"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, July 25, 2013

Gold Backwardation Misinformation

Let me preface this short missive by stating that this is pretty much a rehash of a comment I posted in the comments section below one of my recent articles in response to some erroneous information being supplied by a particular reader.

I also wish to state that this is in no ways meant to be singling him out for any sort of ridicule or mockery in any fashion. We have enough of that stuff that goes around these days. He is however, symptomatic of those who continue to greatly err on the subject of backwardation and thus I thought it best to put these comments up as a general post in the hopes of a more widespread dissemination.

I am also glad to see that my pal Jesse over at his website, (which is listed here as one of my favorites ) has also done the gold community a great service by attempting to also define this term and dispel some myths surrounding it. I would urge my readers to check that out when you can.


Here are the comments I posted earlier today repeated in their entirety with some fresh additions.

Thanks as always for your comments. What I am actually saying however is that backwardation is not happening at all on the Comex, not even for a few minutes. I was using absurdity to illustrate the absurd.

For example - here is the latest series of bids for the August, December, February and June gold comex contracts in order as of this snapshot.

August  2013           $1324.2
December 2013       $1325.1
February 2014         $1326.1
June 2014               $1328.4

As usual I am sitting here and have been watching this all morning as well as a goodly portion of last evening's trade and not once has any nearby contract had a bid higher than a back month.

There is no backwardation occurring on the Comex at this present time for any time interval whatsoever.

I am attempting to teach folks about this so as to prevent the spreading of more disinformation that so frequently afflicts the gold bug community. This is the reason why more often than not, many of them get discredited and end up doing disservice to their cause.

The reason why some contracts occasionally have a last trade price higher than a more distant month is because the more distant months are not trading as frequently because there is no liquidity in those months.

when you have a volume of trade of 182,000 in a nearby versus 2,085 in a more distant February for example - there are going to be times when the last trade price of a more distant month might be at a discount to a nearby. That is merely a function of low liquidity. If you want to see where the contract might trade IF AN ACTUAL TRADE OCCURRED, you have to look at the Bids and Offers and see where those are currently sitting.

In the time it took me to type the above comments, here is now the latest series of bids...

August 2013            $1325.3
December 2013       $1326.3
February 2014         $1327.4
June   2014              $1329.7

Again, notice the market is in contango at all times. There is not a single instance of backwardation.

This might help dispel any confusion about this current misinformation going around but in all honesty, I doubt it. Most gold buys are pretty closed mind about this stuff having made up their minds beforehand, truth be damned.

Here we are now in the Asian session this evening as I post these new set of comments and here is a new set of bids for those same contract months at this moment:

August 2013          $1334.70
December 2013    $1335.30
February 2014       $1336.20
June 2014             $1338.20

Once again, NO BACKWARDATION....

Why am I making a big thing out of this? Perhaps because I try to be a stickler for truth. I have been in this industry now as a private trader for more than 2 decades. In that span, I have seen enough charlatans, quacks, con artists, flim flam mans, and what have you. I have also seen a proliferation of misinformation abounding now that anyone with a keyboard and an internet connection can suddenly dub themselves an "expert analyst".

The gold community in particular seems to be plagued with this sort of thing, far more than any other commodity complex. Yes, we have them in the grains as well with the constant spreading of misinformation, falsehood and assorted 'rumors' that just so happen to line up with the position that those who are propagating have taken in the market that they are attempting to either talk up or talk down.

When it comes to the topic of backwardation, I explained the significance of that last evening in a response that I wrote in the comments section.

here are the key highlights from that post:

It  (BACKWARDATION)  that that the commodity is in a serious short supply which is not able to keep up with current demand levels. What the futures board then does is to move into backwardation to entice sellers to part with the metal RIGHT THEN AND NOW instead of holding onto it later in hopes of a better price in the future.

That is done by pushing the price higher  ( in the nearby months) ABOVE The back months and taking away the incentive to hold or store the particular commodity.

A market with a true supply shortage will REMAIN THAT WAY all the way into the closing bell and will maintain that structure for as long as is necessary for the current shortage to be alleviated.
Based on this fact - gold is not in backwardation and has not been at any time whatsoever on the Comex during the entire time this backwardation talk commenced and picked up some gullible followers.

Look, I get it - those who are advocating for honest money ( as I am ) and who are generally bullish gold all the time ( I am not) , without exception, even as it is plunging, will latch hold of any sort of story that can be construed as strongly bullish because it CONFIRMS THEIR BIAS TOWARDS THE LONG SIDE of the metal. That is not hard to understand as it is human nature. However, to try to present something as factual when it is in fact, incorrect, is what causes me to take a stand against it.

Gold does not need a campaign of misinformation to define it is honest money. What too many seem to forget is that outside of the gold community, many other investors/traders do not share their view of the metal.

Let's be blunt, for those in that group, gold is an asset that throws off no yield whatsoever. Thus, they had better have a good reason to take investment capital and allocate it into the metal. If they are getting decent returns on their investments elsewhere, and have no concern whatsoever about inflationary issues, they are not going to buy gold. It really is that simple. We who favor honest money must come to terms with the fact that an extremely large portion of the global investment community does not share our views about the value of the metal.

