Gold Backwardation – The Real Story

[Jonflyfish]

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

Civil discourse is different. I welcome that.

Cheers!

[Engineer]

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

Civil discourse is different. I welcome that.

I don't welcome your replies, and have asked you nicely. Please cease and desist.

[Jonflyfish]

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

Civil discourse is different. I welcome that.

I don't welcome your replies, and have asked you nicely. Please cease and desist.

That's your choice. I have moved beyond the past. Water under the bridge.
All civil discourse warmly welcome.
Cheers!

[InfleXion]

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

The spot price is the paper price, not the actual price of physical gold. When assessing backwardation we have to take into account the physical market, not an electronic ticker.

Backwardation occurred because people have been (although premiums are definitely coming back down) willing to pay extra beyond the spot/future price in order to get their hands on it.

As to whether we are in backwardation at this very moment, it depends where you go. Asia for example has had serious premiums with lines going for blocks at the gold dealers, and is probably still in backwardation. In the US where people are more interested in racking up debt, gold is probably not in backwardation. I am not sure how to determine the big picture.

[ZenOps]

If spot is the paper price, then if everyone was required to use no leverage to buy precious metals (margins at 100%)

Then technically, shouldn't spot price be much much lower? Contrary to popular belief most paper metal is bought fractionally with paper (meaning much less paper than commodity)

[Jonflyfish]

If spot is the paper price, then if everyone was required to use no leverage to buy precious metals (margins at 100%)

Then technically, shouldn't spot price be much much lower? Contrary to popular belief most paper metal is bought fractionally with paper (meaning much less paper than commodity)

Correct. The term "spot" is used in industry to represent going out to a location and buying a physical commodity right there, on the spot.

Cheers!

[Engineer]

If spot is the paper price, then if everyone was required to use no leverage to buy precious metals (margins at 100%)

Then technically, shouldn't spot price be much much lower? Contrary to popular belief most paper metal is bought fractionally with paper (meaning much less paper than commodity)

You're correct that an absence of leverage in the exchanges would drive down prices. Even though it would crater the value of those PMs I hope to retrieve from the lake, I'd love nothing more than to see leveraged trading abolished. Doing so would go a long way towards easing inflation and getting rid of the paper trading parasites who have wedged their way between consumers and producers.

[Jonflyfish]

If spot is the paper price, then if everyone was required to use no leverage to buy precious metals (margins at 100%)

Then technically, shouldn't spot price be much much lower? Contrary to popular belief most paper metal is bought fractionally with paper (meaning much less paper than commodity)

Also, for anyone who is long in the futures, forwards, swaps, options markets, someone else is short, either bilaterally or via exchange clearing. One can be fractionally or wholly long or short.

Cheers!

[SoFa]

I don't understand. What type of silver and gold do you use to determine spot in this case?

[Engineer]

I don't understand. What type of silver and gold do you use to determine spot in this case?

Elemental.

The spot price is for "good delivery bars", which really just means they're a standard weight and purity from an approved manufacturer.

[cupronickel]

In retail, you're paying now, and just waiting for delivery. The retailer is offering a discount because they aren't carrying as much inventory (hence the wait time for delivery). This discount would be compensation, for the buyer, for the risk that delivery was never made.

[Thogey]

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

Civil discourse is different. I welcome that.

"I don't welcome your replies, and have asked you nicely. Please cease and desist"
"That's your choice. I have moved beyond the past. Water under the bridge.
All civil discourse warmly welcome.
Cheers!"

I get it now!

You two are married! It all makes sense now

[InfleXion]

If spot is the paper price, then if everyone was required to use no leverage to buy precious metals (margins at 100%)

Then technically, shouldn't spot price be much much lower? Contrary to popular belief most paper metal is bought fractionally with paper (meaning much less paper than commodity)

I don't believe it's so cut and dry. The simple answer is only yes if there are more speculative longs than speculative shorts that would get wiped out by 100% margin.

But that doesn't address that the baseline is already skewed because due to the ability to price control independently from the leverage fair value could be anything.

[InfleXion]

I don't understand. What type of silver and gold do you use to determine spot in this case?

Spot is determined by a combination of paper/electronic exchanges. These exchanges have the metal at that price avilable for delivery. The problem is that they only have a fraction of what should be redeemable. So premiums in the physical market where you actually want to go buy from a gold dealer are normal. Futures contracts make up part of the exchanges, and are essentially a promise to buy or sell something for such and such price at a future time. If nobody agrees to complete your contract it's as though it never happened (so you never had to have it), but it does influence the price while it's out there. Normally, in the real world if you are storing metal there is cost associated with time, therefore the futures contracts should inherently gain in value beyond the spot price, and they typically do. However, when they don't gain enough over spot price to counterbalance the physical market premiums then that is backwardation. It doesn't do any good to compare futures to spot when determining backwardation because spot is influenced by the futures.