The Last Contango Basis Report
Gold and Silver Price
The purpose of this Report is to shed some light onto market dynamics, focusing on the basis. To summarize, a rising basis tends to go along with a falling cobasis. This is not a bullish sign for the dollar price. A falling basis along with a rising cobasis is a bullish sign.
Our analysis of the basis led us to call for the price of silver to fall in gold terms on January 24. When we produced the video, the gold:silver ratio (i.e. the gold price divided by the silver price) was 52.3. As of close of market yesterday, Friday, the ratio sat at 55.1, which is an increase of 5.4%. When you consider that the silver price in gold terms strips out the volatility of the collapsing dollar, a 5.4% change in a month is huge.
In this weekly Report, we will show graphs of the basis for gold and silver along with our commentary.
Gold Basis and Cobasis
There has been a steady falling trend in the basis all year (and longer). On February 20, it may have put in a bottom. We shall have to see. It is significant that the cobasis is positive, which is another way to say that the April gold contract is in backwardation. While it is not a large amount of money (less than a dollar an ounce), it has a yield higher than a Treasury bill of the same duration. For whatever reason(s), not enough people are taking the arbitrage (sell gold metal / buy an April gold future) to compress this to zero.
This is a very bullish looking chart, though readers should note that there is no guarantee that the gold price could not fall further. And the basis is not a timing indicator. It is simply saying that, at the current price, the supply of physical metal is tight.
Silver Basis and Cobasis
The silver basis, unlike that of gold, was not looking especially bullish. It began to change around February 15 and accelerated last week. This corresponds roughly to the sell-off in silver. Now, it is not possible to carry silver at a profit (to carry is to buy metal and simultaneously sell a future against it, to earn the basis as one’s profit). This is one degree of tightness in the market. But nor is May silver in backwardation (March is, but that is less significant).