http://news.goldseek.com/GoldSeek/1228744800.php
Gata's got some stuff about this, saying it's almost never happened and means dollar collapse, and all kinds of stuff. i'm guessing their essential argument is that people are losing faith in comex's ability to deliver, and putting a risk premium on futures.
what i don't understand is some of these pieces say backwardation is when the futures price of gold is lower than the price to obtain physical. Well, would that not be simple short selling, speculating a declining price? Surely such a thing has been correctly predicted before, and gold has had substantial declines.
Is there any better resources about this? Does anyone think this is something to be concerned about? (Currently spot and futures prices are about identical).
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meambobbo: what i don't understand is some of these pieces say backwardation is when the futures price of gold is lower than the price to obtain physical. Well, would that not be simple short selling, speculating a declining price? Surely such a thing has been correctly predicted before, and gold has had substantial declines.
No, short selling means selling a borrowed quantity and rebuying it back at a later date to return it. In such a situation, the short-seller hopes for the price to fall so he can win the difference. As far as I can tell, the article states that Comex is in trouble because the company has been losing on its open short positions (the price of gold has been rising), up to the point where it will not be able to close those positions (that is, buy back the quantity of gold it had previously short-sold).
Wait - are these the prices of the futures contracts that are coming due today, or are these the contracts most recently entered into but not due for quite some time? I was assuming the latter.
Are we confusing stock market short selling with futures contract short selling. Maybe I'm mixing up semantics. Would I be correct to say a futures short position means to provide the contractually-agreed-upon asset at a certain date in the future in exchange for a certain amount of money?
If the current price of gold is $10, and I think it's going to be $5 next year, I could make a futures contract on the Comex to provide the gold next year for $10. Gold price goes down, I buy, I supply, and I make a profit. Well, if most of the market thinks the price is going to go down, the average Comex price is going to be lower than the current price. In the prior example, let's say the futures contract specifies $7. I still expect to make money because I expect a $5 price before I have to trade. I find it unbelieveable this has never happened, especially in the early 80's.
So what you are saying is that there is speculation the Comex does not have the gold to deliver, and it can't get it because physical has simply become too expensive, and that's why the futures price has dropped below the spot price? My response: isn't comex the government? How does it run out of money?
Also, doesn't comex simply provide a vehicle for exchanges between private parties, rather than hold positions itself?
meambobbo: Wait - are these the prices of the futures contracts that are coming due today, or are these the contracts most recently entered into but not due for quite some time? I was assuming the latter. Are we confusing stock market short selling with futures contract short selling. Maybe I'm mixing up semantics. Would I be correct to say a futures short position means to provide the contractually-agreed-upon asset at a certain date in the future in exchange for a certain amount of money? If the current price of gold is $10, and I think it's going to be $5 next year, I could make a futures contract on the Comex to provide the gold next year for $10. Gold price goes down, I buy, I supply, and I make a profit. Well, if most of the market thinks the price is going to go down, the average Comex price is going to be lower than the current price. In the prior example, let's say the futures contract specifies $7. I still expect to make money because I expect a $5 price before I have to trade. I find it unbelieveable this has never happened, especially in the early 80's.
Future contracts are also traded on a secondary market, just as equity is also exchanged after the initial public offering. Shorting occurs on secondary markets, so in this sense you can have shorts on futures.
meambobbo: So what you are saying is that there is speculation the Comex does not have the gold to deliver, and it can't get it because physical has simply become too expensive, and that's why the futures price has dropped below the spot price? My response: isn't comex the government? How does it run out of money? Also, doesn't comex simply provide a vehicle for exchanges between private parties, rather than hold positions itself?
Err, I believe I got this mixed up. Let me try again... Comex is a private exchange, so it makes profit in several ways: providing warehouse space for goods, charging fees for exchanges and so on. Regarding short positions, it could credit short-selling. And regarding the contraction, I believe Comex does transactions only with the gold in their warehouses. Taking all these into account, yes, Comex could go bankrupt if subjected to severe losses due to the financial/economic crisis.
Ah - I get it. Secondary market - that makes WAY more sense!!!!
As far as comex's warehousing, I'm fairly sure that it allows contracts to be made on gold that it does not have physical possession of. I believe the difference is whether the contract is for "registered" gold or something like that. Only on those contracts can you demand physical delivery. Also, if they run out of physical, I think there is some mechanism to roll over contracts for 30 days or so before they face bankruptcy.
But yes - that makes sense - the futures price is usually higher than physical because comex essentially acts as a gold bank, a more valuable means of exchanging gold than by using physical gold. Essentially, a lower futures price is like a discount on its bank notes, indicating more paper gold than the actual gold it is expected to provide.
I have a severe problem, however, with defining backwardation as a lower futures price than the current cost of physical. What current cost? The spot price is the best we have here, not ebay prices, etc. The quantities must be close to matching up. For low quantities, such as .1 - 10 oz. it may be far more valuable to have them in possession. They are quite easily traded by hand. For 100 - 10,000 oz., it may be much less so, and thus warehoused trading/banking is preferred.