Monetary Metals Supply and Demand Report: 17 Aug, 2014

We have been bearish on silver in terms of its price measured in objective money—gold—for a long time. We have also expressed bearish opinions on silver as measured in terms of the US dollar. The current trend began on April 26, 2011. This was when the speculative silver bubble burst. On Monday April 25, the [...]

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4 replies
  1. kendo451 says:

    Hi Keith.

    Does the fact that your basis/co-basis analysis heavily relies entirely on the COMEX contracts introduce some risk of distortion?

    There are a number of people and organizations that allege the Federal Reserve and bullion banks are manipulating the COMEX prices by selling unbacked contracts, as well as a longer terms process of leasing central bank gold to bullion banks who have sold it into the jewelry markets.

    I don’t know how true these allegations are. I certainly don’t see how one could sell unbacked contracts without having to deliver or else buy them back when they come due.

    But, if the central banks have leased or sold several thousand tonnes of gold into the markets over the past two decades, that is also listed on the balance sheets of those banks/countries as reserving their currency, wouldn’t that set up the conditions for a massive short squeeze on gold?

    James Turk argues that gold has gone into backwardation because the market prices have been manipulated to be significantly below the real demand for physical gold.

    The Bank of India reported that the ratio of physical to paper claims on gold is 1:98, which would seem to provide some official substantiation to these claims.

    Your co-basis analysis seems to work very well at predicting short term COMEX movement. But does it take into account the fact that the Federal Reserve can sell unlimited gold contracts, and then print unlimited dollars to buy them back at the lower price, or if necessary at a higher price?

    If, as some allege, there is some kind of fraud or manipulation underlying the COMEX it seems likely that this could result in a very non-linear results that were not predicted by the basis/co-basis analysis.

    Your algorithm seems to provide accurate predictive results, but no algorithm can give valid results when fed invalid data. I’m questioning the long-term validity of the COMEX data.

    • Keith Weiner says:

      kendo: The whole point of the basis analysis is to look at the spread between spot and future. If someone were to sell large numbers of futures contracts they could push down the price of the futures contract. Suppose they pushed down the future $100. There would be a $100 backwardation. I would be standing on the rooftops bellowing at the top of my lungs if such an unprecedented thing occurred.

      I am well aware of the claims of manipulation. I have written an substantial body of work (all of it published on this site) analyzing every aspect of it: warehouse stocks, GLD stocks, the events of Apr 12-15 2013, China, etc. If you’re interested, I recommend you browse through the site going back, page by page of the blog, to around Feb 2013.

      The issue is not whether a contract is sold “unbacked”, i.e. without a bar sitting in the warehouse. A gold miner may sell a contract and it will have the gold by the time the contract matures. Or a bank may lease gold out for 6 months and sell a future that matures in 6 months. So you cannot count contracts and compare to bars in the COMEX warehouses.

      Many people define backwardation as a negative GOFO. I think that is a rough approximation. It will get you in the right ballpark. For more precision, one must compare the bid on spot to the ask on the future. This is the actionable trade in the market. I wrote an article on negative GOFO and backwardation, it’s in the blog archives.

      I hope this helps.

  2. Greg Jaxon says:

    What drives Negative GOFO and Temporary Gold Backwardation
    Why is Gold Draining Out of COMEX Warehouses?
    may be the best explanations of the underlying logic.
    Outright frauds aside, the logical possibility of massive manipulation in the monetary metals market would tend to sabotage the widely-held hope that future monetary standards could be based on gold because of its inherent stability. I find that Keith’s views come from the direction of “you can’t fool Mother Nature” i.e. the market sees through all agendas and the forces that recognize gold as money are simply too fundamental to be easily undermined.

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