View: Gold Leaps Into Backwardation | Keith Weiner | FINANCIAL SENSE

Since late January, the February gold contract has been in backwardation. This means that one could make a profit by simultaneously selling a gold bar and buying a February contract. One would still have one’s gold plus a little extra. I coined the term “temporary backwardation” (http://monetary-metals.com/temporary-backwardation-the-path-forward-from-2008-3/), to describe this curious and very recent phenomenon. In our “new normal”, most gold and silver contracts go into backwardation as they get close to expiry.

When the Feb contract first jumped into backwardation, it was well within the “contract roll” period. The roll is when naked longs sell the expiring contract and buy a contract for a more distant month. This heavy selling of the expiring contract pushes down its price. Since cobasis is Spot minus Future (oversimplified slightly), the cobasis rises purely due to the mechanics of this selling.

But today something more serious occurred. The April contract, which is not yet being “rolled”, fell into backwardation. See the chart.

The market is offering a free profit to anyone who will sell a gold bar and buy an April contract. For whatever reason, no one is either able or willing to take the bait. This is proof that the market for physical gold metal is drying up. Speculators in the futures markets may believe that the gold price “should” fall because the central banks say they are not going to competitively devalue their irredeemable paper currencies. Owners of real metal are increasingly reluctant to part with it at the current price.

We don’t recommend that anyone ever naked short the monetary metals. Instead, we always advise to use an arbitrage position such as long gold / short silver.

Using the basis theory, we have been bearish on silver this year, against the consensus: http://monetary-metals.com/is-silver-a-good-trade-right-now/ and http://monetary-metals.com/the-coming-silver-correction/.

Using the basis theory on gold today, we would suggest that now is a great time and a great price to buy gold.

And to those who may be shorting gold due to downward momentum, we would say this. Caveat venditor.