Saturday, November 22, 2008

Is This It?

Yesterday, explained gold's $50 up move as follows:
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.

From Wikipedia:
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!



FOFOA said...

"In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it." Born called for greater transparency--disclosure of trades and reserves as a buffer against losses.

Born was appointed to the CFTC by Clinton and served alongside Fed Chairman Greenspan, Rubin and SEC Chairman Arthur Levitt on the President's Working Group on Financial Markets.

Instead of heeding the advice of the very independent and tenacious Born, her powers were limited and she ultimately left the CFTC to return to private practice.

To individuals who have the bulk of their net worth in gold, this will come as a blessing in disguise. Since the derivatives notional volume continues to increase, the explosive pressure on gold is theoretically building at exactly the same rate. At some point, its going to blow, and the long-maligned gold supporters will have more than just their day in the sun. Many will conclude that they were right all along."


"History has shown that persons that holding gold during times of change, do always find a better life."

Source: ANOTHER (Hat tip Pain d'Or)

FOFOA said...

Is this it? Jim Sinclair thinks so. He just posted another one of his "This is it, it is now" posts, which he hasn't done since early July.

My Dear Extended Family,

Things are now "Out of Control."

This international financial crisis is now out of control as the world asks if the USA has two presidents, one president or no president at all.

It would appear that Paulson is in financial control with Bernanke as his second.

I warned you by personal email long before the statement was proven totally correct that “This is it.” That was followed by “This is it, and it is now.” Many people laughed it off.

This is it, and it is now.
Now it is out of control.
Now we enter the Collapse of Confidence period.
Then we begin the Weimar Experience.

It has all hit the fan, and still the absolute majority have no clue. The OTC derivative dealers broke the system into millions of pieces of glass. This broken glass cannot be put back together.

It is heart rending to see a picture of GM autoworkers holding a prayer meeting for their retirement funds. The retirement money was never funded. It is a lost hope. This is another responsibility the government has undertaken that is going to go wild.

Those of you still in freeze frame are headed for lines around your bank. Your bank will likely be acquired by another bank that also is in deep trouble.

The US dollar, like a leaderless company, will lose its respect and therefore value.

In order of importance the following MUST be done unless you want to be one of the suffering masses that will be all too visible this winter:

1. You must have your assets held anywhere they are in true custodial-ship accounts. That type of account at a bank or broker states clearly that the assets held there are not on the balance sheet of the host financial entity. Those assets are clearly segregated in your name. This must be reviewed by counsel to be sure you have what you think you have. Don’t cheap out. All you have is depending on the validity of true custodial-ship accounts.

You cannot know all the banks are broke, however I feel ALL banks are broke because finance is an intertwined system that if visible would look like a spider’s web. Problems on the top will materialize all along the web. Therefore the singular most important step you must take is the establishment of a true custodial-ship account.

Do not assume you have this type of account unless a competent attorney reviews the account papers.

2. I am extremely concerned about those of you who persist in holding certificates for gold rather than holding the actual metal either delivered to you or held for you in a true custodial-ship type account. The scams out there in gold are plentiful. The only way to avoid these scams absolutely is to have your gold in your own possession.

Every other means of holding gold is steps away from perfection. Some will be ok, but many will not.

3. Why would anyone fail to either take paper certificates or order their financial agent to make direct registration book entry at the transfer agent? In most cases you only have until year-end to accomplish this strategy.

4. Withdraw from ETFs.

5. If you carelessly keep large assets with your broker you are as mad as a hatter. The FDIC DOES NOT have the money to guarantee all they are undertaking. Withdraw excess money constantly from any net broker. If you are so stubborn that you think you can trade to insure yourself when your funds are not making money while still getting your money that counts you are nuts. Admit to yourself you are nothing more than a gambling addict in a downward spiral.

6. Leave no gold or coins with any coin dealer.

7. If you can withdraw from your corporate retirement plan do it.

8. Withdraw from credit unions.

9. Withdraw from all money market instruments.

10. This is it.

11. It is now.

12. It is out of control NOW.

The next two months are going to be shocking, but nothing compared to what you will have to experience in 2009.

Respectfully yours,


Anonymous said...

The year 2008 is shaping up to be one of the most exciting ever! The housing implosion continues unabated, we're entering a severe recession (or worse), the U.S. banking system has undergone radical alteration, all three U.S. automakers are dead men walking, and now, if gold goes ballistic, that would top off the year. About the only thing that could exceed all the above would be a huge false flag terrorist attack, followed by World War III.


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