Gold Backwardation Stories
December 8th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
If I buy a wheat contract, I should have to take delivery of the physical wheat on the specified date. If I sell a wheat contract, I should have to deliver the physical wheat on the specified date. I should not be allowed to buy or sell those leveraged contracts without having to take delivery, or deliver, physical goods. I shouldn’t be allowed to close my position without an exchange of goods.
The same should hold true for gold, coffee, palladium or any other commodity.
It is absolute madness that commodities are bought and sold using leveraged vehicles in markets that allow participation by speculators; individuals and organizations who have no interest or connection to the underlying physical commodity.
—CBOT Resembles Carnival Act as Billion Dollar Black Box Operators Move In
Backwardation is yet another artifact of the confetti currency system. Backwardation occurs when the price of a commodity, for delivery in the future, is lower than the price of the same commodity for immediate delivery. This indicates that confetti paper market participants have lost touch with the underlying reality of the supply/demand situation on the physical commodity in question.
For months, I wrote about how speculation in oil futures contracts was one of the factors driving oil prices higher. That is, parties with absolutely no ability to deliver or take delivery of oil were using credit to manipulate oil prices (to some extent). As oil ran up in a ridiculous manner, I maintained that prices were due to a combination of the collapsing dollar, tight supplies and speculation/manipulation. Now, oil prices are being driven lower by a combination of a rising dollar, more plentiful supplies—despite depletion and cutbacks by producers—and shortside speculation/manipulation.
Yes, speculation may also be used to manipulate prices to the downside. On gold, parties with absolutely no ability to deliver physical gold are using credit to manipulate prices (to some extent). They are creating, essentially out of thin air, promises to deliver physical gold in the future.
Most people have no idea how the futures markets work, and I’m trying to make this as simple as possible. While there are many more details: That’s it, in a nutshell. Market participants with credit can promise to deliver or take delivery of a physical commodity at some price WITHOUT ANY ABILITY TO ACTUALLY DELIVER OR TAKE DELIVERY OF THAT PHYSICAL COMMODITY.
So what, that’s the futures market. What’s the problem?
The problem is that, occasionally, reality kicks in.
On gold, for example, an increasing number of market participants who bought gold futures contracts may decide that they want to take delivery of the physical metal. That is, rather than closing out their positions by selling the contracts to someone else (cash settlement), they elect to take delivery of the gold itself.
This backwardation disequilibrium has the potential to throw a blinding light on the fraud based commodity markets in general, while causing the price of gold to literally explode higher as market participants move to execute deals in the spot market. Key word: Potential. It depends on how many people demand physical delivery of metal.
Here’s a site that’s tracking the physical inventory of gold that’s allocated for delivery (resulting from Comex futures contract settlements): Meltdown2011 – Vaporize Comex Countdown.
Here are some gold backwardation stories that are floating around right now:
Red Alert: Gold Backwardation!!!
The Manipulation of Gold Prices
Gold to Break Upside, Dollar to Break Down (First analyst to notice gold’s backwardation, as far as I know.)
Research Credit: IL, bozomind, pookie
