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Ragnarok
26th July 2010, 06:39 PM
http://fofoa.blogspot.com/2010/07/red-alert-gold-backwardation.html

Snip:

"The Gold Backwardation Story

Do any of you check the GOFO rate from time to time just to see if it is getting close to zero? GOFO is a relatively good proxy for the gold contango because it represents the cost basis a dealer calculates to take either side of a 'gold for currency swap' over a fixed length of time. It is also a good proxy for liquidity in the gold market. It should never turn negative because that would mean it costs more to borrow gold than to borrow dollars. (GOFO = $ interest rate - gold lease interest rate) In other words, if GOFO goes negative, the message is that gold is more precious than dollars.

As long as the GOFO rate is positive, the borrowing of dollars will cost you more "elbow grease" (debt service) than borrowing gold. So it can be said that there is a bid from gold for dollars as long as the GOFO is positive! When it turns negative, it can be said there is NO bid from gold for dollars.

(Dollar forward mechanism - LBMA (graphic below))

I check the GOFO rate every few days, but more for amusement than analysis lately as it has been rising!
(A side note: Last week when I clicked my GOFO bookmark that I have been using for years, for the first time ever it asked me to log in, which apparently costs "an application fee of £1,000 (which is not refundable if the application is rejected for whatever reason) and an annual levy of £2,500." I'm sure this was just a normal LBMA site improvement though, because they put the new URL for free GOFO data in the small print down at the bottom. And they also improved the actual GOFO data by reducing the font size to tiny, compressing the columns, and reducing the contrast to light-gray on white background making it much easier on these tired old eyes.)"


fyi, R.

Answer2me
26th July 2010, 08:45 PM
Harvey Organ would disagree, he thinks that silver is in backwardation when looked at through the eyes of the comex.

"In silver we saw a massive 91,831 oz of silver leave the comex dealer inventory and NOT get entered into the customer inventory.

It left the front door and out to various entities that did not wish to keep their silver in a comex vault.

There was also another strange internal transfer of silver. This time 450,000 oz of silver was transferred back into the customer

inventory as this no doubt was a lease repaid from May. This silver no doubt was the major part of silver removed from the

customer inventory as these guys refused to let any of its silver stay at any comex facility.



Now let us see how the notices shaped up:



Wow, we have only 3 days to go and only 6 notices were served upon or only 30,000 oz of silver

Please notice that we now have 1.4 million oz or 283 contracts left to be served. On Thursday's reading he had 380 contracts, so we lost

97 contracts yet only 6 were served upon.



The rules of the comex states that if silver or gold is served upon, it must come from the dealer inventory and then withdrawn

This did not happen yesterday. Then how could 97 contracts disappear? This is 485,000 0z of silver which represents approx. 8.7 million usa dollars worth of silver.

The owners of these long positions having plucked their money down on July 1.2010 surely would not give up this late in the game and also having surely witnessed the chaos at the silver comex. Something happened and if I am a betting man,

it looks like these guys got a huge cash settlement instead of taking the metal. There is no other explanation.

Silver is now in backwardation as players are getting more for the silver in the front month than in future months.

We are witnessing the leasing of silver metal by the customer to the dealer for a huge premium and now settlement for huge dollars instead of taking the metal.

The silver comex is in crisis.

The amount of silver standing in this delivery month of July is as follows:



1.4 million oz (283 contracts) left to be served+ 11.2 million oz (22 54) + .200 million oz of silver options exercised) = 12.8 million oz of siver.

(the other 485000 oz of silver was cashed at a premium)"

http://harveyorgan.blogspot.com/search?updated-max=2010-07-26T15%3A58%3A00-07%3A00&max-results=7

gunDriller
27th July 2010, 12:11 PM
someday i will understand all of this.

is there a correlation between backwardation and the price drop today ?

Answer2me
27th July 2010, 01:28 PM
No correlation between the price drop of today. All it simply means is that gold is bidding for dollars instead of dollars bidding for gold (backwardation). No physical inventory at the comex means cash settlements.

Steal
27th July 2010, 02:27 PM
someday i will understand all of this.

is there a correlation between backwardation and the price drop today ?


Actually, in backwardation, today should not have happened. Just shows who is really in control of the market. Simple explanation of backwardation,gold worth more today than in the future. I think it will be hard to see which way it is heading until asia opens Wed or would that be Thursday asia time? Although I believe in volume, when it is controled and they know where the stops reside and how to trigger them, does not mean that the sell orders really wanted to sell. . hmm, that makes no sense. Guess in short, Wed night guess we will see who is coming back into gold. Or not. I cant say I am complaining too much, used the opportunity to aquire some much wanted fracs. Decided not to go any higher than 1/4 oz from now on.