As far as any "Panic" to buy gold (this is how some are now defining the current state of the gold market as they peddle the backwardation nonsense), the futures board simply does not confirm that by its present contango structure. We just came off what I would describe as a near "panic" in the corn market back when the March contract expired and when the May contract expired. That was a true case of backwardation.

I put far more credence in the withdrawals of the Comex warehouse inventories and the GOFO rates. By the way, Dave, my buddy in Denver, whose website is also linked to here at my site, has done good work on this topic. But, as I have written before and will do so again - without a true backwardation structure in the gold futures market, those things alone are not a sufficient reason for me as a trader to rush in an take a long position in gold. I need market price confirmation and chart pattern confirmation.

One last thing - too many people are erroneously defining the word "backwardation" by confusing it with the term "basis".

As I have already defined it, backwardation is a structure or condition of the futures market that occurs when the price of the nearby contract is trading above the more distant month contracts. It is a signal of a tightness in supply at current demand levels.

BASIS is an entirely different matter. Some are claiming that because the SPOT MARKET CASH PRICE of gold may be, at some times, higher than the nearby futures contract, that the market is in backwardation. AGAIN, It IS NOT.

What a strong basis means, ( when the cash market price is above the futures market price ) is that demand for that commodity, be it gold or soybeans or wheat or whatever, is STRONGER THAN AVAILABLE SUPPLY at THAT PARTICULAR LOCATION.

We see this all the time in the grain markets. I also see it occur at times in the various direct markets for hogs as well as some of the individual packers buying cattle in Nebraska or Kansas or Texas.

There are times in the grain markets that one elevator will be paying higher prices for grains than the nearby on the board because of logistical issues such as a flooded river, etc., which is making it difficult for the grain to get to their location. They will then have to offer incentives to get it there. That does not necessarily mean that there is a world-wide shortage of that grain; it does mean that as far as that location goes, there is a shortage. The strong price being offered is the incentive to give sellers every reason to try to get their product to that elevator operator.

My friend John Brimelow publishes an excellent "Gold Jottings" report where he is perhaps the best in sourcing the cash market prices for gold in India and elsewhere in the Far East. John will report on whether the spot price for gold is at a premium or at a discount. That is a good gauge to demand IN THAT LOCATION OR AREA however and it does not necessarily translate to the same thing here in the US or elsewhere in Europe for example. Heck, there are times when buyers in India are paying huge premiums over the world price of gold elsewhere. That does not mean gold is in backwardation. PERIOD!

When we do however see a STRONG BASIS PLUS a BACKWARDATION STRUCTURE ON THE FUTURES BOARD, then we have the real deal.

I also want to echo something that Jesse mentioned in his nice piece on this; those who keep crying up backwardation in gold had better damned well be careful that they do not get what they are wishing for. As one of the posters here has said, gold at $50,000 or silver at $500 means that I do not want to be living anywhere near civilization. The sheer chaos, fear, breakdown in society, etc. are not the things that I wish for no matter whether gold goes up or not.

I am already fearful enough about the state of our nation, its gargantuan level of indebtedness, its moral decay, its hedonism and lack of work ethic, its dumbing down, and its corrupt monetary system without having to worry about MAD MAX BEYOND THE THUNDERDOME coming to a city or town near me!

Gold owners and buyers - just lighten up a bit... life consists of far more than the last price of gold, or silver for that matter. Family, Friends, Faith - these are far more important... do not let the means to an end become your reason for existence or happiness.

Down goes the Dollar; Up goes Gold

Gold was firm for the entirety of today's New York session after encountering a round of selling in Asian trade last evening. Additional downside momentum was seen following on the heels of yesterday's retreat from chart resistance but dip buyers moved in above psychological round number support at $1300, never allowing it to test that level.

If we wanted to see whether or not those dip buyers were going to make their appearance in Asia, we got our answer.

The market dipped down to as low as $1308 and then moved quickly higher last evening with the buying continuing at a steady pace into Europe and New York.

Late this afternoon, and I am still unclear as to what the exact reason for the sharp selloff was, the US Dollar came under rather intense selling pressure, in spite of the fact that interest rates had been rising for most of the session. The Yen, the Euro, the Aussie, the Swissie, it did not matter - all of them shot upward in a fashion that was reminiscent of their performance that day earlier this month when Bernanke gave his now famous comment about QE continuing "for the foreseeable future". I must have missed some comment from some Fed governor or something but either way, something lit a fire under the Dollar bears.

As the Dollar imploded lower, gold caught another gust of wind and jumped with the result that the metal put in a $30 range from top to bottom and now goes into Asian trade with upside momentum, the exact opposite of yesterday's status! As I said yesterday:

"She loves me; She loves me not; She loves me; She loves me not".

Here we go again.

While the HUI was up, it's performance was rather lackluster given the sharp thrust higher in the metal.

Now we face the Friday Follies once more to see whether or not gold gets its usual beating on that day or if it can mount a counter rally. For the metal to generate some further upside, $1350 needs to be cleared.

By the way, take a look at the following 2 hour composite chart I put together comparing the price action in gold to that of the US Dollar... Can you say the words. " MIRROR IMAGE IN REVERSE"?

Note that as the Dollar gets whalloped, gold shoots higher. Gold is back to acting as the ANTI-DOLLAR.