Thoughtful Disagreement with Ted Butler – Gold Basis

This article follows on from Keith Weiner’s response to Ted Butler’s Thoughtful Disagreement challenge. Below is a graph of all 130 gold contracts since February 1996, aligned by contract age in terms of number of days until expiry on the X axis of the chart and basis in percentage per annum on the Y axis.

Out of a total of 130 contracts, only 10 contracts which held a positive basis or which rose slightly into First Notice Day. As with the corresponding chart for silver (included below for easy comparison) this shows that long speculators, those who bet on the rising price, predominate.

We have maintained the same Y axis scale on both charts to enable direct comparison and highlight two interesting features. First, silver has a more volatile basis, reflecting the generally lower liquidity in silver compared to gold. Second, as the gold contracts approach first notice day, they compress more than silver contracts – in other words, gold contracts seem to converge around minus 1% whereas silver contact, while still declining into first notice day, maintain a wider range of basis percentages, with many ending up beyond minus 5%.