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GOLD BACKWARDATION AND PRICE EXPLOSION IMMINENT

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I think backwardation means this:

 

1. You can sell your physical gold now for x.

2. At the same you buy a futures contract for delivery of gold in say 3 months, at something less than x.

 

You can't lose. You sell at x and buy at less than x.

 

Unless the futures contract doesn't actually delivery the gold !

 

Hence the higher price for immediate delivery, at the moment.

But doesn't the principle works equally well for contango?

Sell a future, buy at (the lower) spot price now, lock in guaranteed profits. In fact in the backwardation situation you need to already have Gold to take advantage of the spread, whereas in contango anyone can. Have I missed something?

 

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But doesn't the principle works equally well for contango?

Sell a future, buy at (the lower) spot price now, lock in guaranteed profits. In fact in the backwardation situation you need to already have Gold to take advantage of the spread, whereas in contango anyone can. Have I missed something?

there is a name for that.

Its called hedging.

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In a good investment, value risk is unimportant, because you are buying/selling it to bring in income. For example, buying some land to grow/build something on, the price is unimportant as long as you intend to hold onto it and take the income. All that matters is it generates more income than it looses in depreciation.

 

For example it could be something simple like an authors pen, very small value, massive income.

 

In that case you are interested in income risk, which is not unimportant, but a helluva lot easier to estimate.

 

The example with the pen is a good one. But it only works because the income is massively more than the cost of the pen. That's pretty unusual.

 

The example of farming is interestingly topical. Here in NZ up until months ago, many people were predicting agricultural land would not be affected by the housing downturn. Huge debts have been taken on to buy land and to convert it.

With the dramatic drop in agricultural commodity prices, incomes have dropped, and now there are questions whether the debts will be serviced, and what effect this will have on agricultural land prices.

 

In hindsight for some, and blindingly obvious for others, this was an agricultural bubble. And fits very well into the definition of speculation.

The land value matters because some farmers will be unable to service their debts, and will be forced to sell.

 

Very much the same as BTL.

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Another debunking on the backwardation hysteria:

 

The gold backwardation theory

http://ftalphaville.ft.com/blog/2008/12/09...rdation-theory/

 

But before you rush out to stock up on tinned goods, there is, of course, a more muted explanation for gold backwardation out there too. The gold bugs have misinterpreted all says Dennis Gartman, of the Gartman Letter:

 

Normally, we would join them in their enthusiasm for the backwardation if we were talking about soybeans, or cotton, or sugar or crude; but in the case of gold, we are far less given to this sort of enthusiasm, for the “Bugs” are misinterpreting what is happening there.

 

Simply put, o/n funding rates are so low, with the o/n fed funds rate as effectively near zero as it can get, that there are strange distortions taking place in gold lending operations. The “Bugs” want very badly to see collusion and manipulation and intervention and all sorts of mischief taking place in the gold market. Instead, we see rather boring, inordinately prosaic interest rate arbitrage taking place and little else. Yes, there are shortages of gold coins in the market, and yes the spot/1st and even to the 2nd future gold future is backwardated, but this is hardly the stuff of manipulation and central bank intervention. We would counsel everyone to take a deep breath; to sit down and count to ten. The “Bugs” won’t, however, for the air is ripe with visions of manipulation rather than sugar plums and St. Nick!

 

That's the weakest poorest effort I can imagine !

It certainly doesn't convince me.

 

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In a good investment, value risk is unimportant, because you are buying/selling it to bring in income. For example, buying some land to grow/build something on, the price is unimportant as long as you intend to hold onto it and take the income. All that matters is it generates more income than it looses in depreciation.

 

For example it could be something simple like an authors pen, very small value, massive income.

 

In that case you are interested in income risk, which is not unimportant, but a helluva lot easier to estimate.

Unfortunately such circumstances never exist in reality.

 

There is always a risk in doing anything and "not doing anything" is equivalent to doing something even if one doesn't realise so.

 

Even not getting out of bed entails some risk, even if it appears smaller than the alternative.

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That's the weakest poorest effort I can imagine !

It certainly doesn't convince me.

It certainly sounds like the talk of conspiracy theorists.

Tut, tut, nothing to see here. :P

 

But seriously, I've taken only a curious interest in these matters but when somebody says "conspiracy theorist" my ears prick up.

 

Who is Izabella Kaminska, anyway?

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Unfortunately such circumstances never exist in reality.

 

There is always a risk in doing anything and "not doing anything" is equivalent to doing something even if one doesn't realise so.

 

Even not getting out of bed entails some risk, even if it appears smaller than the alternative.

agree entirely.

my 'definition' of speculation to investment still stands tho - speculation looks entirely at future value (for example, buying a BTL with a negative yield, just because you expect its price to rise), investment is more interested in income.

but then that's what makes all this so intensely interesting.

