COMEX Gold and Silver in slight backwardation ...

[Toro]

The ETFs are supposed to hold the physical metal, not engage in futures contracts. I have no doubt that they do hold metal. But I do have doubts about whether they have full backing for their outstanding issued shares. Much has been written about this (from several analysts) over the past couple of years. Many folks also claim that the custodians are using this metal to back short positions in the futures markets.

The 10K says that they are barred from holding futures.

And wouldn't the auditor want to see their inventory? They might not count each and every bar, but I thought an auditor would at least want to go into the vault to see if its not empty.

 

[Toro]

Here's another question. Why is backwardation so shocking? I know that gold is usually in contango but most commodities are usually in backwardation. In fact, something like 2/3s of the return from commodities over the past 50 years has come from playing the roll. For much of the past two years, oil was in contango as pension funds poured hundreds of billions of dollars into the commodities markets, which reversed the traditional backwardation of the strip. But this wasn't really forecasting anything. If you bought the WTI one-year forward a year ago and held it, you got crushed.

Today, we had 3-month treasury bills yielding -0.01%. The $30 billion auction was priced at 0.00%. There are a lot of weird things going on. Why isn't gold backwardation merely a technical manifestation of the extreme fear in the credit markets? After all, two years ago, junk bonds were a record low spreads, Argentine bonds were trading at 275 bps over, and it looked like stocks would never go down again. Now, its the exact opposite. The market was dead wrong then. Why is it correct now?

 

[gonegolfin]

I asked a friend of mine who collects gold and silver coins and follows the physical coins market. What he tells me is that the premium is primarily in the American Eagle coins. There is little if any shortage in the Canadian Maple Leaf coins, the Krugerrands, etc. Is this correct?

It seems that there is no shortage of Canadian Maple Leafs, which you can buy directly from the Canadian Mint.

Royal Canadian Mint - Gold Coins

The Eagles have had the most intense shortage. These are also by far the most popular coins. But the shortage has come and gone and come again in the coins of all types (not just Eagles). There were periods of time where you could not get any of the mint coins in Gold or Silver. The supply has been very inconsistent, which is what you would expect in a shortage. For more than a month, none of the coin dealers had anything to sell locally and larger national dealers were also dry.

A couple of months ago my neighbor was attempting to buy Silver coins. The only item available from this very large and influential dealer was Canadian Maple Leafs. But they had a $4.50 premium over the spot price attached (which eventually rose $3.00 until they ran out). It took him six weeks to get his coins. Two weeks later, a small batch (less than 2000) Silver Eagles became available at $6.99 over spot, but the Canadian Maple Leafs were gone. It has been hit or miss for a period of time. In the last month, supply has improved. Just last week, APMEX came across 200,000 Silver American Eagles. These were sold out in less than 24 hours and they have none again.

You can get some Silver Canadian Maple Leafs from APMEX now. But they are delayed and are currently priced at $3.99 over spot in bulk purchase (500+). That is about a 40% premium. The highest I have seen the Maple Leafs or Silver Eagles are $7.99 over spot (when Silver was just under $10/oz.).

The Gold coin supply has improved substantially since you can now purchase Gold Eagles and Gold Maple Leafs. But they still have a premium attached to them.

But the shortage has not just been limited to coins. It has also been limited to bars and generics. There was a significant period of time where 100 oz. bars could not be found. And when a few trickled in, there were significant premiums attached. Even generic Silver rounds have experienced shortages and delays. Northwestern Territorial Mint has significant delays (over 3 months) on various products. Customers have become quite frustrated.

Brian

 

[Toro]

Brian

I looked at buying gold coins a few years ago when the gold was much lower and hadn't seeped into the public consciousness. There was a premium over them at the time. And the bid/ask spreads were far too wide. That's why I bought the ETFs. It seems to me that this a constant, perhaps a liquidity premium because they are difficult to trade.

 

[gonegolfin]

The 10K says that they are barred from holding futures.

And wouldn't the auditor want to see their inventory? They might not count each and every bar, but I thought an auditor would at least want to go into the vault to see if its not empty.

I should have worded it better. I was agreeing that the ETFs do not engage in futures contracts.

I do not think anyone is saying that the vault is empty. Folks are questioning whether there is full backing. I do not know whether audits have actually been performed. Here is one of the articles I have seen in the past addressing full backing as well as short selling. Weekly Commentary

Brian

 

[gonegolfin]

Brian

I looked at buying gold coins a few years ago when the gold was much lower and hadn't seeped into the public consciousness. There was a premium over them at the time. And the bid/ask spreads were far too wide. That's why I bought the ETFs. It seems to me that this a constant, perhaps a liquidity premium because they are difficult to trade.

There is always some premium attached. But not nearly the premium that we have experienced in the last six to nine months. For years I have purchased Silver American Eagles at $1.49 over spot and Gold American Eagles at $23.00 over spot. These premiums are history. I am always looking for deals and call coin shops every week. There have been no deals in recent months. If you find some, send it my way.

Additionally, dealers have been offering to buy back various products at well over spot price. This includes pre-65 Silver as well. Three months ago I was offered $22/Silver Eagle by a local dealer.

Brian

 

[gonegolfin]

Here's another question. Why is backwardation so shocking? I know that gold is usually in contango but most commodities are usually in backwardation.

I would read Fekete's articles as he explains it better than I can. There are other authors available that have been writing about it recently. But Gold is not just usually in contango, it has always been in contango (using the Gold basis as the definition). The reasoning being that it is a monetary metal with significant storage, insurance, and lost interest costs, which separates it from other commodities.

Today, we had 3-month treasury bills yielding -0.01%. The $30 billion auction was priced at 0.00%. There are a lot of weird things going on. Why isn't gold backwardation merely a technical manifestation of the extreme fear in the credit markets?

I think the question to ask is why are spot prices higher than delivery contracts several months out? And why are investors not executing on this arbitrage? COMEX Gold is leaving the warehouse.

Brian

 

[Paulie]

I've dumped a couple silver rounds on eBay lately, and I'm getting $5+ over spot for generics. I'm still profiting from coins I bought at $17. It's crazy.

 

[Zoomie1980]

Another article by Prof. Fekete:



"Has the Curtain Fallen on the Last Contango in Washington?" by Antal E. Fekete. FSO Editorial 12/08/2008

Conspiratorial Comedy at it's finest..... Libertarian literature can be pretty entertaining at times.