Rigged Jobs Report Triggers Extreme Backwardation In Gold

I really don’t like going too far “off the rails” in looking for explanations to occurrences that are completely dislocated from reality.  An example of an occurrence that is entirely disconnected from reality is the 300:1 paper gold to deliverable gold ratio on the Comex. The only explanation for that is that entities operating the Comex are implementing extreme measures to limit the upward movement of the price of gold.   How can there be any other explanation when there is no other futures market in the history of the world in which the ratio of the paper futures contracts outstanding were 300x greater than the amount of the underlying physical commodity available for delivery into those markets.

Try this exercise:  Imagine where the price of gold would be if gold futures trading were removed from the equation.   Too be sure, it would reduce the number of hedge funds involved in trading the gold market via futures.  But the market would be left to find a market clearing price based on the actual amount of physical gold available for delivery and the amount of gold being demanded by buyers for actual delivery.

Occasionally an event occurs in the gold market which points to the extreme degree of artificiality imposed on the market.  It’s a variable that occurs outside of the control of the banks and Central Banks who are highly motivated to keep a lid on the price of gold.

This event is known as backwardation.  Backwardation occurs in a futures market when the spot price of the commodity – in this case gold – exceeds the futures price.  For a lot of technical reasons, futures markets should almost never experience backwardation except in extreme circumstances.   If you can sell your gold at the spot price and buy a futures contract to “guarantee” the delivery of the gold you sold in the future at a lower price than what you get paid today to sell at spot, you’ll do that trade all day long until you run our of gold to sell.  It’s free money – also known as arbitrage.  Arbitrage opportunities should quickly remove backwardation from any futures market.

Only in the gold market it’s not free money.  When gold goes into backwardation it’s because investors who have gold are not willing to engage in “free money” arbitrage because are unwilling to risk the possibility that their futures counterparty will be unable to deliver gold in the future.  In other words they don’t trust the future availability of physical gold.  The risk of delivery default by the counterparty removes the “free” aspect of arbitrage from gold market backwardation.

Today when the phony employment report hit the tape – at the exact moment – 10,800 UntitledDecember futures hit the Comex in the first minute.  This drove the futures price down nearly $20.   (click on image to enlarge).  This is 1.8 million ounces of paper gold. Yesterday’s Comex vault report shows that there were only 151.3k ozs of gold reported to be available to deliver into the December contract.  This is manipulation in the extreme.

Of course, the unintended consequence of this is that this artificial market activity cause extreme backwardation in the gold market.  This is best illustrated with this graphic posted on Twitter by Sandeep Jaitly (@bullionbasis), who is a fund manager:

Untitled1Without getting into the “gory” details of futures trading terminology, this graph shows what happened between the spot price of gold and the futures price of gold. The red line represents the backwardation in the market that occurred when the futures prices were slammed at 8:30 EST. It represents the annualized rate of return you would earn if you sold your gold in the spot market and bought December futures to replace the gold you sold. This of course assumes that you actually receive delivery of the gold.

Another way to think about the backwardation that occurred today in the futures market is that the spot market did not “believe” that the big hit in the futures market when the employment report hit the tape had any basis reality other than that it was a massive paper manipulation operation.  We know this because the spot market price did not adjust accordingly when the futures price was smashed.

The graph above reflects the backwardation that occurred in the Comex futures market. Backwardation in the London LMBA “physical bullion” market has been persistent since 2013.   Prior to 2013, backwardation was an extremely rare occurrence in the gold market.  It happened briefly in 2000/2001 – when the 20 year bear market in gold ended – and it occurred briefly in 2008, just before gold began a run from $700 to $1900.

The fact backwardation in London has been occurring with persistent frequency and lingering for extended periods of time reflects the extreme “disconnect” between the paper gold and physical gold markets.   It reflects a gold market in which the price is being kept artificially low with paper gold because backwardation would only occur when demand for physical gold now is greater than the promised supply of that gold in the future.

Several market indicators are now signalling the amount of intensity being exerted by the elitists to keep the entire global financial system from collapsing.  Negative rates in the European sovereign yield curves which extend out several years now;  the high volatility in the stock markets;  the growing divergence between high yield bond prices – which are quasi-equit –  and the S&P 500;  the negative 10-yr interest rate swap spread;  the very large and very frequent Fed reverse repos; and, of course, the backwardation in the gold futures market, which directly reflects the amount of manipulation required to keep the price capped.

There’s no telling how long this fraud can last, but there will be a lot of people who wished that they had loaded on the Wall Street Journal’s “Pet Rock” when the price was low because at some point acquiring possession of physical gold and going to be extremely difficult and expensive.