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Tut, tut, nothing to see here. :P

 

But seriously, I've taken only a curious interest in these matters but when somebody says "conspiracy theorist" my ears prick up.

 

Who is Izabella Kaminska, anyway?

 

Please PLEASE be careful watching this:

 

The Great Gold Debate: Do Financial Institutions Conspire to Suppress the Price of Gold?

Bill Murphy & Tim Wood argue it out *** UNMISSABLE ***

http://www.greenenergyinvestors.com/index....ic=5308&hl=

 

 

Your ears are at great risk every time Tim Wood speaks :lol: :lol: :lol:

 

 

More to the point. Who's Dennis Gartman :lol: :lol: :lol: :lol:

 

 

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Hasn't money just hit "backwardation" yesterday (said with tongue in cheek)?

 

Huge Demand For Treasuries As Banks Refuse To Lend

 

If you invested $1,000 in three-month bills today at a negative discount rate of 0.01 percent, for a price of 100.002556. At maturity you would receive the par value for a loss of $25.56.

 

http://globaleconomicanalysis.blogspot.com...s-as-banks.html

(Note also some interesting comments on Deflation accompanied with exploding Adjusted Monetary Base...)

 

If I read this right it means that you can sell money (in the form of US Debt in USD) now and get it back later (3 months) for a cheaper price. Isnt'it the same as Gold?...

So do we expect the USD money to have a price explosion? ;)

 

I am just trying to be facetious with the above (or am I?) but I believe that really shows that the system is really screwed up!!

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I am just trying to be facetious with the above (or am I?) but I believe that really shows that the system is really screwed up!!

 

agreed

 

looks similar but different, One looks like a way of making money for nothing, the other looks like a way of losing money for nothing.

 

Chris Martenson has a good take on the matter.

http://www.chrismartenson.com/blog/floatin...o-negative/9994

 

To call this "unusual" is to engage in an extreme form of understatement. Unusual means "not usual." A car driving by with dolls glued all over it is unusual. A car floating by 6 feet in the air is something else entirely and on a par with negative interest rates in a debt-based money system.

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agreed

 

looks similar but different, One looks like a way of making money for nothing, the other looks like a way of losing money for nothing.

 

Chris Martenson has a good take on the matter.

http://www.chrismartenson.com/blog/floatin...o-negative/9994

 

 

well - depends which side of the trade you are on..

both commodities (Gold and money - yes I believe that they are both commodities as in the strict-original sense of the term) are more expensive for immediate availability than future availability.

 

In both cases the current owner of the commodity Gold or Money-T-Bills can make money by selling now and buying same in the future.. IF they trust they can get it back 100% safely in the future.. or if they dont need it right now while loads of people seem to (ie I read that this has to do with year-end effect where evrybody wants to be in bonds coupled with ultra-low yields)

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The Great Gold Debate: Do Financial Institutions Conspire to Suppress the Price of Gold?

Posted on December 5th, 2008 by Tim Wood

http://www.newsthattrades.com/?p=22

via: http://www.gata.org/node/6972

 

This was an excellent video, thanks.

 

Tim Wood was really good.

 

His advice: "Do not mix short term trade moves with the long term trend. It'll mess up your investment criteria" (paraphrased)

 

 

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Gold Backwardation Resulting Gold Fever

Commodities / Gold & Silver Dec 10, 2008 - 02:54 PM

By: Professor_Emeritus

http://www.marketoracle.co.uk/Article7722.html

 

Here is an update on the backwardation in gold that started on December 2 at an annualized discount rate of 1.98% and 0.14% to spot in the December and February contracts. It continued and worsened on December 8, 9, and 10 as shown by the corresponding rates widening to 3.5% and 0.65%. It is nothing short of awesome. This is a premonition of a coming gold fever of unprecedented dimensions that will overwhelm the world as soon as its significance is fully digested by the doubting Thomases.

 

(Thanks FWIW)

 

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Gold Backwardation Resulting Gold Fever

Commodities / Gold & Silver Dec 10, 2008 - 02:54 PM

By: Professor_Emeritus

http://www.marketoracle.co.uk/Article7722.html

 

 

 

(Thanks FWIW)

 

talks a lot of sense does mish - i think he may have called this one wrong though

 

Our present experiment with irredeemable currency can last only as long as it is able to support futures markets in gold. The declining gold basis is the hour glass: when it runs out and the last grain of sand drops, gold fever will bleed the futures markets of cash gold, and the days of the regime of irredeemable currency are numbered.

 

Previous episodes of experimentation lasted no more than 18 years, or half as long as the present one which has taken 36 years so far, a world record. Of course, none of the earlier episodes were supported by futures markets. Forewarned, forearmed. Get ready and move closer to the doors. When the curtain falls on the last contango in Washington, there will be panic and some people may get trampled to death at the exit.

 

Dear Mish, lower your gun. The topic of gold backwardation is not for you.

