Gold futures backwardation

[pmbug]

Not often in financial markets is the future price of gold is lower than the spot price (live), but lately we’ve witnessed such an event in both the New York and London gold market. This is called backwardation, the opposite of contango.

What causes backwardation and will it increase the price of gold? In my opinion there are two possible scenarios: the market expects the gold price to fall in the future, or there is scarcity now.
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We could say, negative GOFO signals scarcity in the gold market. Unfortunately the LBMA ceased publishing GOFO rates with effect from 30 January 2015 “following discussions between the LBMA and … Market Makers”. Ironically, GOFO rates went dark right after dipping into negative territory in 2013 and 2014.
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Currently there is said to be scarcity in gold in the market. Which of the two scenarios described above is true will be exposed in the future!

More:

New York & London Gold In Backwardation

Not often in financial markets is the future price of gold is lower than the spot price, but currently in London...

www.bullionstar.com

Koos elaborates on the case for both scenarios. Click the link for the details.

 

[ancona]

I say scarcity. The miners are dropping like flies in a cloud of raid. The operating environment has become absolutely toxic in this era of paper poison and artificially low precious metals prices and the miners can no longer pretend that they can remain open for business to supply these criminal cartels with discounted metals. Look for prices to get stupid sooner than later is my uneducated guess.

Da Boyzz have pushed just a little bit too far I think.

 

[pmbug]

Gold is rocketing higher during the first two weeks of October, up roughly $75 to $1,185 today. This is a gain of 6.7% in just two weeks as investors are increasingly betting that the gold price has bottomed.

The price advance is being driven partially by comments from Federal Reserve board members suggesting that a rate hike is not a sure thing in 2015, as most analysts had once expected. This news has helped to push the dollar lower and precious metals higher over the past few weeks.

The technical chart has turned bullish over the past few days. ...

More: http://www.mineweb.com/regions/usa/gold-flashes-buy-signal-on-technical-breakout/

Doesn't look like the markets are expecting the price of gold to fall (Koos scenario #1 above).

According to the CME website, the gold futures have flattened out somewhat but there are still hints of backwardation: http://www.cmegroup.com/trading/metals/precious/gold.html

 

[DoChenRollingBearing]

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Bug! (Or anyone)

How do I get futures pricing on the Web so that I can keep track of any backwardation that we may see, either now or later?

Antal Fekete (years ago) made a strong case that backwardation of more than a few days and more than by a tiny amount would spell that

"The End Is (Very) Near".

His logic was compelling, but it has been awhile since I last reviewed it. A signal of severe backwardation would be of great use to people like me -- and probably all of you!

 

[pmbug]

I posted a link above to the CME group that lists the price of gold for various months in the future. You can see backwardation in the futures price when prices of gold in farther months is cheaper than prices in nearer months. Contango is when prices get more expensive as you move further into the future. Backwardation is when prices are cheaper further out in time (more expensive to get immediately).

As the link in the OP above explains though, this is just the futures market. True "backwardation" is usually considered how the price curve looks for GOFO (the Gold Forward Offered Rate) which is calculated as LIBOR less the Gold Lease Rate (GLR):

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Actually, I think backwardation and contango cause inventory to go down and up, because of the cash and carry trade. First, the situation how contango increases inventory: when there is a steep enough contango futures curve all prices in the future are significantly higher than spot. An arbitrage opportunity arises where traders can borrow USD funds, buy spot gold and store it (in a COMEX vault) to sell through a futures contract at a higher price. If the difference between the spot and the future price over period X is higher than the interest to be paid plus the cost of storage over period X, it becomes profitable to cash and carry.

For example, simplified: the spot gold price is 1,000 USD per ounce, the one-year gold futures price is 1,050 USD per ounce, the cost to store 100 ounces of gold for one year is 900 USD and the USD interest rate (LIBOR) is 0.5 %. Paul borrows 100,000 USD at 0.5 % and buys 100 ounces of gold to store at the COMEX. At the same time he sells short a 100 ounce futures contract at 1,050 USD per ounce. Paul’s total costs are, 500 USD interest and 900 USD storage costs, equals 1,400 USD. His revenue is 5,000 USD, as he will receive 105,000 USD for the gold in one year that he bought for 100,000 USD. 5,000 minus 1,400 USD, is 3,600 USD in profit.

Contango can cause inventory to increase, whereas a lack of contango unwinds inventory. Also, during backwardation a reversed cash and carry trade arises: borrow gold to sell for USD and buy long a futures contract to settle the debt when the gold loan matures. The price of the futures contract would be lower than that of the gold borrowed. Whenever demand to borrow gold increases, the gold lease rate (GLR) goes up, which is exactly what happened recently.

Now we can see how GLR and LIBOR are related and how LIBOR can affect the gold futures curve. If LIBOR is lower than GLR there is gold backwardation, if LIBOR is higher than GLR there is contango. Hence…

LIBOR – GLR = Gold Forward Offered Rate (GOFO)

We could say, negative GOFO signals scarcity in the gold market. Unfortunately the LBMA ceased publishing GOFO rates with effect from 30 January 2015 “following discussions between the LBMA and … Market Makers”. Ironically, GOFO rates went dark right after dipping into negative territory in 2013 and 2014.
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[rblong2us]

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Antal Fekete (years ago) made a strong case that backwardation of more than a few days and more than by a tiny amount would spell that "The End Is (Very) Near".
His logic was compelling, but it has been awhile since I last reviewed it. A signal of severe backwardation would be of great use to people like me -- and probably all of you!

I also read and believed this when Antal was a regular on the alt internet.
However since then we have seen gold in backwardation for significant periods of time with little consequence down at our level.

I guess if a market is totally managed then market signals are irrelevant.