• 393 days Could Crypto Overtake Traditional Investment?
  • 397 days Americans Still Quitting Jobs At Record Pace
  • 399 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 402 days Is The Dollar Too Strong?
  • 403 days Big Tech Disappoints Investors on Earnings Calls
  • 404 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 405 days China Is Quietly Trying To Distance Itself From Russia
  • 406 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 410 days Crypto Investors Won Big In 2021
  • 410 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 411 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 413 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 413 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 417 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 417 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 418 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 420 days Are NFTs About To Take Over Gaming?
  • 420 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 423 days What’s Causing Inflation In The United States?
  • 424 days Intel Joins Russian Exodus as Chip Shortage Digs In
Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

  1. Home
  2. Markets
  3. Other

Backwardation in Gold And Silver

On Monday, May 14, something happened that hasn't happened since Dec of 2008. Two successive near-month precious metals futures contracts were in backwardation at the same time. To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market. It should not be possible for it to happen in gold and silver (see my piece http://keithweiner.posterous.com/when-gold-backwardation-becomes-permanent).

But ever since Dec 2008, it has been recurring intermittently, and recently it has become the "new normal" for each futures contract to head into backwardation before expiring (see http://keithweiner.posterous.com/temporary-backwardation-the-path-forward-from).

Even in this "new normal", however, it has been only one at a time: one metal, and one month. This is because the backwardation occurs with the "contract roll", as people sell the expiring contract and buy one farther out. The selling pressure on the expiring contract is most intense for a short period of time. After that, the spread widens as the market makers move on, the selling pressure abates, and with wider spreads all around, both the basis and cobasis fall into oblivion. Except for the December month, gold and silver futures are liquid in different months.

That is why one does not see both monetary metals in backwardation simultaneously because they are "out of phase" by 30 days and temporary backwardation typically persists for only about a week or so. And it should be even harder to see two different successive near-dated futures contracts in backwardation.

On May 14, this is precisely what occurred. Both May and July silver are backwardated. And June gold is backwardated. Incredibly, the May silver contract is giving away a 3% annualized profit to anyone who would sell physical silver and buy a May future that delivers in a few weeks (thus recovering the same position). Even more incredibly, no one can or will take the profit that is dangling out there!

July silver backwardation is smaller, and June gold backwardation is even smaller. But still! This should not be possible at all.

Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust. I think that it is a lack of unencumbered metal. The markets for precious metals, silver more than gold, have become quite tight.

 

Back to homepage

Leave a comment

Leave a comment