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Further Clarification on Backwardation

Dec 11, 2008

I thought this further clarification from Bill would be of interest to the general audience . . .

Stephen,
I thought I should clarify what I sent to you in an email earlier this week concerning gold backwardation.  What many people are talking about is the current cash price for physical gold being approximately $1250/oz this morning versus the Dec Futures price being only $824/oz.  What I was referring to in the futures business is that when a true inverted basis or backwardation occurs, it will also be reflected in the Dec futures price being much higher than the next trading month's futures price, in this case February gold, which today is currently trading at $828 dollars per ounce.  Though obviously gold has rallied some the past few days, I don't believe the real fireworks will start until you see it in the futures market premiums as well as the cash premiums, thus forcing delivery by bidding up the closest month's price.  I hope this clarifies what I wrote for your readers.
Thanks,
Bill


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Dr. Stephen Jones


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