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XMFSinchiruna (27.52)

The Return of Gold Backwardation, and why Gold Suppresion will Fail

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April 23, 2009 – Comments (6)

http://www.mineweb.net/mineweb/view/mineweb/en/page33?oid=82310&sn=Detail

Central Bankers cannot prevail in war against gold - Jim Sinclair

A personal view on the latest machinations in the gold market from Tanzanian Royalty Exploration's Jim Sinclair.

Author: Jim Sinclair
Posted:  Wednesday , 22 Apr 2009

MASSACHUSETTS - 

The vast majority of those who read this site are fully aware of the shenanigans of the bullion banks over at the Comex and how they continue to bamboozle the hedge funds whose automaton-like response to momentum trading prevents them from beating this group at the paper game by standing for delivery in size. Additionally, their allegiance to system-trading and computer algorithms prevents them from thinking creatively and learning to take advantage of their enemies' tactics against them. Good traders learn to adapt to changing market conditions and modify their strategies when confronted by successive losses - the hedge funds, however, when it comes to gold, do no such thing.

Keep in mind that the name of the game in gold, as far as the monetary authorities are concerned, is deception. By artificially suppressing the price of gold, for much the same reason as the Fed has been artificially attempting to suppress long term interest rates by a deliberate policy of quantitative easing, the money lords hope to cloud the signals that free market prices would generate to the investing public.

Remember when gold prices first spiked above $1,000.00 and all the coverage that was received on both the financial cable shows and the internet news sites? That is the last thing any Western Central Banker wants to see because it is in effect a condemnation of the policies and practices that they have embarked upon. So what to do? Simple, confuse the issue and distort the signal by working over the gold price to dampen down any potential excitement, not to mention attempting to kill a rival.

When one looks at the present price at the Comex as of today and the short term technical chart pattern, it is not particularly encouraging for the bulls so you could say that Central Bank efforts in conjunction with their favored insiders at the bullion banks have been somewhat effective of recent weeks. However, there is one thing that no amount of market intervention and price manipulation can succeed in doing and that is in changing the basic structure of the futures market as evidenced by the relationship of the front month contracts to the later dated contracts.

In trading terms, we refer to the "spread" between the front month and a back month/months or the difference in price between the two, as a gauge of demand for that particular commodity. As a general rule, when the front month trades at a discount to the next month or to a later-dated month, the structure of that particular commodity futures market is normal or in contango. A market in contango will see those distant month contracts trading at enough of a premium to the front month to account for any storage charges, insurance against loss and interest rates. Simply put, a seller has to be recompensed for his/her expense in storing a commodity while they wait to sell it into the market at some point in the future.

Whenever a market begins to see this "spread" between the front month and the next month or more distant months begin to tighten or narrow, then something is beginning to change regarding the demand/supply picture in that particular commodity. Why is this? Because the market is ratcheting up the front month price and attempting to send a signal to potential sellers that demand is increasing and that they are better served by selling sooner rather than later. Economically speaking, the incentive to store the commodity, pay all those storage costs, insurance costs, etc, is not worth the increased cost that they might hope to receive at some point in the future. "Sell it to us now and we will pay you more for it than if you try to sell it later", is the message the market is sending.

When markets begin moving in this direction, narrowing the spread, they are said to be moving towards a condition known as, "backwardation". True backwardation occurs when the front month moves to a PREMIUM over the next month and particularly over the next set of three or four different contract months ( a note here - generally a market will not go into backwardation more than a few distant contracts out because it is assumed that the increased demand will result in increased production at some point and induce producers of that particular commodity to increase production on out into the more distant future bringing the demand/supply picture into more of an equilibrium. That will serve to bring the market back into a more normal structure of contango).

Backwardation is a powerful signal of very strong demand that is attempting to send a signal to the market that it needs more of that commodity to satisfy existing levels of demand. While market price manipulation can be somewhat effective short term for fogging signals generated from a rising price in gold for example, it is generally unable to affect the spread structure of the entire set of futures contracts listed on the board at any given time.

With this in mind, take a look at the April 09 Comex gold contract and its spread between the June 09 Comex gold contract. Notice the narrowing of the spread, or the move in the direction of backwardation. It is not there yet but the fact that this particular spread has narrowed so significantly is more than noteworthy. It is a mere $0.60 from moving into backwardation after having traded as wide as $6.50 at one point.

To show that it is not just an April/June phenomenon, but rather one that is beginning to characterize the structure market of the Comex gold contracts, please note that the EXACT same thing has been occurring in the April 09/Dec 09 Comex gold spread. It too has narrowed quite significantly.

While nothing is foolproof in this day and age of managed markets and official sector shenanigans, the timeless spread charts are telling us a story that even the best efforts (or worst efforts if you prefer) of the Western Central Bankers and their unending war on gold is drawing to a close in which their policies have all but ensured their defeat at the hands of the "barbarous relic". Short term they can win many battles but long term they cannot prevail in the war against gold.

