COMEX Gold and Silver in slight backwardation ...

Discussion in 'Economy' started by gonegolfin, Dec 6, 2008.

  1. gonegolfin
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    gonegolfin Member

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    ... again. They first entered into backwardation on Tuesday and Wednesday (first time in history (at least for Gold) - on close) of last week.

    COMEX Gold ...
    Gold (Globex) Futures Price Quote
    The January contract is down $1.60 from the December contract. However, much more importantly, the front month contract (February) is down $0.10 from the December contract.

    COMEX Silver ...
    Silver (Globex) Futures Price Quote
    The January and February contracts are down from the December contract. But the front month contract (March) is still slightly higher ($0.04) than the December contract.

    Brian
     
    Last edited: Dec 6, 2008
  2. Toro
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    Brian

    The gold silver ratio is 80:1. What do you think of that?
     
  3. gonegolfin
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    gonegolfin Member

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    Well, on the surface I would say that Silver is getting hit harder due to recessionary and deflationary fears due to its significant use as an industrial commodity. I think it also says that Gold has had some safe haven buying in the last several months. This is supported by the fact that there has been significant physical buying during this time period. Even ETFs (not physical) have increased (as they have for Silver).

    Brian
     
    Last edited: Dec 6, 2008
  4. Toro
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    Do you think a pair trade of long silver/short gold would be profitable? The ratio has averaged 60:1 over the past 15 years and 65:1 since 1980. It was ~55:1 in August.

    It got has high as 120:1 in the 1980s. Do you have any idea why that was?
     
  5. gonegolfin
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    Based on the historical ratio, it looks like a good trade. But I would not touch it.

    #1 I would not want to be short Gold at this point in time for many reasons. Gold probing backwardation is one reason. Another is that physical buying has been intense. Also, the Fed has flooded the banks with massive reserves which could make their way into the money supply ... with the result possibly being stagflation or a reflation.

    #2 If we do enter a deflationary (money supply contracting) recession or depression, Silver will get hammered. But I am not at all convinced Gold will go down much from here. I think it continues to be a safe haven.

    I think that we will need to see inflation and more confidence in the world economy for Silver to move significantly higher. Or a COMEX default (or long term backwardation), which I think is unlikely.

    IOW, I think the ratio could just as well get worse from here as better. I just continue to have long positions (physical metal) in Gold, Silver, the US Dollar, and some selected foreign currencies for now. But I do have some long trading positions in Gold and Silver from time to time (none at present).

    As for the 1980's, I would need to check the charts. But the ratio may have gotten out of whack when the Federal Regulators forced liquidations of the Hunt Brothers' long Silver positions. Meanwhile, Gold was on a tear at the time. Or, it is possible it happened immediately prior to the Hunt brothers establishing their positions (Gold moving up towards $850 while Silver was still lagging).

    Brian
     
    Last edited: Dec 6, 2008
  6. Toro
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    Here is some context.

    I have daily data that only goes back to 1984. This is the ratio since that time.

    [​IMG]

    The price of gold

    [​IMG]

    The price of silver

    [​IMG]

    As you can see, from 1984 to 1991, the ratio rose from 40 to 100. My guess - and I emphasize the word "guess" because I don't know - is this happened because of a rise in the supply of silver.

    You can see that the spike in the ratio over the past few months is unprecedented, at least over the past few decades. When a pairs trade moves that hard in the short-term, my inclination is that there is something out of whack.

    Now, I have not checked the shape of the futures curves for both metals - I'll check that next week. However, the ratio on the December 10 contract is 78, very similar to the spot ratio.

    What do the curves being flat tell you? Normally, gold and silver are in contango, are they not? Also, why does it matter that there is intense buying of the physical if I execute the transaction in the futures market or the swap market, say off the Dec 10 contract?

    Why do you think gold will not get hammered in a deflationary environment? Gold has fallen 30% from its highs. It was presaging the end of inflation. If all this money that was created around the world flowed into the gold market over the past five years is now being destroyed and we are in a deflationary cycle which means that the money supply is contracting, if all real prices of assets are falling, why would gold be spared? It is economic logic that gold would fall. Gold held up in the Depression because the price of gold was fixed by the government. Its not fixed now.

    It is interesting to note that the Dec 11 oil futures price is $70, nearly $30 higher than the spot price, though that's down $5 this week, and the steep contango be a reflection on future supply concerns more than anything.
     
  7. editec
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    Any idea what effect the change from film to digital is having on the price of silver?

    Anyone have any idea if, based on atom weight and probability statistics, the ratio of silver V gold that we currently have is in any way in relation to the probable amount of gold and silver that exists on this planet?
     
    Last edited: Dec 7, 2008
  8. gonegolfin
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    The futures market is out of whack.

    Not just normally. Always. Gold has never been in backwardation with respect to the spot price. There has been a time where some of the contract months were in backwardation for a few hours. We are in uncharted waters. It may resolve itself with additional COMEX supply. But if not and we enter into a significant backwardation for a non-trivial period of time ...

    Because there is now less trust in the futures market. There is less trust that the metal will be there, hence the temporary backwardation. A nice arbitrage was setup last week where spot metal could be sold into the market and a futures contract could be bought back for less. But if there is no confidence that the future metal will be delivered, folks will not part with their metal in such a trade. This is bad news for the futures market and extremely bullish for Gold. But it is important to note that while this is significant news, the backwardation we have seen thus far is minor and has not been consistent ... yet.

    Significant physical demand has manifested itself in the physical coin and billion markets, the ETFs (which continue to build holdings), and now physical demand in the futures market. Gold and Silver delivery demand is on pace to exceed the high numbers since I have been watching these markets.

    You can see the delivery notices for Gold, Silver, and Copper on this page ...
    NYMEX.com: Gold
    Through Friday (12/5), 12,164 December Gold contracts were submitted for delivery (1.2164 million ounces). 5466 Silver December contracts were submitted for delivery (27.33 million ounces).

    Warehouse stocks can be found here ...
    NYMEX.com: Metal Warehouse Stocks
    For some reason, the warehouse stocks report was not updated on Friday (12/5). The COMEX currently has a max of 2.918 million ounces available to satisfy delivery demands (the actual number is less, potentially much less).

    Gold has fallen nearly 25% from its closing high on the futures markets. The physical price has been higher since March (even moreso for Silver).

    I do not think it will get hammered because the increased flow into the physical metal has shown that it is being considered a safe haven, even if the paper futures market shows it to be less so (but it has been holding up here as well).

    As for the end of inflation, I think it is a hiatus for inflation. I think that the massive monetary reserves that have been pumped into the system will eventually make its way into the money supply (via lending or investment by the banks). Although, I think it may take a year or more. If it does not, equity markets will get hammered.

    I should also mention that the current COT levels are very bullish for Gold. So, weighing all of these factors in this post, I am not shorting Gold.

    And/or the expectation that demand will be back by then. Which will mean somewhat of a reflation.

    Brian
     
    Last edited: Dec 7, 2008
  9. gonegolfin
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    Not much, according to Silver expert Ted Butler. Any negative effect on demand has been at least offset by the many other new uses for Silver, according to Butler. Yearly silver demand continues to outstrip yearly mine supply.

    Much has been written about the amount of above ground stocks of Silver versus Gold. Some claim that above ground Silver is more rare than above ground Gold (and go to significant lengths to prove it so). I do not believe this, but I think the gap has narrowed.

    Brian
     
    Last edited: Dec 7, 2008
  10. Toro
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    Brian

    If there is a shortage of the physical, why aren't the ETFs higher?
     

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