Gold enters Backwardation

[Zero]

Interesting for anyone who is following the financial crisis and a very important but unreported bit of news.

http://www.kitco.com/ind/fekete/dec052008.html

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Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?

Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.

December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel.

[FatLip]

Now that is a very interesting report. I have long held the belief that the only real money is represented by actual, physical gold, and that there is only one single amount of gold on our planet and it never changes (collision with golden asteroid notwithstanding) - therefore the massive surge in Asian economies (in particular) should have chimed warning bells for the 'old school' major economies of the world, along the lines of 'how is all this paper money being paid for?'....

I have no idea if the above makes sense to anyone who understands economics, it is just my intuitive reaction to global recession...

[Zero]

There's certainly an element of truth to what you're saying. I wouldn't say it encompasses everything that's going on, but it's an important part.

Here's a good podcast from Jim Rogers today on the topic.

Jim Rogers Podcast (click)

[chainsnuser]

Gold had only a real worth till 1974, when the U.S.A. decided to no longer backup their currency with gold-reserves. Other countries have done the same even long before.

Since then the worth of gold has constantly declined and it will continue to do so. The metal itself is not specially useful. Even iron, which is dirt-cheap nowadays, is more useful, technically spoken.

In other words: the economic power of a billion of people, represented in the currencies of the western world, has a much bigger value than this shining metal, which looks good and happens to be unsensitive against corrosion, but is really not specially useful for any meaningful everyday-purpose.

That's not to say that speculation with gold cannot be profitable in the short term, but I guess that in just a few years from now, people who have accumulated gold instead of money, will have terrible problems to sell it again for a reasonable price.

I trust much more in the Euro or the U.S.-Dollar than in gold. There might be other materials that are worth investing in (I'm no expert - mind you - silver comes to my mind, but I'm not sure about it), but the current rush on gold certainly is just a big nonsense.

Cheers!

[Zero]

Since then the worth of gold has constantly declined and it will continue to do so.

By what metric? If we use the US dollar, then let's consider an ounce of gold bought 20 years ago, in 1978, for the market price - $350. If we apply normal inflation correction we would today expect an ounce of gold to cost about $1100, which is not far off from the peak that gold hit just a few months ago.

What the article I've posted is saying is that supply of gold in reality has become short, and people who have it are wary about selling it - there is a feeling that it is undervalued and that the price is likely to rise.

Gold has immense value as a money commodity to this day. I don't see where you're getting this idea.

[chainsnuser]

Well, keep in mind that the price of gold has tripled in the last five years, but that's because of speculation and I'd like to say that this kind of speculation is not more backed up by real values than to sell 800.000 Dollar-houses to people who make less than 1K per month.

People should be warned to invest in gold - at least not as a long-term investment and not at the ridiculously high prices of today.

BTW, no wonder that the gold-market is collapsing with that many people falsely believing that the price will rise endlessly. The same shit that happened with mortgages will happen again with gold. I can only hope that not as many people are invested in gold as are (or were) in estates.

Cheers!

[Zero]

But the gold price isn't collapsing. In fact, the fact that it's gone into backwardation is a sign that the real shortage of real gold is true - and that the price of gold is equally real, and not a bubble at all. It is a sign of loss of confidence in things like the US Dollar and the UK Pound, though.

[chainsnuser]

Sure, investors are requesting real gold, but only a small fraction of them wants it for "real" purposes. They don't need the gold to fabricate something, they just want it because of an irrational paper-money-devaluation-fear. This fear could stay for the next few years, but it also could pass again, very soon.

Gold has a real value and real uses, but given the output of the gold-mines around the world and given the real fields of application, it is terribly overprized at the moment ... and the price is already falling again, quite rapidly, thus the shortages, I guess. People are not willing to sell for less than they have paid. But I'd say that with the current prices, better to sell the gold sooner than later.

It's nothing but another bubble IMHO, but it indeed speaks volumes, that so many people put more trust in a useless metal than in the economy of their respective countries.

Cheers!

[Zero]

sounds familiar...

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[bakerbarber]

Nothing like passing out credit to dumb shits who could never have possibly paid it back.

Add to that an irrational emphasis on home ownership in the U.S., total emphasis in the media on materialism and shallow minded dribble, using governmental mandates to process food for fuel, a complete and total lack of ingenuity and sustainability in manufacturing, total failure of the educational system to teach basic economics or personal responsibility, an overwhelming aura of entitlement, easy access to bankruptcy protection, and you end up with "Joe Bag o' Doughnuts" in a house he can't afford with a car he can't afford in the garage, sitting on his ass screaming at his T.V. that someone should "do something."

Then to top it off the government b s's everyone for a year before announcing a post dated recession.

Gold might be security, but it isn't going to matter if society collapses Mad Max style. For now most turds are more worried about getting a flat panel television and who's on this season's American idol than tangible reality.