21 thoughts on “Rigged Jobs Report Triggers Extreme Backwardation In Gold

  1. Arbitrage, arbitrage, arbitrage.

    Just set up a (global) arbitrage market for the physical already, and get this idiotic charade that has been going on for the last 3 years over with. I’m sure, all 3 of Singapore, Dubai and Shanghai will step up to the plate for setting up arbitrages.

  2. The system whole system is ridiculous! Im just a thick 24 year old professional athlete from england, and not even a very good one at that, and even i see it!

    It doesn’t take a great deal of intellect to realise its all based on insolvent governments lending money to insolvent banks, who lend it to insolvent companies and corporations who let insolvent people walk out the door without paying for them, but making a promise to pay for them some time in the future.

    Surely that cant go on forever?

    1. James
      You are certainly not “thick” if at 24 you are taking an interest in this stuff and you have a reasonable idea of what is going on.
      Thick is no interest, no care or concern……..

  3. This Comex should be removed from the loop as a price-determining “market”.

    Of course, easier said than done. Could you one day do a post on the mechanics of exactly HOW Comex paper trades are wired into a system which gives us Kitco’s “gold prices” or Sharps Pixley’s “gold prices”? Is it all done by computer? Presumably…but if so, why don’t mine sales of dore show up in price numbers? Why don’t jewelery fabricators purchases affect price calculations? Why can thousands of tonnes of metal exchange hands in practically all other parts of the world and make no difference whatsoever to price?

    WHO selects “Comex”, “Globex”, London etc., as the sole price determinants? Governments? Regulators? Who? International? Or US only? Have any of these entities ever been unplugged?

    And WHO is it permitting 300-to-one leverage and naked shorting? It can’t just be US regulators: such a decision must be international, in what is supposedly an international market.

    It has become very curious: during US stock market open hours “the gold price” drops and just STAYS dropped for the entirety of the session – again and again and again, even though markets all over the world (including China! India!) are open during some of these hours.

    Does “the gold market” only trade on US government data releases? Or is something less puffy and airy still important?

    Does anyone outside 9AM-4PM EST have ANY effect on “the (world!) gold price” at all????

    I do look forward to some answers, but they never seem to come.

    1. I’ve always wondered about these issues. No one in the alt pm space has explained this for lay people to understand afaik.

  4. I’m just glad all the key manipulation days of the past few weeks have passed. They were:

    – The Fed announcement
    – Raising (suspending) the debt ceiling, and budget deal
    – Yellen testimony to Congress
    – NFP report

    All of those events are always a reason to slam PMs, and PMs got slammed. SSDD

  5. The whole precious metals investor community seems to be biased in their thinking with the “shorts have to be covered someday” -premiss. However, there’s a sustaining rule that has been unchanged for nearly as long as you want to observe it: “The bank” never loses.

    Day by day it’s getting clearer that the PM pricing system won’t meet their liabilities in the future in physical terms. That leads me to think the exessive shorting of PMs by the cartel might be a winning bet (in fiat terms) after all, while the zombiefication of this paper charade finally isolates itself completely from the physical market, and the price of their paper (digi) products rockets heading to zero . And the shorts will make loads of fiat all the way down.

    Precedents (bailouts 100c on the dollar, MFG, London whale, etc, etc.) have been sown.

    Dave, could you ponder on this one, thanks.

  6. It’s surprising how quickly this thing is going
    down hill for TPTB. They obviously are losing
    control and in their desperation their actions
    resemble that of a drowning person who will grab anything available in a death grip to try
    and keep themselves afloat. I suspect Yellen
    and crew are now close to the panic stage when
    anything or everything could happen in a very
    short period of time.

  7. The manipulators are digging themselves a hole again! Drive the price of gold and silver down too low and they spark a buying binge by the small retail investor. As happened this past Summer into early Autumn, when shortages of small denomination bars and coins pressured mints and their physical silver supply.

    If charts and market analysis have ANY meaning left, then the prices of gold and silver should not fall below $1,078.50 and $13.95
    Only 1% of the small retail investor community is buying small denomination gold and silver products. It would not take too much more of a fall in price to increase demand dramatically. Look for more physical small denomination shortages to occur.

  8. The End of Chapter 11 Bankruptcy Protection

    Is Chapter 11 doomed? There are reasons to think that the famous financial reorganization law won’t work much longer in its current form.

    It has already been widely remarked that the tendency for distressed firms to grant first, second and even third liens on their assets makes reorganization all the more difficult. The bankruptcy code was really not intended for a world where everyone is a secured creditor.

    And there is the trend of putting companies’ real estate assets into REITs, or real estate investment trusts. Caesars Entertainment is proposing to put its real estate into a REIT as part of its Chapter 11 plan. But a host of other companies have already made this move or are considering it. REITs benefit from a tax subsidy, provided that they pass on all of their real estate income to shareholders. Separating a firm’s real estate into a distinct corporate entity allows the company to enjoy this subsidy.

