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GOLD BACKWARDATION AND PRICE EXPLOSION IMMINENT

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This will soon bankrupt many large banks who are massively short gold.

 

http://www.ft.com/cms/s/0/f565b702-949a-11...0077b07658.html

Bullion lending by central banks all but dries up

 

Published: October 7 2008 21:44 | Last updated: October 7 2008 21:44

 

Central banks have all but stopped lending gold to commercial and investment banks and other participants in the precious metals market, in a move that on Tuesday sent the cost of borrowing bullion for one-month to more than twenty times its usual level.

 

The one-month gold lease rate rocketed to 2.649 per cent, its highest level since May 2001 and significantly above its five-year average of 0.12 per cent, according to data from the London Bullion Market Association.

 

Gold lease rates for two, three and six months and for a year also jumped to levels not seen in the last seven years.

 

Traders said the jump reflects the fact that central banks – mostly European – have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.

 

“A number of central banks have been cutting back on their gold lending,” said Tom Kendall, a precious metals strategist at Mitsubishi in London.

 

John Reade, a commodities strategist at UBS, added that there had been a lot of talk about some central banks being unwilling to lend their gold because of a redoubled focus on the risk of borrowers not returning it.

 

“There is very little appetite for unsecured lending at the moment,” he said.

 

Central banks usually do not ask borrowers to post any guarantee – or collateral – to secure bullion loans. “The key word now is safety,” an official from a Europe-based central bank said.

 

In normal circumstances, central banks lend gold into the market – providing key liquidity – to earn a small return on what otherwise is a non-yielding asset.

 

Other factors are also pushing lease rates higher, including more investors’ positions no longer available for lending, according to Philipp Klapwijk, chairman of GFMS, the London-based precious metals consultants.

 

Traders said the general dysfunction in money markets, with US dollar rates significantly higher, was contributing to volatile gold lease rates. Demand for physical gold and small and medium-sized bars had been strong, removing supplies from the market that otherwise could have been lent, traders added.

 

The US Mint onTuesday said it had run out of half-ounce and quarter-ounce American Eagle gold coins following “unprecedented” demand.

 

Gold prices on Tuesday rose $19.3 to $880.6 a troy ounce, having hit an intraday high of $890.6 an ounce. Bullion prices hit an all-time high of $1,030.8 in March. In euro terms, gold prices rose on Tuesday to a record high of €654.22 an ounce, above March’s all-time high of €651.24 an ounce. It also hit a record in Australian dollars.

 

Investors are seeking refuge in actual gold coins and bars as fears about the safety of their savings increase. Some have even been selling their positions in gold futures, as this is a less tangible form of the metal. Since the collapse of Lehman Brothers three weeks ago, bullion prices have risen about 20 per cent.

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What do you think we are talking about here though?

 

Price spike a la oil a few weeks ago or Volkswagen today?

Or a sustained move up?

 

Volkswagen was up to 50% today and ended the session at -5%

http://uk.finance.yahoo.com/q?s=VOWG.DE

 

From what I gather from various sites a sustained upward rise of the pog over the next few years and a run on rocket images...

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From what I gather from various sites a sustained upward rise of the pog over the next few years and a run on rocket images...

 

Don't worry, I have been stocking up on rocket images, and they are fully backed by real money, so you need have no fear of us running out before we pass the Moon :D :D

 

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OK this is going to get me some flack, but I'm quoting from an article I downloaded from Silveraxis about gold leasing

 

A spike higher in the gold "lease rate" could result from the gold market moving from

contango toward backwardation, but it could just as well result from a jump in market

interest rates (LIBOR). The former case is usually bullish for gold while the latter may be

bearish. Thus, a move in the gold "lease rate" is meaningless without an understanding of

the underling moves in both the Gold Forward Offered rate and LIBOR.

 

Now, I think we all know that LIBOR has been spiking higher lately, so it seems likely that the higher lease rates are at least partly a result of high LIBOR. This MAY be bearish for gold or it may not, in this environment I am inclined to feel it will be neutral. If lease rates remain high after LIBOR comes down (assuming succesful central bank intervention in the money markets over the next few days), then this would be extremely bullish for gold, but it doesn't seem to be the case YET.

 

Also the gold market is not yet fully in backwardation, there is some contango in just the futures prices below (around 5.15pm New York)

 

Comex Gold Oct 2008 875.5

Comex Gold Dec 2008 890.5

Comex Gold Feb 2009 894.1

Comex Gold Dec 2009 905.5

 

However spot gold seemed to be around 885 (from a visual check on a chart) so some evidence of backwardation. If it continues it could be very bullish for gold

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OK this is going to get me some flack, but I'm quoting from an article I downloaded from Silveraxis about gold leasing

 

 

 

Now, I think we all know that LIBOR has been spiking higher lately, so it seems likely that the higher lease rates are at least partly a result of high LIBOR. This MAY be bearish for gold or it may not, in this environment I am inclined to feel it will be neutral. If lease rates remain high after LIBOR comes down (assuming succesful central bank intervention in the money markets over the next few days), then this would be extremely bullish for gold, but it doesn't seem to be the case YET.

