Monetary Metals Supply and Demand Report: 30 Nov, 2014

The fireworks came this week, with a vengeance—and we do not mean the price moves in the metals. The gold price fell $34, or 2.8%. The silver price fell exactly $1, or 6.1%. We are careful to say that it is the price—the exchange rate to dollars—that goes up or down. Gold does not go [...]



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9 replies
  1. magnus says:

    Keith,
    Shouldn’t the rot come from Long to short contracts? What does it implie that the opposite happens?
    Why should longer contracts be more trusted than short?
    Magnus

    • Keith Weiner says:

      Magnus,

      That is a very interesting question. I think one could write a serious paper on the topic of whether backwardation should start with the long-term contracts or the short.

      I addressed only the short to long case, because that’s what happened on Friday. There is a consistent tendency of the near contracts to have a falling basis (though not contracts out so far).

      In monetary collapse, would it be the long contracts where the bid collapses first? I think a case could be made either way. Pro: people will distrust a multiyear contract before they worry about a contract that will deliver in 60 days. Con: there is little open interest so far out, so a collapsing bid will not necessarily drag down the offer. And backwardation is when cobasis > 0 which is when the bid on spot > offer on the future.

  2. mdragosi says:

    On the other hand, when the cobasis is positive, anyone can sell a gold bar and buy a future. This is known as decarrying, and will tend to cause the open interest to fall.

    …so with gold cobasis well in the positive territory, we should expect more physical gold selling?

    • Keith Weiner says:

      mdrgosi: You should not think of carrying as buying, nor decarrying as selling. These are arbitrages that affect the basis, but not what outside observers see as the price.

  3. jfbastian says:

    Hi How do the negative GOFO rates figure into this scenario These rates have been negative for the past month and increasingly so. This Am the one month rate is -0.58. Seems to me that this is another indication that there is scarcity of gold

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