 

6 Comments – Post Your Own

#1) On April 23, 2009 at 9:57 AM, jesusfreakinco (28.93) wrote:

Chris,

I agree that 'eventually' things will bust loose, but I have been amazed at how well the Fed and CBs have been able to suppress the price of gold and silver.  

I know there have been lots of talk about the Comex warehouse running dry.  We'll see what happens.  Locked and loaded for launch, but am wondering if that launch will come sooner or if 'they' will find other means to keep the genie in the bottle. 

What are your thoughts?

JFC

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#2) On April 23, 2009 at 10:30 AM, XMFSinchiruna (27.52) wrote:

jesusfreakinco

Yup, it';s amazing what those bullion banks can accomplish when the spigots of free capital are turned on. They can literally borrow money for free to exert these influences provided their reverse strategy for playing the flip side behaves predictably. In the equities space, for example, I often see them pressuring the less liquid junior explorers lower on days when they permit the big guys to bust higher. This is suspect because of the enormous volume spikes on those juniors when that occurs. 

As for when / how this manipulation will be stopped, that all depends upon the conviction of wealthy individual longs as well as the actions of the unaffiliated central banks like China and Russia. Also, I have to believe that there is an upper limit to the potential disconnect between developing fundamentals and this ridiculous price action. In other words, as quantitative easing progresses, maintaining levels below $1,000 will start to make the manipulation more apparent, which in turn will force them to ease off and let gold find a new low above that mark. Over the long haul, I believe that the banks/Treasury/Fed cabal is aiming for a controlled ascent in gold, knowing full well that the inflationary impacts of their actions cannot be avoided by any means. I continue to believe that that controlled ascent plan, like their bailout plan, will fail miserably and gold will break out of their grasp sometime over the next year or two. That latter forecast is more just a gut feeling than a concluion based pon evidence, but for the underlying manipulation processes there is an ample supply of mounting evidence.

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#3) On April 23, 2009 at 3:17 PM, XMFSinchiruna (27.52) wrote:

Commentary from Trader Dan:

Gold put on a very impressive breach of upside resistance in today’s session as bulls were finally able to shove prices high enough to reach the bevy of buy stops that had been building above the $902 level basis June.

If you note on the price chart, the downsloping trendline drawn off the February and March peaks is controlling price so bulls will have to take that out to really give the shorts a good scare and induce further short covering. That trendline comes in and splits the difference between the all important 40 day and 50 day moving averages so we can expect the bears to attempt to make a stand in this region. If bulls can dislodge them from there, a trending move to the upside is likely. If bulls hesitate near this level, expect bears to regain some of their composure.

I am not sure what the catalyst was today that provided the impetus to push prices higher other than the fact that the Dollar was down and most of the commodity markets were higher, a few markets excepted. Equities were struggling today and that might have been generating some further safe haven flows but normally on days in which stocks are weak, we have been seeing the Dollar move higher. That was not the case today however. Regardless, the buying was impressive. If gold can close above the $902 region at the end of the pit session today, it would be very constructive on the price charts and could spur some further short covering heading into the weekend tomorrow.

Incidentally, let me make a quick comment here on my recent posting detailing the narrowing of the spreads in the Comex gold futures market. I fielded some emails from a few of you talking about the low interest rate environment being responsible for that. I want to thank those of you who took the time to jot me the notes. So that I can save a bit of time and avoid having to answer any further emails about this individually (Alas - I must trade if I am to make some sort of living) let me just state that I concur with those of you have expressed that concern. Interest rates most assuredly affect the spread structure as they are part of the cost of carry. With gold the interest rate environment affects gold leasing. But it is also important to note that carry involves storage fees or in the case of gold, vault fees, as well as insurance fees against loss. When a futures market moves into a backwardation structure, the market is no longer paying any potential seller of a particular commodity enough to cover those costs. That is what supposedly induces those sellers to part with the commodity NOW rather than later.

Gold is somewhat different from other commodities in the sense that it is not “used up” like the rest of them. While a small portion of gold does goes into industrial use for various items, the amount pales in comparison to its use as a store of wealth and as jewelry. If prices shoot up high enough, some owners can be induced to part with their gold (mainly from jewelry and other scrap sources) and this supply can then be drawn from to meet the increase in demand.

Gold is not yet in a true backwardation condition but the spreads are moving in that direction and are already very tight. Should gold indeed move into backwardation, it would be indeed be most telling as it would signify that demand is so strong that owners/sellers are not being paid to store and insure the gold.

