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-ba...comes-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 target="_blank" http://keithweiner.posterous.com/temporary...th-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.
