RED ALERT: GOLD BACKWARDATION!!

Antal E. Fekete of Gold Standard University wrote in a recent article:

"December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2nd, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.) The condition got worse on December 3rd, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours.

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. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington ― contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located. This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market."

Backwardation exists when the price of a commodity for immediate delivery is higher than its price for later delivery. For a storable commodity like gold, backwardation implies scarcity of supply. Ordinarily, COMEX gold is a carrying charge market - sometimes ascribed as a "contango" market - in which contracts for later delivery are priced higher than spot to reflect the costs of storage. Because gold isn't consumed and supply is so visible, there's usually enough metal to carry forward.

Forward rates are the interest charges levied by dealing banks for borrowing gold. These rates are calculated for various maturities on a swap basis against U.S. dollars.

Normally, the forward market looks like any other yield curve, with near-term rates lower than those of longer maturities. Those rates, too, are ordinarily positive. What was noted as backwardation last week was the quotation of negative forward rates in the London dealer market for one- and two-month gold loans.

In simple terms borrowers are being paid to borrow gold from central banks. This effectively restricts the price from moving higher at a time of great scarcity. With so much chatter around a COMEX default the current backwardation may be an early sign something big is about to happen.

Stay tuned.....