The "coordinated smashdown of gold and silver" was on everyone's
mind this week, but is it true? Did the price of paper gold (futures) divorce
from the price of physical gold? One thing is for sure, the dollar
gained from 21g to over 22g of gold on Friday. A 5% move in the world's
biggest paper currency is a big move.
We have long been predicting volatility as the paper monetary system goes
off the rails. Those with their balance sheet in gold can safely watch. Just
as most dollar-based investors do not lose sleep if a stock is rising that
they don't own, gold-based investors do not lose sleep if the dollar is
rising. But those who borrowed dollars to buy gold are sweating...
Here is the graph showing the prices of the metals in dollar terms.
Gold and Silver Price
One cannot understand the gold market in terms of the quantity of dollars
the Fed "prints", nor by looking at price charts. One must look at
the basis (see here
for a basic explanation). Week after week, we have been saying that the
positive basis, i.e. contango is disappearing (hence the name of this
report). This is a process of gold withdrawing its bid on the dollar. One
cannot understand this if one lives in the dollar bubble, looking at the gold
"price" as if it were comparable to the wheat price or the Mercedes
E500 price. What would a falling gold "price" mean? The gold
"bull market" is over? And when it rises, does that mean sell to
take "profits"?
In this report, we have been tracking the temporary
backwardation in both metals.
The cobasis in the June contract fell below zero; it went out of
backwardation. This means that a big part of the price drop was driven by
owners of gold metal selling (perhaps to cut their "losses"
measured in dollars). After the big plunge, the cobasis began rising along
with the price, showing that the price was rising due to buying of physical
metal more than futures (more on the futures below).
Gold Basis and Cobasis
In the gold chart, we've marked the place where, rumor has it, 500 tons
(assuming this is Imperial tons, it would be 16.3M troy ounces or 163K gold
futures). According to the rumor, the price of "paper" gold was
smashed down but physical gold has strong demand. It's hard to interpret
magical thinking, but if we were to take a stab at it, it should mean that
physical gold is still trading for $1600 and only "paper" gold is
now $1400.
There is a technical term for this, that some readers may have seen
somewhere along the way: backwardation. If the June contract were at
$1400 and physical gold were $1600, that would be a $200 profit to decarry
(i.e. sell physical and buy a future) which would be 12.5% in about two
months, or about 75% annualized.
Back in reality, the cobasis did not rise; it fell. Below zero. Now it has
risen above zero again (though the magnitude is still a fraction of 1%,
annualized).
Here is the basis chart for silver. We have included both May and July
futures, as traders are rapidly closing May and moving to July.
Silver Basis and Cobasis
We marked the points at which the alleged massive "naked" short
supposedly knocked the price down. As with gold, the cobasis fell.
Unlike in June gold, in May silver we now have the dynamic of the contract
roll. Those who have naked positions must close those positions. Longs
must sell. Shorts must buy. If there were a significant short position, this
would drive up the ask in the contract.
Cobasis = Spot(bid) - Future(ask)
A rising ask on the future would cause the cobasis to fall during the roll
process. Yet we see a rising trend in the red line until the crash and it has
begun rising again. Everyone has to make up his mind whether he wants to
believe in the tooth fairy, Santa Claus, and the Vampire Squid who shorts
gold and silver "naked". All we can do is provide the evidence.
Santa would not fit into the chimney of a wood fireplace nowadays, much that
of an oil burner.
Here is an update on the gold:silver price ratio. It ended the week at
60.5.
Gold to Silver Price Ratio
Here is the graph of the open interest in the metals. The rumor claims
163,000 gold contracts (and presumably an equivalent number of silver) were
sold where the arrows indicate. All in all, we see about a 16K drop in open
interest in gold, and about 12K in silver.
Open Interest in Gold and Silver futures contracts on COMEX
If someone had sold 163,000 futures to cause the price to drop, then
wouldn't the open interest have risen? If Santa went down chimneys, wouldn't
there be soot on his red and white uniform?
This was the Last Contango Gold Basis Report for 21 April. If you found
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