The further a society drifts from the truth, the more it will hate those who speak it. ... In a time of deceit, telling the truth is a revolutionary act. George Orwell

Friday, December 5, 2008

Important article: "Red Alert: Gold Backwardation!!?"


Red Alert: Gold Backwardation!!! By Antal Fekete

(Wiki: "backwardation")

Is this the beginning of the end for the us dollar? Could this all take place as soon as this December? Tighten your seat belt, batten the hatches, whatever...

Some numbers (from a different source):

... Now, the World Gold Council has confirmed the trend with hard numbers for the third quarter of this year. In a page-and-a-half press release summarizing 3Q2008 activity, the WGC had to use the word “record” ten times. Some highlights:

* Dollar demand for gold in Q3 was a record US$32 billion, 45% higher than the previous record, set in 2Q2008.

* Identifiable investment demand, which incorporates demand for gold through exchange-traded funds (ETFs), bars and coins, rose to $10.7 billion (12.3 million ounces), double year-earlier levels.

* Retail investment demand rose 121% to 7.5 million ounces, with strong bar and coin buying in the Swiss, German, and U.S. markets. Europe as a whole saw an all-time record 1.64 million ounces of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.

* Gold ETFs posted a record quarterly inflow of 4.8 million ounces in Q3. After the collapse of Lehman Brothers in late September, ETF inflows shot higher by an unprecedented 3.6 million ounces in only five days.

* Demand for gold jewelry hit a record $18 billion. Leading the way was India, which witnessed a rise of 65% in dollar value (1.3 million ounces) compared with 3Q2007. The Middle East, Indonesia, and China all experienced increases of more than 40% in value or 10% in weight, year over year.

At the same time that demand is setting records, supply has been unable to keep pace, falling 9.7% from year-earlier levels, the WGC reported. The drop was largely due to inaction on the part of central banks, which have increasingly shut their vault doors.


7 comments :

Sven said...

One of the best macro-blogs I know is:

http://globaleconomicanalysis.blogspot.com/2008/12/nonsense-about-gold-backwardation.html

You seem to be interested in such topics. Check it out.

Stan (Heretic) said...

Thanks Sven,

I just looked at Mike Shedlock's article in his blog and he strikes me as a "know it all" personality. He may be right I have no way of testing what he says, since he gave no reasons, just quoted some other people. He seems to be fighting one expert's view (Fekete's) with some other expert's views calling one of them "nonsense". Nowhere in his blog he explains the mechanism of the present gold backwardation even though he admits it is rare (in gold). If it is rare indeed then why it is happening? Random? Why are gold leasing rates now at record high, at ~2% per year, about ten times higher than even a few months ago? Coincidentally, those rate happen to be of the same order as the amount of backwardation - can that in fact explain it naturally? May be may be not. So I would rather see a discussion of facts and mechanisms rather than dismissing it out of hand as a "nonsense".

Sven said...

"Backwardation" ist pretty common in the commodity markets. It happens all the time. Usually it is a sign of physical shortage or delivery problems. Most of the time it is a short term phenomen. The world could be awash in crude oil but if you have a hurricane damaging transportation/refining/whatever you could have huge spikes upward in the cash market and/or nearest crude/crude product futures.
Obviously the seems to be some short term shortage of physical gold. That doesn´t tell you anything about the long term prospects of gold.

By the way: Mish is a gold bull and has been for a long time. Sometimes he appears to be a "know it all"-personality but I would say he actually knows a lot und is pretty modest compared to others.

Stan (Heretic) said...

Yes, but I would like to know what exactly is that causes the observed breakdown in deliveries of gold and silver! You can blame oil hiccups on hurricanes or terrorists blowing up pipelines but gold?!

Sven said...

I suppose a lot of people are frightened about the economic prospects. Some of them are buying gold as safe haven investment. clowns like the red alert guy or hal turner are doing their share to frighten people. if short term demand spikes relative to supply you get backwardation. it´s just simple supply and demand dynamics. gold demand is usually high during christmas season too. it´s important to note: backwardation is usually a sign of short term problems. if long term prospects are bullish than prices rise across all maturities.

p.s.: you don´t need a "breakdown in deliveries" to get backwardation.

Stan (Heretic) said...

OK, but why does then the spot delivery price not rise up faster and higher even for a short time, if the supplies are insufficient?

If kitco and ebay traders are capable of jacking up huge premium on bullion delivery, why does comex not react to that short term trend? The market is supposed to adjust pricing automagically as to balance (equalize) the supply and demand at any given moment in time. Sorry for being simpleminded in my questioning but isn't it how the commodity exchange or any other marketplace is supposed to work?

Sven said...

The price usually rises as fast as necessary. If the short term demand is only a litlle higher than supply than a small price increase will be sufficient. if the commodity is really in short supply, than wide price moves are possible. Like 100% over deferred contracts. We´ve seen such moves in corn, wheat or soybeans. Short term shortages are much more common in foodstuffs.
What is comex supposed to do? Comex is just the exchange or the warehouse. Whatever you mean. As I said: backwardation is nothing special so there is no need to do anything about it. If spot prices are higher then deferred contracts than you might sell if you own the commodity. But maybe you expect even higher prices and hold on.
Retail demand for gold and silver has been high for quite some time. It was hard to get some silver coins even while silver was crashing from 20 to below 10. Don´t read too much into short term availability of a commodity.