Agoracom Blog

First Ever Gold “Backwardation” Could Signal Price Spike As COMEX Runs Out Of Gold

Posted by AGORACOM at 9:28 AM on Thursday, December 11th, 2008

AGORACOM Chief Commentator, Peter Grandich, made a call to BNN to alert them about this article on gold officially hitting backwardation.  Backwardation occurs when the futures price of a commodity is lower than prices in the cash market.

Forward prices for gold turned negative on December 2nd and, according to Antal Fekete the author of the story, this is the first time it has happened in history (with the exception of contract expiry dates for a couple of minutes).  Fekete states:

“On December 2nd, at the Comex in New York, December gold futures
(last delivery: December 31) were quoted at 1.98% discount to spot,
while February gold futures (last delivery: February 27, 2009) were
quoted at 0.14% discount to spot. (All percentages annualized.)

The condition got worse on December 3rd, when the corresponding
figures were 2% and 0.29%. This means that the gold basis has turned
negative, and the condition of backwardation persisted for at least 48 hours.

In addition, demand for gold delivery on December 31 means COMEX may be running out of gold.  Specifically, 40% of COMEX’s 2.8 million ounces is set for delivery on December contracts but – given the fact not all COMEX gold is available for delivery – this means COMEX supply will fall short if demand for delivery does not change between now and the end of the month.

Why is this taking place? Fekete believes owners of gold are no longer willing to sell their gold at any price. Thus, as opposed to selling on the spot at a higher price and buying it on the futures at a lower price – an easy arbitrage trade – they are choosing to hold onto their physical gold because they don’t believe it will be available for delivery in the future.

Conclusion – a supply shortage in gold can only translate into a significantly higher price.


As a result of the Grandich Alert to BNN, John Ing – CEO of Maison Placements – was brought in to talk about the matter further on The Close. You can view the interview by clicking on the screenshot above.

Gold prices broke through $825 today and is up 4 days in a row.

UPDATE #1: Backwardation has hit mainstream, with a discussion on CNBC at 9:30 AM this morning (December 11)

UPDATE #2: Merril Lynch Chief Economist, Dave Rosenberg, was on CNBC this morning and said gold is a hedge against inflation and deflation.  The only time gold isn’t a good investment is during “perfect” bull markets such as the one we had in the 90’s.


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