HOUSTON -- As we mentioned yesterday in What is Wrong with this Picture, including a screen shot of the futures backwardated, COMEX gold has moved into a more robust form of backwardation.
Not only is the spot or cash price (the price for gold sold for immediate delivery) trading above the near active futures contract, but we are now seeing the near months' contracts trading at higher prices to months thereafter in the front part of the futures strip.
This backwardation is occurring at the same time when the gold forward offered rates in London, the interest rate offered for gold by bullion banks called GOFO, have been negative for a full month (beginning July 8) and appear at last glance to be widening (growing even more negative). Essentially that means that gold is commanding a higher interest rate than U.S. dollars which is the same thing as saying that demand for immediate delivery and soon to be delivered gold is high enough to pay a premium for gold today.
Whatever the reasons for the negative GOFO, the condition is very rare as other capable observers have commented, such as at this link; and at this one. The short version is that backwardation and negative GOFO indicates tightness in the near-term of the availability of physical gold at prevailing market prices. A condition that should be quickly arbitraged away as it presents an apparent riskless profit to those in a position to benefit from the opportunity.
The fact that backwardation is most definitely not being arb'ed away is a signal to the market that current prices have over sold gold availability and/or signals that some other stress is beginning to show in the gold market clearing structure, both here in the U.S. and in London.
Take note then, that we continue to see backwardation in the COMEX gold futures market as the screen shots below, taken near 12:15 ET, confirm.
Using the offer side as a guide, note that the remaining contracts for August (current) delivery were trading at a premium to October, which was itself trading at a premium to December. The new wrinkle since yesterday is that now we see that August is also trading at a premium out to the February contract.
That suggests that the backwardation is not only not being arb'ed away, it is widening as of this morning.
Below is a closeup of the price section for a closer look.
Most of the internals we watch for the gold market reacted poorly yesterday. But as we shared with our subscribers in a daily comment there was one important indicator which bucked the trend, so to speak. The gold/silver ratio, one of our most trusted indicators, loosely represented below by the hourly GLD:SLV ratio chart, seemed to "argue" with the Tuesday gold selloff.
As anyone can see the gold/silver ratio (GSR) has been moving relentlessly, as our friend Dennis Gartman might say, 'from the lower left to the upper right.' To those of us who rely on the GSR as an indicator of whether money flow for precious metals is turning more positive than negative, a possible trend-break now showing on the chart above is kind of an eye opener. Very generally, a rising GSR tells us to keep stops on bullish bets tighter and vice versa.
A theory we have held for many years is that when the GSR is falling and fails to 'answer' gold sell-downs by rising apace, and instead holds or falls, is quietly signaling that money flow has at the very least stopped being negative and may indeed be turning positive for precious metals. (Best with several weeks of data to gauge it, but the apparent break of the GSR above is encouraging to GSR watching gold bulls.)
Bottom line. Add widening backwardation and a possible turn in the gold/silver ratio to the list of important signals gold market observers have to study. When the gold/silver ratio is falling it usually means that money, wealth, resources are moving out of other stuff and back into gold and silver.
No, the GSR is not universally accurate or bulletproof, but name any indicator that is. Should the GSR begin an expected decline just ahead, then gold bears should be (and likely will be) the ones with tighter trading stops.
Gene Arensberg for Got Gold Report
