From Lance Lewis this am:
8:50 EST: Gold Officially Goes Into Backwardation
This morning, gold officially went into backwardation for the first time since the announcement of the Washington Agreement in 1999, which sent gold shorts scrambling to find physical metal after the world's major central banks agreed to limit sales of gold going forward and ended the one-way trade to the downside in gold that had been in place in the late 1990s.
We know gold is now in backwardation because the gold forward offerred rate (GOFO) has now gone negative. The 3M GOFO has fallen 12 bps to -0.07%, and the 1M GOFO has fallen 20 bps to -0.1167%.
Unlike other commodities, gold very rarely goes into backwardation, and only when 1) the market fears a collapse in the currency, and/or 2) the market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).
Translation: Gold is about to meltup, and the dollar is about to have an accident.
Buckle up, gold bulls. Gold is set to blow its top soon in my humble opinion.
Backwardation is a futures market term: the situation in which, and the amount by which, the price of a commodity for future delivery is lower than the spot price, or a far future delivery price lower than a nearer future delivery.
The opposite market condition to backwardation is known as contango, in which the spot price is lower than the futures price. Different from contango, backwardation ... is unlimited.
On June 3, 2006, Antal E. Fekete wrote:
People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: "watch for the last contango in silver".
It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount. When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis.
More from Wikipedia:
Some argue that backwardation is abnormal, and suggests supply insufficiencies in the corresponding (physical) spot market. [FOFOA: This argument refers to monetary metal] This is empirically false: many commodities markets are frequently in backwardation, specially when the seasonal aspect is taken into consideration, e.g., perishable and/or soft commodities. [FOFOA: Gold is not a perishable or soft commodity. In fact, I would argue that gold is not a commodity at all. And that backwardation in gold is akin to negative interest rates in Treasuries. It doesn't make much sense, and therefore it is a signal that something deep is happening. Comments anyone?]
Backwardation very seldom, if ever, arises in money commodities like gold or silver, except one situation in the early 1980's when there was a one day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses. [FOFOA: I believe this refers to the Hunt Brothers. Comments?]
Then on August 30, 2008, A.E. Fekete touched on this again in a new article. Here's a snip:
That will be the most dramatic event in the entire history of money, an event that I have, tongue in cheek, called "The Last Contango in Washington". The basis will give you an early warning signal...
...The basis will tell you well in advance when all the offers to sell real gold or silver are about to be withdrawn in all the markets of the world. Once that happens, infinite demand will confront zero supply. Don't say it can't happen here. It has happened locally in France in 1796, in Germany in 1923, in China in 1947, to mention but three episodes. This time it will happen globally.
So I ask again, is this it? Is this the beginning of the end for the dollar, and the opening round of Freegold? We will have to watch the COMEX action for the next four weeks to know. Will there be a default in a large delivery of physical metal? Will a buyer ask for physical gold and get only paper fiat money in settlement? If this happens, I would expect the future price of gold on the COMEX to head down toward $0/ounce, the intrinsic value of paper, while face to face exchanges of paper for physical gold become difficult to make happen, and very expensive when they do happen.
I expect the COMEX price of gold to continue rising for a while. Perhaps "the Cartel" will allow it to rise in hopes that the longs will be tempted to take their paper profits or roll over their long positions into the future. But if the basis is saying what I think it is, some of those longs will say "screw your paper, gimme my GOLD!" Let's hope enough of them do this to "break the bank" at the COMEX warehouse and the "warehouses" of the naked short sellers like JPMorgan.
As ANOTHER said, "We watch this new gold market together, yes?"
I say yes!