Tag Archives: backwardation in gold

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.

Massive Shortages In Gold And Silver Developing – GLD Looting Continues

Renowned gold expert James Turk says prolonged gold backwardation like we are seeing now, where the spot price is higher than the future price, has never happened before. Turk contends, “No, never, and I am a student of monetary history as well, and I have never seen it happen like this in monetary history.  – James Turk on Greg Hunter’s USAWatchdog

The signs are everywhere.  We are seeing extreme “backwardation” in gold on the LBMA. Backwardation occurs when the spot price is higher than the future price for LBMA forward contracts.  It means that buyers of gold are willing to pay more for gold for immediate delivery than pay a lower price to receive delivery in the future (30-day, 60-day, etc).  It means that physical gold buyers do not trust the ability of the market to delivery physical gold in the future.

It is an unmistakable sign of physical gold shortages.

Not surprisingly, the LBMA suspended reporting the gold forward rate which was the best indicator of physical gold shortages in London, but we can still get reports on physical market conditions from London gold market participants, like James Turk.

To reinforce this information, Bill Murphy reported his latest conversation with his LBMA trader source in London (www.lemetropolecafe.com):

The essence of it is more confirmation that the BIG MONEY is buying down here at these price levels.More confirmation that silver is extremely difficult to buy in size. It takes two to four weeks for delivery. What is new is that buying gold in size is now becoming a thing … for our source says it now takes two weeks to buy in size.

Perhaps the most visible sign is the removal of gold from the GLD ETF.   The only way gold is removed from the Trust is when an Approved Participant bank redeems 100k share block in exchange for delivery of bars from the Trust. – (source:  John Titus of the “Best Evidence” Youtube channel, edits are mine) – click to enlarge:

GLD tonnage.001

Make no mistake about it, the bullion banks often can borrow GLD shares to scrape together 100k share lots in order to redeem gold. Or they can smash the gold price with paper and force weak holders of GLD to sell shares in the hands of the bullion banks.  In the last two weeks the short interest in GLD has soared 49% from 9.4 million shares to 14 million.  That represents roughly 46 tonnes.

The ongoing raid of GLD gold is perhaps the most direct evidence that the Central Banks and their bullion bank agents are struggling to find gold in which to deliver into Asia.  But speaking of which, something interesting is occurring on the Shanghai gold exchange.  In the last three days, 298 tonnes of gold have been delivered into the SGE.  While everyone monitors the amount of gold withdrawn from the SGE, the amount of gold flowing in to the SGE is just as important.   This is by far the most amount of gold that has been delivered into the SGE that I can recall.

I get my data from John Brimelow’s “Gold Jottings” report, which is invaluable for tracking the physical gold market outside of London.  He had this to say about the stunning flow of gold into China over the last three days:

Delivery Volume was 90.444 tonnes (Wednesday 112.454 tonnes) and open interest surged 48.374 tonnes (11.26%) to 477.920 tonnes. Since last Friday Shanghai open interest has risen 18.68%. Something is happening in gold in China. What is not immediately apparent.

Finally, to further reinforce the evidence of physical market shortages, we can monitor the gold lease rates, published by Kitco everyday.  I sourced this graph from Jesse’s Cafe Americain, who sourced it from Sharelynx – click to enlarge:

JessesCafeGold lease rates spike up like this when there is heavy demand from bullion banks to borrow physical gold from Central Banks in order to sell the gold into the market or deliver gold that can’t be readily procured in adequate quantities in the spot market.  It is one of the most visible signs that there is a shortage of physical gold on the market.

To be sure, the unprecedented degree manipulation of the gold price in the paper gold market reflects a serious desperation by the Central Banks and western Governments to cover up an enormous disaster fomenting beneath the heavily applied of veneer of “things are so good we need to raise interest rates in September” mantra.  In fact, the specific reason to keep a lid on the price of is to enable the Central Banks to maintain a zero interest rate policy.

The truth is, the Fed can’t afford to raise interest rates and anyone with two brain cells to rub together and a willingness to look at the truth knows that the Fed is trapped – unless it wants to crash the system for some reason.

We note that physical off-take of gold is spiking higher, with Reuters reporting yesterday that the South Koreans are buying gold in record sums while the US Mint reports that sales of gold coins in July were nearly 5 times what they were a year ago.  – John Brimelow, “Gold Jottings” report