Backwardisation means big gold price rally coming!
Posted on 10 December 2008 with no comments from readers
Please forgive this late contribution – I have been distracted by the delights of ancient Egypt in Luxor – but this is highly significant.
Professor Emeritus of Mathematics Antal E. Fekete says that December 2nd marked the beginning of the end for paper currencies and wealth based on such currencies. The reason, backwardisation.
Since at least 1972, the price of gold futures has been higher than the spot price. But on December 2nd, the futures price went below the spot price – and has stayed there for several days.
Fekete argues that this means that gold owners are hoarding their gold because (1) they’re not confident that they’ll be able to buy it back in the future, and (2) they have lost all faith in paper currency. He says:
Back to the future
‘Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.
Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks.
They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system.
Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days.
In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?
Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.’
A big change
PhD economist James Conrad confirms the backwardation of gold:
‘Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia(BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.
Things … are changing fast … the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest.
Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.
European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold.
Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman.
He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.
Huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a ‘future’ than as a spot exchange.
Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as backwardation.’
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Peter
I’m an onvestor in Sino Gold (OZ). In the most recent, dazzling display of cant JPMC, one of the slime that covers the Earth, has been shorting SGX massively in order to build a large stake. ML, another slime, did exactly the same thing earliuer this year. It is on record that JPM made transactions of only 1 share. My OZ authorities stand by and allow this. I wonder why?
They obviously know what is coming. Both slime have, if they haven’t increased their holdings, aroung 5% in SGX.
regards.
Your only consolation is that they clearly desperately want these shares – and they are blue chip investors in your tiny stock. This bodes very well for the future – so I would hang on and add to your holding if you can.
… there is more to come …
Comex Silver Warehouse Stocks (registered) are
down by nearly 13 mill. oz since mid of year,
currently little more than 78 mill. oz (registered) still there…
… it’s getting more funny and more ugly by the day …
Fear triggers gold shortage, drives US treasury yields below zero
The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.
By Ambrose Evans-Pritchard
Last Updated: 9:26AM GMT 11 Dec 2008
“It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year,” said Marc Ostwald, a bond expert at Insinger de Beaufort.
The rush for the safety of US Treasury debt is playing havoc with America’s $7 trillion “repo” market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.
“You know the US Treasury will give you your money back, but your bank might not be there,” said Paul Ashworth, US economist for Capital Economics.
The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into “backwardation” for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.
It appears that hedge funds in distress are being forced to cash in profits on gold futures to cover losses elsewhere or to meet redemptions by clients. But smaller retail investors – and perhaps some big players – are buying bullion in record volumes to store in vaults.
The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.
Peter Hambro, head Peter Hambro Gold, said the data reflects a “remarkable” shift in the structure of the market. The rush to safety reflects a mix of fears about the fragility of world finance and concerns that the move towards zero interest rates could set off an inflationary surge further down the road, and possibly call into question the worth of some paper currencies.
The near paralysis in the “repo” markets may prove to be no more than pre-Christmas jitters as banks square their books.
However, there are some signs that extreme monetary stimulus by the US Federal Reserve and other banks is starting to have unintended consequences.
The Bank of Japan is it is reluctant to cut its rates to zero again because of the damage this causes to the money markets, which serve as a key lubricant of the credit system. The US is now starting to face the same dilemma.