation is when "right now" costs more than any future price. Comparing two future dates that have yet to pass doesn't involve the present, and by definition backwardation is when a future price is cheaper than the current price. Comparing two future dates is not pertinent to backwardation. Aside from that, any futures contract that doesn't reach fruition in the upcoming month is even less pertinent because it can be rolled out further into the future indefinitely.

Understood. The "right now" price for any future delivery date is in contango in the futures market- i.e. the current price for every delivery date between June 2013 (prompt) and Dec 2018 is higher than any preceeding delivery date, including the prompt contract. This is contango, representing a normal forward curve for gold. If futures were in backwardation, the current price of near-term delivery dates would be higher than longer-term dates.
Again, all delivery dates along the forward curve are consecutively higher. That's contango, not backwardation.

Cheers!

[SoFa]

A couple years ago when silver was shooting up and got into backwardation, there were two schools of thought. One school (the bullion bloggers) asserted that it was a result of shortage. The other side suggested that it represented an expectation that the price would decline in the future (thus there was an unwillingness to pay more for it now).

Looking back, we know there was no shortage and the prices did decline.

Time is money, so futures should be more expensive, not cheaper as is the case with backwardation. If there was an expectation the price would decline it doesn't make any sense why people would pay more in the present if they could wait and get it cheaper when their expectation of lower prices was validated. An unwillingness to pay more now is the opposite of backwardation (forwardation?).

OK, what about the sellers?

[InfleXion]

Understood. The "right now" price for any future delivery date is in contango in the futures market- i.e. the current price for every delivery date between June 2013 (prompt) and Dec 2018 is higher than any preceeding delivery date, including the prompt contract. This is contango, representing a normal forward curve for gold. If futures were in backwardation, the current price of near-term delivery dates would be higher than longer-term dates.
Again, all delivery dates along the forward curve are consecutively higher. That's contango, not backwardation.

Cheers!

You are still comparing futures to futures. Backwardation is when people are paying more for metal in hand than for the futures price.

[Jonflyfish]

Understood. The "right now" price for any future delivery date is in contango in the futures market- i.e. the current price for every delivery date between June 2013 (prompt) and Dec 2018 is higher than any preceeding delivery date, including the prompt contract. This is contango, representing a normal forward curve for gold. If futures were in backwardation, the current price of near-term delivery dates would be higher than longer-term dates.
Again, all delivery dates along the forward curve are consecutively higher. That's contango, not backwardation.

Cheers!

You are still comparing futures to futures. Backwardation is when people are paying more for metal in hand than for the futures price.

Agree. I was always talking about futures (prompt) and the forward curves, as stated. Contango and backwardation refers to the forward curves, either sloping higher (contango) or inverted (backwardation) beginning with the prompt month on out. Institutional purchases are made on delivery from the prompt contract. There is presently no backwardation there.

Additionally, the price curves aren't interchangelable. In decision metrics, you can't fairly compare retail spot prices to institutional forward curves without a basis differential tacked on. It's apples to oranges. Otherwise, to say retail is more expensive than wholesale is simply logical.

I guess what you are saying is that for the same grade, retail always trades at a premium to institutional (wholesale).


Cheers!

Edited to correct typos

[cupronickel]

gold and silver are both in contango now. The future price is higher than the spot price.

[Engineer]

gold and silver are both in contango now. The future price is higher than the spot price.

In the paper markets, yes.
The retail markets are showing some backwardation, and you can still get a better price if you're willing to wait a few weeks for delivery.

[Jonflyfish]

gold and silver are both in contango now. The future price is higher than the spot price.

In the paper markets, yes.
The retail markets are showing some backwardation, and you can still get a better price if you're willing to wait a few weeks for delivery.

There is only a financial market when analyzing strips of forwards or futures.
What price curves are you looking at for "some" retail backwardation? Never heard of such a thing.
Also would be interested in knowing the data provider if you don't mind.

Cheers!

[Engineer]

gold and silver are both in contango now. The future price is higher than the spot price.

In the paper markets, yes.
The retail markets are showing some backwardation, and you can still get a better price if you're willing to wait a few weeks for delivery.

There is only a financial market when analyzing strips of forwards or futures.
What price curves are you looking at for "some" retail backwardation? Never heard of such a thing.
Also would be interested in knowing the data provider if you don't mind.

You've asked me not to reply to your posts. Please grant me the same courtesy.