 

Also the gold market is not yet fully in backwardation, there is some contango in just the futures prices below (around 5.15pm New York)

 

Comex Gold Oct 2008 875.5

Comex Gold Dec 2008 890.5

Comex Gold Feb 2009 894.1

Comex Gold Dec 2009 905.5

 

However spot gold seemed to be around 885 (from a visual check on a chart) so some evidence of backwardation. If it continues it could be very bullish for gold

 

 

Very interesting stuff and definitely worth watching closely. Does anyone have a good link for checking the futures price v's spot?

 

To me it looks like yet another divergence of paper from physical. Who writes these futures contracts and are they good for it? Market says maybe not - show me the physical! :o

 

 

edit:sp

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Very interesting stuff and definitely worth watching closely. Does anyone have a good link for checking the futures price v's spot?

 

To me it looks like yet another divergence of paper from physical. Who writes these futures contracts and are they good for it? Market says maybe not - show me the physical! :o

 

I get the futures prices from my Interactive Brokers brokerage account however I can't seem to get spot gold. I simply do a visual check on the spot gold price on Kitco's chart, but ideally I would like to get hold of a proper feed for spot prices - does anyone know where this might be available?

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I get the futures prices from my Interactive Brokers brokerage account however I can't seem to get spot gold. I simply do a visual check on the spot gold price on Kitco's chart, but ideally I would like to get hold of a proper feed for spot prices - does anyone know where this might be available?

 

http://www.bloomberg.com/markets/commodities/cfutures.html

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...

Traders said the jump reflects the fact that central banks – mostly European – have almost completely stopped lending gold in the last few days and are not rolling forward old leases after maturity. This is because of fears that some borrowers might not repay their bullion loans if they are engulfed by the financial crisis.

...

Two conclusions:

(1) Central banks act in extremely stupid manners (pro-cyclical and actively risk seeking/producing).

(2) Gold will go beyond Neptun (Pluto is no planet no more).

 

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Since the collapse of Lehman Brothers three weeks ago, bullion prices have risen about 20 per cent.

Interesting theory on this weeks Financial Sense that the recent gold price reverse could have been a ploy by the banks to pull down the price of paper gold and to cover in the physical market. To get funds on board to cover the pain they know is coming.

 

Sounded good at first. BUT there has been stuff going on in the silver market for years according to Ted Butler. AND gold hasnt yet spiked upwards - 20% doesnt really count for much.

 

I guess I will come off the fence and say that IMO as gold hasnt reached new highs, not even the $1k mark following most recent events some sort of intervention is afoot.

 

Which leaves me with cgnao's theory. Scary.

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Interesting theory on this weeks Financial Sense that the recent gold price reverse could have been a ploy by the banks to pull down the price of paper gold and to cover in the physical market. To get funds on board to cover the pain they know is coming.

 

Sounded good at first. BUT there has been stuff going on in the silver market for years according to Ted Butler. AND gold hasnt yet spiked upwards - 20% doesnt really count for much.

 

I guess I will come off the fence and say that IMO as gold hasnt reached new highs, not even the $1k mark following most recent events some sort of intervention is afoot.

 

Which leaves me with cgnao's theory. Scary.

There is manipulation in the markets but intervention never ever works in the long term, otherwise gold wouldn't be nearly 4 times higher now than in 2001. Also look at gold in GBP - it has been reaching new highs. Gold is an anti-fiat currency, not just an anti-dollar. The dollar index measures the USD against other free-floating currencies, which the world is waking up to discover are also just as worthless as the USD, so the dollar could easily rise together with gold or not. It doesn't really matter so much anymore. A price explosion will happen at some point unfortunately it is more likely to be when most people aren't looking/expecting it.

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Gold is an anti-fiat currency, not just an anti-dollar. The dollar index measures the USD against other free-floating currencies, which the world is waking up to discover are also just as worthless as the USD, so the dollar could easily rise together with gold or not.

 

Thanks cbs, an interesting and worthy reply

 

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1-3 month gold forward rates (%) are nearly in backwardation.

 

This is IT.

 

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

 

Date 1-month 2-month 3-month 6-month 12-month

03-Nov-08 0.69167 0.69167 0.70833 1.02500 1.48333

04-Nov-08 0.64167 0.64167 0.65833 0.98333 1.46667

05-Nov-08 0.50000 0.50714 0.57857 0.96143 1.41000

06-Nov-08 0.50714 0.50714 0.55000 0.94429 1.36714

07-Nov-08 0.59167 0.60833 0.62500 0.98667 1.38333

10-Nov-08 0.54167 0.55000 0.65000 1.10000 1.43750

11-Nov-08 0.50000 0.54286 0.59286 1.00571 1.33429

12-Nov-08 0.12500 0.23333 0.33333 0.80667 1.12500

13-Nov-08 0.07667 0.14286 0.20000 0.71429 1.08000

14-Nov-08 0.02857 0.08200 0.13571 0.73333 1.08667

 

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Could someone interpret for moi?

