View Full Version : gold in SERIOUS backwardation
krakknisse
09-30-08, 06:48 AM
According to the LBMA, "As of 1 September 2008 this website will no longer show BBA LIBOR or figures derived therefrom. LIBOR is available from news services. Gold and silver fixings will be shown as usual. "
http://lbma.org.uk/stats/currstat
Well, it's good that they did that. The overnight LIBOR (presumably USD-denominated) just climbed to 6.88%. The one-month LIBOR in Euro is now 5.04%. I don't know where to get the one month LIBOR in Dollars, but it is well above the gold forward rate. The one month gold forward rate is 2.93%.
So, gold is now in serious backwardation, like -2% or something. I won't prognosticate on short term gold price trends, but we will have a few interesting months ahead of us!
Krasse, can you explain the implications of this for an economics rookie like myself?
krakknisse
09-30-08, 10:31 AM
Krasse, can you explain the implications of this for an economics rookie like myself?
Bart can probably do this later. But the gold forward rate is the percentage "rent" you have to pay to borrow gold. So, let's say gold is at 1000 USD/troy ounce, and the gold forward rate is 2%. So you have to pay 20 USD per year to borrow it. If it is a shorter contract, the 2% is annualized.
If you have gold on hand, but don't want to sell, you can rent it out for profit (instead of having "dead gold" in storage, incurring storage costs). If you think gold is going down, you can sell it short. Naturally, you have to pay the physical gold back at some time in the future.
But most people don't take "naked positions". If you're a producer, you can hedge your future output and make more profit than just selling at spot - as long as the futures curve is in contango.
This principle applies to all commodities. The economics of this depends on the cost of carry and some other things. Grain silos live off the basis, according to Fekete.
Take a look at this for one view of the implications for gold.
http://www.financialsense.com/editorials/fekete/2006/0604.html
With today's fiat money, the gold forward rate doesn't quite stand on it's own. A gold forward sale must be financed, and the LIBOR is a useful comparator. Hence the difference between the gold forward rate and the LIBOR has been published by the LBMA as an indicator.
The current situation isn't that gold forward rates per se have declined. Rather, it is no longer quite as profitable to sell gold forward (borrow it), because the "risk free" interest rate is much higher.
So, it is good for gold.
I've explained this previously in some other posts. This was sort of a quickie attempt, so pardon me if it isn't crystal clear.
Lukester
09-30-08, 02:38 PM
PLUNGING SILVER PRICES ... AND PERKY LEASE RATES. HUM. :confused:
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phirang
09-30-08, 02:41 PM
PLUNGING SILVER PRICES ... AND PERKY LEASE RATES. HUM. :confused:
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Let there be no doubt: central banks are selling gold to finance their operations.
I would hardly call LIBOR the risk-free rate anymore. Even CDS on 10Y treas are at about 30bps. Hence the problem.
krakknisse
09-30-08, 11:46 PM
I would hardly call LIBOR the risk-free rate anymore. Even CDS on 10Y treas are at about 30bps. Hence the problem.
I agree. But remember the Exeter pyramid? The huge top of that is being sucked into the lower levels (sounder money). Right now, fiat "reserve currency" is at a premium. And still, shorting gold is extraordinarily expensive right now vis-a-vis bank interest.
I agree. But remember the Exeter pyramid? The huge top of that is being sucked into the lower levels (sounder money). Right now, fiat "reserve currency" is at a premium. And still, shorting gold is extraordinarily expensive right now vis-a-vis bank interest.
Exactly! Plus the price breakdown between physical gold and paper gold.;)
Exactly! Plus the price breakdown between physical gold and paper gold.;)
CMX 100oz silver bars are at a $2.50 per ounce premium over spot? WTF.
CMX gold kilo bars are at a $20 per ounce premium over spot? DWTF?
WTFO?
CMX 100oz silver bars are at a $2.50 per ounce premium over spot? WTF.
CMX gold kilo bars are at a $20 per ounce premium over spot? DWTF?
WTFO?
Yeah, it's quite strange. I can imagine how a price decoupling can evolve for oil, but I have no idea what will happen when the paper gold decouples from physical gold. Probably it will start by an important decoupling of gold ETN/ETF index value from gold trusts or pure unleveraged gold ETF's (if there are any).
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