    From a bankruptcy perspective, this means that if any of these companies ends up in bankruptcy – or in Caesars’ case, if it ends up in bankruptcy again – the operating company will no longer have direct control over the company’s real estate.

    This continues the trend of slicing and dicing the company, giving priority claims to select creditors before the company ever thinks about filing for bankruptcy, and sometimes even when bankruptcy is already looming. In either case, the results in bankruptcy are significant, leaving the bankruptcy estate with increasingly narrow options if the company is to survive.

    In the 1980s, law professors would talk about corporations as nothing more than a bundle of contracts, but modern corporate finance is making that a reality. The question is whether Chapter 11 works with such a company, especially if some portion of those contracts are “safe harbored” from the operation of the bankruptcy code.

    http://www.nytimes.com/2015/11/07/business/dealbook/the-end-of-chapter-11-bankruptcy-protection.html?

    interesting

  9. The one thing I still have yet to see a clear explanation is how do bankers continue to find and deliver gold if we are in extreme backwardation, and paper vs physical is 300:1 ratio. I understand the naked paper selling is artificially compressing the spot price, but shouldn’t the “great” demand blow up the Comex/LMBA exchanges? The only explanation is that there continues to be good supply of gold, which would undermine the backwardation theory. This just doesn’t make sense…

    1. Venezuela has been forced to liquidate almost ALL of their gold, which Chavez had worked very hard to get out of the dirty grip of Bank of England. Not sure how many tons that amounts to, but this somewhat explains the brazenness of current shenanighans, as well as what went on in August.

      Unlike silver coinage shortage in the summer, we’re yet to hear of any similar gold coin shortage issues for gold eagles, gold maples etc.

      http://www.reuters.com/article/2015/10/29/venezuela-gold-idUSL1N12T1V620151029

        1. xclusive: Venezuela and China in talks for currency swap – sourcesNovember 6, 2015
          November 6, 2015
          Picture of the Day

          CARACAS (Reuters) – Venezuela’s central bank is in conversations with its Chinese counterpart over a possible currency swap that would allow the South American nation to boost its dwindling international reserves, two sources familiar with the talks told Reuters.

          The arrangement, which one source said could total around $3 billion, would provide financing for Venezuela to import Chinese goods or maintain part of its reserves in yuan, leaving more dollar reserves available to meet foreign bond payments amid investor concerns of a potential default.
          http://www.thefiscaltimes.com/latestnews/2015/11/06/Exclusive-Venezuela-and-China-talks-currency-swap-sources

          why doesn’t V just swap gold with China?

  10. Maybe from the beginning West’s plan was to sell gold high to East , now they pushing gold down maybe towards $700 , then they will try to buy back for that price.
    In meantime they trying to demolish BRICS countries and theirs economy’s.
    In few years West will force them to sell theirs gold for peanuts.
    At this moment there is no solidarity among them , that’s big big mistake.
    Somebody has to challenge fraud system , otherwise having thousands of tons of gold changes nothing.

    1. Agree. They got the specs positioned so they may even finally be able to tickle 1k. The game has gotten so predictable be use every knows the specs don’t take any meaningful delivery and you can’t out leverage the banks in the paper game

    2. Agree. Commercials got the specs to position just how they wanted. There is now enough fuel that gold may finally tickle 1k. The game is ridiculously easy for the banks as everyone knows specs don’t take meaningful delivery and you can’t out leverage the banks in the paper game

  11. Here is a suggestion to put to the CFTC:

    All gold (and silver for that matter) futures ‘ounces’ should be valued according the the ratio of COMEX registered physical gold (gold available for sale) and the amount of ‘paper’ contracts issued and outstanding. So, at present if the ratio of paper to physical stands at 300:1, then each paper contract should be worth 1/300 of a physical ounce! The value could be adjusted as the number of contracts issued increased or declined which, in turn, would act as an incentive for fewer contracts to be available as fewer contracts would mean each one would be valued higher. The corollary would be for the registered physical gold (or silver) available to be increased which would then allow more contracts to be issued without an (immediate) effect on the paper contract value. Each paper contract would be value at the time it was bought or sold (adding to or subtracting from the risk as compared to paper contracts issued before or afterwards). The added risk is similar to a currency cross risk (hypothetically, I have to exchange GBP for USD in order to buy COMEX futures contracts – I have never actually bought one!) which would act as a possible deterrent to financial entities accumulating oversized positions as the risk of buying contracts at diminished value compared to those issued later (if the overall number of paper contracts outstanding was falling) would have to be taken into consideration. It would be a half-way house to abolishing all gold and silver futures contracts and options based upon them, too!

    Just a thought (if you can understand it)!

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