|
Yesterday [Nov 29, as I wrote
this on Nov 30], the December gold contract moved sharply into backwardation
(it happened in silver also, but let’s focus on gold). This means
that one could sell physical and simultaneously buy December to make a profit
(please see the graph).
So let’s look a little
deeper. December basis fell massively, and cobasis rose equally.
The other months were unaffected.
Basis is the profit you would make to
carry gold (buy spot and simultaneously sell a future). Basis = Future
(bid) – spot (offer).
When it falls, it could be either a
falling bid on the future or a rising offer on spot.
Cobasis is the profit you would make to
de-carry gold (sell spot, buy future). Cobasis = Spot (bid) –
future (offer). When it rises, it could be a rising bid on spot or a
falling offer on the future.
For both to be true, it means either
spot is rising or the future is falling. But since the bases in the
other months did not exhibit this behavior, it rules out spot rising, and
that means that the Dec gold future fell.
What could cause a gold future to fall
relative to spot and the other future months? Put it another way, what
would cause unbalanced selling of a future relative to other months?
One hint is that the February contract deviated from the other farther-out
contracts and had a rising basis and falling cobasis. February moved
higher in price relative to other contract months.
This is caused by the contract
“roll” as naked longs must sell their Dec futures and if they
wish to remain long gold, buy a farther-out contract (i.e. February).
This action, especially if it happens en masse, would sharply press the bid
down in Dec.
It is equally interesting that the
offer is falling too. What of the conspiracy theory that the banks have
massive naked short positions?
If they did, they would be forced to
buy them back as the contract expired. This would lift the offer on the
future. In that case, the cobasis would be falling, the opposite of
what is occurring.
This is the basis (no pun intended) of
how one would go about debunking the allegations that the precious metals
markets are manipulated by massive short-selling of futures.
As a side note, the spread between the
Dec 2011 contract and Feb 2012 contract also widened sharply. It had
been falling since late October, accelerating in November.
Yesterday, it was possible to buy Dec
(at the offer) and sell Feb (on the bid) for a profit of almost $6 an
ounce. While this is too small to be actionable if you have to pay
commissions and fees and storage for two months (about $8.50 for a retail
account), it’s telling.
 
|
