Without Contango, There's No Dance
August 26th 2009 01:06
Back in December, I posted about Backwardation at Mover Mike. Quoting from that post, I wrote
When I say “backwardation”, I mean that the cash price of Gold is higher than the nearest futures contract. Some would define “backwardation” as the cash price higher than all futures contracts.
But a very strange phenomenon has been manifesting itself during the past thirty-five years, since the inception of gold futures trading. The basis as a percentage of the rate of interest, rather than remaining constant, has been vanishing and, by now, has dropped to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point towards a developing shortage of monetary gold that appears to be irreversible. The support of the paper gold markets is at stake. Without cash gold backing it up, paper gold trading is not viable
What Fekete is worried about is the event where no amount of USDs will buy an ounce of gold. There are no investors who would run the risk of taking dollars for gold. They would be afraid they couldn't ever buy theirgold back.
What if, the chart we have looked at, waiting for a breakout above a $1,000, is really the end of the dollar as we know it? What if, when it breaks, there isn't any Gold to buy? That would mean that a lot of investors will be caught short. Every time you opt to keep the dollars in your pocket and forego purchase of gold, you are shorting gold and going long dollars.
That could be a very financially unhealthy place to be!
Please enjoy the article and comment below, follow me @movermike and Khrono Stock
Mike Landfair
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