Monday, Dec 08, 2008
Paniced markets lead to Contango in oil and Backwardation in gold
Bloomberg: Contango Pays Most in Decade as Shell Stores Crude
I had hardly heard of these terms contango and backwardation till yesterday. With contango the price of a commodity for future delivery is higher than the spot price, backwardation is the opposite. The oil contango is big enough to make it profitable to buy oil now and hold it for future delivery. The current backwardation of gold is very rare and is possibly an indication of a lack of confidence in the COMEX futures market according to this article http://www.marketoracle.co.uk/Article7639.html. Apart from anything else it appears the markets are moving beyond panic and looking for ways of making money apart from shorting.
Posted by mountain goat @ 12:40 PM (773 views) Add Comment
12 Comments
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1. drewster said...
"Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs."
Ummm yes it is for sale. You can go buy gold trinkets at Argos or gold bars at any bullion dealer. The author is wrong, wrong, wrong.
Read what Mish has to say about this: Mish's Global Economic Trend Analysis: Nonsense About Gold Backwardation, Ameros,Yuan Devaluations, etc.
2. george monsoon said...
Is backwardation actually a word?
what the hell is backwardation??? is it possible that somebody, even just one of you geeks can actually use plain English for a change..
I hear about deflation, stagflation.. and all the other "obscure" and I mean "obscure" language, that 99.9999% of the population have no idea about and don't care, because it would never be used for any practical purpose..
It took me nearly a week to get my head round the terms "stagflation" and "deflation".. I did loads of google searches, checked Wikipedia, but they are all written by economic hermits that have spent their entire life locked in a room with no link to the outside world while they invent buzz words that only the incabable will ever use. In the end, i spoke to a farmer friend of mine who described how stagflation works and how deflation works..
Now you throw a new word at me and I say .. bu@@er it! I can't even be bothered taking the time to find out what it means, because I am too busy trying to fight off my impending redundancy..
3. Planning4acrash said...
George, all consequences of our very shockingly poor education and media standards. We simply are not equiped even to discuss the current situation.
Good luck with your job.
4. drewster said...
George I share your frustration. However every field has its jargon - car mechanics talk of sparkplugs and carburettors, of which I have only a faint understanding. Google it, and your patience will be rewarded with knowledge.
5. 51ck-6-51x said...
Contango in oil is low risk ... yeah so long as your supertanker does not get stolen! ;p
6. mountain goat said...
Adrian Bullionvault Ash says this situation of gold "backwardation" is due to the gold leasing market, "the gold "carry trade" – where central banks lend Bullion to raise cash and stoke credit – has become more profitable as the financial markets have melted down." and not due to a lack of confidence in COMEX.
7. george monsoon said...
So backwardation is when the price is predicted to go lower in the future, and you can buy now for the lower price, in the hope that on delivery day, the price has risen again?
8. 51ck-6-51x said...
george:
Backwardation is just a phrase that means
currentBuyPrice + costOfCarry < futureSellPrice
Where futureSellPrice is the price you can agree to NOW to deliver in the future, and the period associated with the futureSellPrice is the same as that associated with the costOfCarry, and the costOfCarry is how much it costs to store the asset.
The 'gold rush' articles may well be ignoring increased risk to the carry (such as plundering by the governments?) and specific market forces - why might traders be demanding delivery in one month over delivery now? ...And use it to imply that gold must go up or that fiat currency is coming to an end. True it is an arbitrage opportunity, but there is no such thing as a free lunch (I related it to the CDS basis in a previous post noting how you would not have been happy taking the negative basis that appeared in many reference names prior to Lehman's collapse!)
9. george monsoon said...
Nope.. I need asprin!!
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