 

 

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Gold Backwardation Resulting Gold Fever

Commodities / Gold & Silver Dec 10, 2008 - 02:54 PM

By: Professor_Emeritus

http://www.marketoracle.co.uk/Article7722.html

 

"Professor_Emeritus" is Professor Antal Fekete! I didn't know he wrote for the market oracle. Thanks for that link!

 

Here's Mish's response:

 

http://globaleconomicanalysis.blogspot.com...r-response.html

 

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Based on CGNAO's method, gold reversed its -ve a week or so ago, but only slightly.

 

Silver on the other hand has turned negative

http://www.lbma.org.uk/?area=stats&page=sifo/2008sifo

 

03-Dec-08 0.06000 0.08143 0.13000 0.27857 0.33286 1.83000 1.96982 2.07125 2.27768 2.37089

04-Dec-08 0.18600 0.18600 0.24000 0.43400 0.54750 1.69025 1.85775 1.95250 2.08600 2.10125

05-Dec-08 0.05714 0.07143 0.12857 0.37143 0.44857 1.81036 1.96920 2.05706 2.17982 2.24393

08-Dec-08 -0.01167 0.01333 0.02167 0.20000 0.33000 1.83667 2.02167 2.16771 2.40063 2.46500

09-Dec-08 -0.07143 -0.05714 -0.05143 0.17429 0.23571 1.70643 2.04964 2.21518 2.35071 2.47429

10-Dec-08 -0.08143 -0.05429 -0.02857 0.16429 0.29714 1.52018 1.95804 2.12732 2.27321 2.32536

11-Dec-08 -0.10833 -0.05833 -0.04167 0.09167 0.30500 1.30333 1.82583 2.03792 2.23083 2.22375

12-Dec-08

 

 

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Based on CGNAO's method, gold reversed its -ve a week or so ago, but only slightly.

 

Silver on the other hand has turned negative

http://www.lbma.org.uk/?area=stats&page=sifo/2008sifo

 

03-Dec-08 0.06000 0.08143 0.13000 0.27857 0.33286 1.83000 1.96982 2.07125 2.27768 2.37089

04-Dec-08 0.18600 0.18600 0.24000 0.43400 0.54750 1.69025 1.85775 1.95250 2.08600 2.10125

05-Dec-08 0.05714 0.07143 0.12857 0.37143 0.44857 1.81036 1.96920 2.05706 2.17982 2.24393

08-Dec-08 -0.01167 0.01333 0.02167 0.20000 0.33000 1.83667 2.02167 2.16771 2.40063 2.46500

09-Dec-08 -0.07143 -0.05714 -0.05143 0.17429 0.23571 1.70643 2.04964 2.21518 2.35071 2.47429

10-Dec-08 -0.08143 -0.05429 -0.02857 0.16429 0.29714 1.52018 1.95804 2.12732 2.27321 2.32536

11-Dec-08 -0.10833 -0.05833 -0.04167 0.09167 0.30500 1.30333 1.82583 2.03792 2.23083 2.22375

12-Dec-08

 

Can you explain what this means and more details on the method used?

 

Thanks!

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Hi FWIW

other than just seeing the numbers as being -ve I cant say what it means to be honest, or how its calculated here, seems like there are several different methods knocking around, but all have been tending lower and lower towards 0 and briefly below, which i think indicates that current price is greater than future price. or that the future price is lower than the current price, depending on where you are coming from.

 

Whether actually -ve or not, it indicates the cost of borrowing gold to sell and using the money to earn the interest is now not profitable and now costs money, this is good news if you are long gold.

 

Im guessing that once it turns -ve the trade comes unwound and banks will try to cover and buy back the gold they have sold. This creates a nice feedback loop that just makes the whole process even more bullish for those long gold.

 

And silver...

 

fwiw thats my take on it.

 

Right off to wollies for the last time.

 

 

 

 

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Hi FWIW

other than just seeing the numbers as being -ve I cant say what it means to be honest, or how its calculated here, seems like there are several different methods knocking around, but all have been tending lower and lower towards 0 and briefly below, which i think indicates that current price is greater than future price. or that the future price is lower than the current price, depending on where you are coming from.

 

Whether actually -ve or not, it indicates the cost of borrowing gold to sell and using the money to earn the interest is now not profitable and now costs money, this is good news if you are long gold.

 

Im guessing that once it turns -ve the trade comes unwound and banks will try to cover and buy back the gold they have sold. This creates a nice feedback loop that just makes the whole process even more bullish for those long gold.

 

And silver...

 

fwiw thats my take on it.

 

Right off to wollies for the last time.

 

Thanks for the answer.

 

So it's basically trying to calculate backwardation and contango.

 

As I understand it (which is probably not 100% correct but my poor brain can only cope with so much) you can now sell your gold at spot price for $X. You can then get a futures option/contract to buy gold in the future at $Y.

Backwardation => $X > $Y

Contango => $X < $Y

 

 

 

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