 

 

1-3 month gold forward rates (%) are nearly in backwardation.

 

This is IT.

 

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

 

Date 1-month 2-month 3-month 6-month 12-month

03-Nov-08 0.69167 0.69167 0.70833 1.02500 1.48333

04-Nov-08 0.64167 0.64167 0.65833 0.98333 1.46667

05-Nov-08 0.50000 0.50714 0.57857 0.96143 1.41000

06-Nov-08 0.50714 0.50714 0.55000 0.94429 1.36714

07-Nov-08 0.59167 0.60833 0.62500 0.98667 1.38333

10-Nov-08 0.54167 0.55000 0.65000 1.10000 1.43750

11-Nov-08 0.50000 0.54286 0.59286 1.00571 1.33429

12-Nov-08 0.12500 0.23333 0.33333 0.80667 1.12500

13-Nov-08 0.07667 0.14286 0.20000 0.71429 1.08000

14-Nov-08 0.02857 0.08200 0.13571 0.73333 1.08667

 

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When the numbers go negative gold is in backwardation, ie it's cheaper to buy future rather than spot gold, if you check the link the numbers have been tumbling all year. It reflects the fact that buyers are willing to pay more for immediate delivery rather than future delivery. Compared with future delivery, demand for immediate delivery is increasing at a faster rate.

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Gold is now in backwardation. Ignore this at your own peril.

 

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

Gold Forward Offered Rates

Date 1 Month 2 Months 3 Months 6 Months 12 Months

12-Nov-08 0.12500 0.23333 0.33333 0.80667 1.12500

13-Nov-08 0.07667 0.14286 0.20000 0.71429 1.08000

14-Nov-08 0.02857 0.08200 0.13571 0.73333 1.08667

17-Nov-08 0.04500 0.13333 0.18571 0.75714 1.11857

18-Nov-08 0.03400 0.12000 0.18333 0.72143 1.01571

19-Nov-08 0.08286 0.01571 0.06333 0.51429 0.90000

20-Nov-08 -0.08000 -0.04500 0.05000 0.46333 0.89167

21-Nov-08 -0.11667 -0.07429 0.05000 0.44000 0.86857

 

Also of interest

 

http://www.financialsense.com/editorials/f.../2004/0503.html

It appears to be a theoretical impossibility for the gold and silver market to be in backwardation for any extended period of time. Such a situation would guarantee unlimited and riskless profits for all those holding gold and silver. They could replace their cash holdings with futures at a lower price. When their futures contract matured, they could take delivery and repeat the procedure. The mere possibility of unlimited and riskless profits suggests that there is an error in the calculation. And indeed, there is. The profits are not riskless. As the ancient adage says: “A bird in hand is worth a dozen in the bush”. When cash gold or silver is replaced with futures, a risk is created, namely, the risk that it may not be possible to convert the futures contracts back into cash gold or silver at maturity. There is the risk of default in the futures markets. Of course, exchange officials, bullion bankers, and government watchdog agencies vehemently deny the existence of such a risk. But the fact remains that under the regime of irredeemable currency it is possible to corner a monetary metal. It is true that cornering a monetary metal goes by another name: that of hyperinflation. There have been any number of hyperinflationary episodes ever since paper was invented by the Chinese. What people don’t generally realize is that every one of these episodes was a corner in gold or silver.

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Gold is now in backwardation. Ignore this at your own peril.

 

Also of interest

 

http://www.financialsense.com/editorials/f.../2004/0503.html

 

A very interesting article, below is a quote from it;

 

Backwardation in gold has a perverse effect. In the case of agricultural commodities backwardation provides a most powerful incentive for traders to sell the cash commodity and buy the futures. Not so in the case of gold. Rather than bringing out deliverable supplies of gold, backwardation tends to remove them. The more the gold basis falls the less likely it becomes that owners will exchange their cash gold for futures. Please remember that you have seen it here first. This perversion of the gold basis constitutes the self-destroying mechanism of the regime of irredeemable currency. The longs tend to take delivery on their gold futures contracts in ever greater numbers, and refuse to recycle cash gold into futures, regardless how low the gold basis may go. As it is not set up to satisfy demand for delivery on 100 percent of the open interest, the gold futures market will default. Exchange officials will declare a “liquidation only” policy to offset long positions in gold. At that point all offers to sell cash gold will be withdrawn. Gold is not for sale at any price. The shorts are absolved of their failure to deliver on their gold futures contracts.

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