Next Week's US Economic Calendar Is Action Packed

As sparse as this week may have been with regard to macroeconomic events, next week is packed with potentially market moving reports.

The heavy hitters with be the 2Q GDP number, an FOMC rate decision, and the July Non-Farm Payrolls Report.

I do not need to tell regulars at the Café that with this lineup it appears that the precious metals may be running the gauntlet into the August delivery period.

Today it looks like the new futures contract holders with in the money calls from yesterday's COMEX option expiration are getting the 'gut check' that I suggested. Smells like teen spirit. The eligible inventories are scraping the bottom of the barrel. Maybe its time to hit up the ETFs again. But that triggers heavy Asian physical buying. So it becomes a vicious circle. What is a confidence man to do?

If the economic news next week is bad enough, bad may be the new good. I wondered why the erstwhile US President decided to kick off his economic road tour this week.

Gold Daily and Silver Weekly Charts - Here Comes the Judge

There is intraday commentary on the subject of gold backwardation here.

You may read it, but to summarize it in twenty five words or less, 'If the problem is a shortage of physical supply, about the last place you would go to resolve it would be the COMEX futures.'

I also wrote a short piece that in retrospect went three times longer than necessary wherein I talk around some of the goofier comments I have seen about the precious metals markets lately in the mainstream media.

Today was fairly quiet for an option expiration, even with the overnight head fake of a bear raid.  Let's see how the holders of new contracts and short positions fare tomorrow and on Monday. 

Remember that next week begins the August delivery period.

Stand and deliver.
 

SP 500 and NDX Futures Daily Charts - Late Day Stick Save In Light Volumes

All things considered, who is buying this stuff?

Intraday commentary here about the measures that JP Morgan is taking to insulate their Retirement Fund from the 'vagaries of the market.'

"J.P. Morgan Retirement plans to liquidate its entire $2.3 billion hedge fund portfolio, which accounts for about 18% of its $13 billion in assets. The bank's pension is able to make the risk-cutting move. It will also pull back from equities ­because it is that rarest of things: an overfunded pension system, with enough money to cover 117% of its obligations.

Eliminating hedge funds will "immunize" the pension from the vagaries of the market, a source told Hedge Fund Alert.

Is the former head of MF Global still accepting qualified investors for his new hedge fund?

I don't know what it will be called, but I hear its theme song will be Nearer My God to Thee.

Gold Backwardation: When Good People Make Bad Comparisons

You may have heard some talk lately of 'gold backwardation.'

Backwardation is a pricing phenomenon in the futures markets where the price of an asset now is higher relative to the price of that same asset in the future. 

The usual state of most assets is one of contango, where the price increases in the future. This is often due to the time value of money. But let's put that aside for now. Especially in times of ZIRP.

And there is the source of the term backwardation.  The pricing is literally 'backwards.'  I don't remember where the heck contango comes from, and don't care, but that is a shortcut in how I remember the difference between them. 

There are strong indications in the gold market of short term physical supply pressures. Gold Forwards prices are negative, and in a way that we have not seen in some time.   Registered or dealer inventories on the COMEX exchange are at record lows for this leg of the bull market, something that has signaled a change in price trend since the gold bull market began.  Reports of tight supply in the physical markets have been in the news especially in Asia.

The German people asked the NY Federal Reserve for the return of their nation's gold bullion that is being held in custodial trust, and the Fed said 'no can do, Fritz, come back in seven years.'  Are you shitting me?  If that does not get one's attention, you have to wonder what will.

But the fact remains there is not much 'backwardation' on the gold futures market at the COMEX. Below is a chart showing the contract pricing over time. What's up with that?

Furthermore, some astute market observers have pointed to the pricing structure in the oil futures market, and rightfully observed, 'Now THAT's backwardation!'

So what does all this mean?

First of all, one has to look at what is usual and customary for a given market, in addition to making cross market comparisons.

When one is comparing the body fat to weight ratio of a polar bear and a flamingo, for example, one might assume that the polar bear was rather unhealthy since in general too much fat is bad, and the polar bear has quite a bit more than a flamingo. Unless of course if one understands that what is normal for a polar bear may not be normal for a flamingo, because there are some basic structural differences between them.  One always compares a thing to itself, to establish the trend and the norm, in addition to something else, in order to accurately ascertain any changes in condition.

If the gold market ever goes into the type of backwardation shown in that oil chart above, I submit that you will not have look at a chart on the internet to figure out why. You will be more concerned with getting long bread, bullets, and bibles, because the economic system will be going up in the flames of some currency failure, barring some anomalous corner on the market such as we saw in silver with the Hunt Brothers and silver.

And yet with oil in that type of backwardation as we see above, nothing is particularly going on in the world.   One might assume that there is something particular with the oil market that is not indicative of the general economy and money.   Oil, while not perishable, has a cost of storage and delivery relative to the utility of a barrel available for distillation and sale as something else that makes for some natural arbitrage opportunities. Its more complex than that but you get the general idea.

So why are not seeing at least some greater degree of backwardation in gold than we see now, throwing out the awkward comparison with oil which is obviously different in character from precious metals?

Well if the problem is a shortage of supply of physical gold bullion, would one go to the COMEX to get it?  The COMEX is a locus of the supply problems,  being a paper market with record leverage or claims to available supply.  Why would you go to the source of the scarcity in order to relieve it? You would try to get the bullion from someplace else.   Do you go to the desert to find water to relieve a drought?  No, you go to where the water is likely to be found.

The backwardation thing, being specific to the futures paper market, is not all that important for gold, for the reasons cited above.

Thanks especially to Dave of Golden Truth for tracking the gold forwards for us.   I will continue to keep an eye on price and supply, and consider the technicals as they are appropriately applied.