My own view on this is that while the tightening of the spreads does indeed have a key interest rate component to it, it also confirms the many credible reports that we have been seeing detailing tightness in the spot market particularly for gold bullion coins as expressed by the much higher premiums that buyers are having to pay compared to a year/years ago. It also dovetails with the increase in demand coming out of the various gold ETF’s around the world as well as increased share offerings from Central, et all which I might add is coming at a time in which expected gold supply from mining sources is dropping. While there are of course many fine outfits whose primary business is gold mining, it should not be lost on gold investors that more than a few miners of base metals mine gold as a by-product of their larger production. Low prices for base metals has resulted in inefficient operations being shut in until prices recover across the board for base metals. Until those mines are reopened, the gold that they had been supplying, will have to come from other sources to meet the very strong investment demand that currently exists. I believe some of that is also being reflected in the tightening gold spreads. Nuff said on that for now.

Back to the mining shares as indicated by the HUI and the XAU - the HUI, representing the mainly non-hedged miners,  has run right to the 40 day moving average where it is encountering selling resistance. It really needs to get a session close above the 305 level to generate some additional enthusiasm among the bulls and run some of the share shorts out. The XAU’s chart is a bit weaker looking than the HUI at this point.

Bonds are attempting to keep from blowing through downside support which goes all the way back to the day that the Fed first announced its intention to follow the path of quantitative easing. For the better part of a month, they have been slowly grinding down towards the 124 level, which was the previous’ day close before the Fed announcement. If they were to violate that low, it would signify a sea change in the interest rate world. If they bounce - well - Stay tuned on this one…

As mentioned earlier, the Dollar is weaker today with all of the commodity currencies, the Canadian, Australian and New Zealand Dollars a bit higher.  Europe as gauged by the Euro, Swissie and Sterling is higher and the even the Yen is stronger. The Euro-Yen cross is slightly higher as I write this but the trading in there is mixed.

Copper finally backed down below $2.00 as it appears that the Chinese buying which has been supporting it is drying up for now. That makes sense as once restocking needs are through they are not going to chase prices any higher if they do not need to. Copper still needs to be watched however for any clues that the market is expecting some sort of economic recovery on out into the future. It is evident that China will lead the way in this regards.

Crude oil is attempting to get back above the $50 mark but thus far has not been successful. It is probably not helping it much that natural gas continues to break down further. Now if only the utility companies would pass on some of its huge fall off in price, our utility bills would come down especially in regions that burn natural gas to generate electricity.

For you silver guys out there, it has a shot at breaking out and moving high if it can first take out $12.95 in convincing fashion. Its ten day moving average is turning up and price has run exactly to the 40 day moving average which it has thus far not bettered. Should that give way, momentum should carry it to $13.00. A close above there and the 50 day moving average near the $13.06 level.

 

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#4) On April 24, 2009 at 9:57 AM, mullet103 wrote:

Whilst a Gold bull, physical demand dries up in May.  April lows are normally taken out in May/June which might suggest a test of the $850 level before we see it take out $1000 again this year. It might be worth waiting before loading up.

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#5) On April 24, 2009 at 10:10 AM, XMFSinchiruna (27.52) wrote:

mullet103

Absolutely not, my friend. In this environment those seasonal presumptions cannot be counted upon. We're one headline away from jumping back over $1,000.

I think those bullish on gold need to stop worrying so much about tweaking the best posible entry price. At $2,000 gold, will you really care whether you paid $850 or $900? 

Personally, while of course I think it's possible that we'll see $850 again before shooting higher... it certainly isn't something I would bet on. Just as likely is a sudden confluence of events that wouldpropel gold substantially higher and leave those awaiting the "right price" out in the cold with no gold.

It's time to get long here.

 

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#6) On April 24, 2009 at 11:07 AM, mullet103 wrote:

Whilst I take your points on board, this isn't about price it's about timing.   Hoping for one headline isn't my cup of tea when the majority of buyers (jewellery and industrial users) are not about. I wouldn't want to be buying just before they shut up shop.  That only leaves sellers and hope that speculators turn up, we've seen this year over year on Gold regardless of what's happening in the wider markets. With the low volume in summer this makes trading volatile and stoplosses can trigger stoplosses. 

This time last year we saw the ETF dump a huge amount of Gold on the market, they now hold double what they did then. If they start exiting it could get very messy. Patience, whilst not my strong point is sometimes a virtue.

Surely it's better to buy whilst the traditional buyers are away and sellers dominate in the expectation that the buyers will buy when they return in the 3rd quarter. Not buy a few weeks before traditional demand dries up and you have a lot of sellers lurking around. This rally could sucker in a lot of "weak" longs who cannot tolerate the Summer volatility.

If I'm wrong and Gold does rally to $930 and beyond in May/June thanks to a bad headline then that's great. For me it's not about price it's about timing/fundamentals. May/June has the uncanny knack of being poor months and it can take a long time to get where you bought it.

Either way it's going to be an interesting few months for Gold, on that we will agree!!   

 

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