I love that video zero. Thanks. The look on that guy's face is priceless when everyone talks over him and they argue that we're heading into a boom. He's saying, "You guys drank the Kool-Aid!" with his eyes. Great commentary.

I believe the paradox of thrift will come into play in the coming months and extend this recession for years.

[holnrew]

Backwardation sounds like a Bushism.

That is all I have to add as my knowledge of economics isn't what I'd like it to be.

[holnrew]

Nothing like passing out credit to dumb shits who could never have possibly paid it back.

Add to that an irrational emphasis on home ownership in the U.S., total emphasis in the media on materialism and shallow minded dribble, using governmental mandates to process food for fuel, a complete and total lack of ingenuity and sustainability in manufacturing, total failure of the educational system to teach basic economics or personal responsibility, an overwhelming aura of entitlement, easy access to bankruptcy protection, and you end up with "Joe Bag o' Doughnuts" in a house he can't afford with a car he can't afford in the garage, sitting on his ass screaming at his T.V. that someone should "do something."

Then to top it off the government b s's everyone for a year before announcing a post dated recession.

Gold might be security, but it isn't going to matter if society collapses Mad Max style. For now most turds are more worried about getting a flat panel television and who's on this season's American idol than tangible reality.

I love that video zero. Thanks. The look on that guys face is priceless when everyone talks over him and they argue that we're heading into a boom. He's saying, "You guys drank the Kool-Aid!" with his eyes. Great commentary.

I believe the paradox of thrift will come into play in the coming months and extend this recession for years.

Nice post, pretty much the same has happened here in the UK, except our government is passing the buck to the banks when it should be criticised over the fact it borrowed too much when the economy was good when it should have been putting aside a rainy day fund for times like these but is now instead borrowing even more...

Still, these are interesting times and are causing me to re-evaluate my political views. I'm considering joining the Green Party.

[bakerbarber]

I was on the floor at the Chicago Board of Trade this time last year. Right when they were making the initial transition from CBOT to the CME Group. The guys in the pits and the runners and pretty much everyone I talked to were dumbfounded at the direction commodities were taking. Granted CBOT is primarily agriculture, and sees contangos and backwardation both depending on the season. Everyone seemed to sense that futures were getting ridiculous and couldn't be sustained.

I was taken upstairs to overlook the currency exchange pits. They were running while under construction to down size since most currency transactions are done electronically now. The woman from the CME Group who was flashing her badge all around to get access everywhere told me that the bubble was straining and they were pushing to complete construction before all the speculators wanted out. She pretty much said that with the construction in the way when everyone called their brokers to pull out someone might get hurt running through.

I know of companies who bought in at the high on some commodities just because they couldn't take the stress of rising prices any more. They panicked and over extended to minimize losses in what they saw as a never ending upward spiral right before everything burst. People have committed suicide losing so much money "on paper."

Now all the sudden speculators and hedge funds have largely fled commodities markets. Where they never really belonged in the first place. They pulled out in such a rapid swoosh that everyone's heads are spinning. The spot markets are the only things moving on some durable goods and a lot of futures don't post on the board for days in a row.

The glossy eyed greed and irrationalism has been replaced by a swing of irrationalism to trades of desperation for liquidity. Markets are trending in angles steeper then anyone thought possible.

While we're looking at gold, corn has dropped to levels that need to be artificially propped up just to give incentive to farmers to plant this spring. This doesn't even take into account the ethanol mandate and correlation to crude dropping like a stone. Pricing on other things like minerals (fertilizer) haven't budged yet. So cost of production remains the same for goods that will go to the elevators at a third of the price they did last year.

Gold has not however taken the same hits in comparison. I think now it's too late unless you're really only looking for stability. The idea of buying gold for profit has been overshadowed by the mandate of buying it for security.

Alright I'm done...

[Dead Rabbit]

Nothing like passing out credit to dumb shits who could never have possibly paid it back.

Add to that an irrational emphasis on home ownership in the U.S., total emphasis in the media on materialism and shallow minded dribble, using governmental mandates to process food for fuel, a complete and total lack of ingenuity and sustainability in manufacturing, total failure of the educational system to teach basic economics or personal responsibility, an overwhelming aura of entitlement, easy access to bankruptcy protection, and you end up with "Joe Bag o' Doughnuts" in a house he can't afford with a car he can't afford in the garage, sitting on his ass screaming at his T.V. that someone should "do something."

Then to top it off the government b s's everyone for a year before announcing a post dated recession.

Gold might be security, but it isn't going to matter if society collapses Mad Max style. For now most turds are more worried about getting a flat panel television and who's on this season's American idol than tangible reality.

I love that video zero. Thanks. The look on that guy's face is priceless when everyone talks over him and they argue that we're heading into a boom. He's saying, "You guys drank the Kool-Aid!" with his eyes. Great commentary.

I believe the paradox of thrift will come into play in the coming months and extend this recession for years.

Perhaps the best description of this mess I have ever read. And I am Joe Bag o' Doughnuts .