Monetary Metals Supply and Demand Report: June 23, 2013

The Gold Basis Report is the only fundamental analysis of gold and silver available. The basis is a measure of availability of metal to the market. When the basis is high and rising, then metal is abundant. When the basis falls below zero, the gold goes into backwardation then that means danger (and likely higher [...]

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7 replies
  1. petter_w says:

    Thanks for posting this.

    Are you saying that the only reason to hold a future contract after delivery notice is to take delivery?
    If so, please let me know if I understand this correctly:
    The selling by naked longs right before delivery notice pushes down the bid and causes temporary backwardation – but the only reason to buy these contract is to take delivery. But then how can there be a divergence between the bid on the futures that is expiring and the cash price if one is equal to the other in the sense that the only reason to hold a future is to take delivery? Doesn’t this then reflect a distrust in the ability to deliver on futures contracts?

  2. jmf says:

    “September silver was backwardated, but just by a smidge (under 0.1%) last week. By Friday, it hit around 0.4%. That is a big move in a short time. And yet the silver price has kept falling”

    So silver has recently become more scarce as the price has fallen.

    Is this not counterintuitive and perhaps a reason why people think these markets are manipulated especially when high volumes of contracts are dumped in thin overnight markets ?

  3. monetary says:

    “The story told by these long-dated contracts is twofold. First, the bases are now lower than they were in January. That means the market is tighter, scarcer. Second, since the bottom in April, they have been rising. Scarcity is decreasing.”

    Given the current trend in gold prices, this would seem to be an incredibly bearish indicator. “The dog that didn’t bark in the night” might well have been the sound of a heretofore unknown source of gold getting uncorked. How do you reconcile this with backwardation and other bullish analyses?

  4. Keith Weiner says:

    petter: one could do the arbitrage: sell physical / buy the expiring future. One would make the spread. To put it in perspective, one could get between 4 and 7 cents per ounce to do this with July silver.

    jmf: why is it counterintuitive? A lower price encourages buyers and discourages sellers.

    monetary: There are several ways to read it, and clearly it could be interpreted bearishly. Of course, the gold price fell $75 after I wrote that. There are other interpretations that I am still thinking about. More on this topic in the future…

  5. Rueffallais says:

    Keith ,

    Do you make the comparison (in number of days) of when the basis for each contract became <0, in order to see if the backwardation is speeding up or not ?

    THanks a lot for all your analysis

    • Keith Weiner says:

      Rueffallais: I posted that statistic a few weeks back in a comment to one of the basis reports and I may have included it in a basis report itself. It has been increasing for gold, which is what I looked at, and I believe for silver too though I did not specifically look.

  6. Mark says:

    Further to those interesting points above – I received a letter from our retail bullion vendor apologising for back orders of bullion aged to over two months caused by The Perth Mint’s inability to keep up to current demand.
    Given the basis for Gold are now lower than they were in January – the market is showing scarcity and in consideration that since the bottom in April, the basis has been rising – scarcity is decreasing. That seems in conflict with what I understand is heavy demand from private buyers which has caused a back log in delivery of Gold bars –the lower the price the more demand which is behaviour more like a consumable. From your previous articles – would a plausible explanation may be that the current scarcity of bullion is a ‘process’ backlog (adjustment) rather than a market signal?

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