Gold Backwardation Conspiracy Nonsense

Business Insider says "Traders Are Talking About A Gold Conspiracy Theory And There's Evidence To Back It Up"

No discussion about gold is complete without a good conspiracy theory. While most theories are easily dismissed, some stay around for a while due to a confluence of circumstantial evidence surrounding it. Wall Street veteran Art Cashin addresses one such theory in this morning’s Cashin’s Comments.

From Cashin:

All That Glitters Is Not Arbitrage – Monday, spot gold spiked up $45 and the media pundits pointed to things from China to the FOMC. While all the cited may have been factors, veteran traders saw the bulk of the move resting in a conspiracy story.

In my mid-day email to friends I had noted this:

Gold soars as NYT story on metal warehouses fans flames of conspiracy theorists that gold warehouse stores have been “lent” out. That theory also aided by backwardation (spot price far above near future).....

Unfortunately, we are not sophisticated enough to answer these questions.  But email us at moneygame@businessinsider.com if you can.

Email is on the Way

Consider what follows as my email to Business Insider and Cashin.

People like conspiracy theories for two reasons:

1. Conspiracy theories are sexy and fun to discuss
2. Traders want to blame someone else for their poor trades.

Simply put, if gold goes up, it's because it should (and the traders are brilliant for understanding that). If gold gold down, it must be a conspiracy (because the traders cannot possibly be wrong).

Investigating Backwardation

My friend Nick at Sharelynx Gold emailed me earlier today regarding the alleged backwardation in gold.

Nick writes....

Hello Mish

The attached chart shows gold's current spread band of all the active futures vs the spot price of gold. Shown in the top window are the active futures. Shown in the bottom window is the Last/Near Future spread. (this needs to go below zero for a full inversion)

Gold Futures Spread



click on any chart for sharper image

Gold Chat

Bron at Gold Chat posts the following amusing set of charts that may be easier to understand.

Gold Futures Spread



Oil Futures Spread



Now That's Backwardation!

Recall the definition of backwardation: Current price above future delivery price.

There are many reasons this can happen with commodities, but the typical explanations are: temporary short-term supply shortage, expected future supply, or expected falling demand.

Supposedly this can never happen with gold because "gold is money".

Leaving aside the philosophical question as to whether or not gold is money, presume for a moment that it is.

Using the above oil chart as a basis (assuming the gold chart were the same), backwardation implies that someone could borrow money today and pay it back in 2018 for 80 cents. Logically, that shouldn't happen.

Acting Man Chimes In

My friend Pater Tenebrarun at the Acting Man Blog (see his recent post Gold and Gold Stocks – More Signs of Life) chimed in with this email comment:

There is no persistent and deep backwardation in gold, so it is definitely not something to get alarmed over just yet. However, it is still notable that the nearby futures repeatedly slip into slight backwardation versus spot. Moreover, the gold forward rate has recently turned negative. That means that people are now paying more interest for gold in a gold-dollar swap than for dollars. That happens only rarely. Of course all of this happens mainly because interest rates are so low. If interest rates were higher, then it would really be worth getting exercised over. Still, GOFO only rarely turns negative and it often marks a low when that happens.

Philosophical Question

The philosophical question regarding whether or not "gold is money" is an interesting one.

If indeed "gold is money" (not an ordinary commodity like corn, copper, or oil), then severe backwardation implies skepticism as to whether future gold contracts will really be delivered.

Thus, backwardation claims fuel all sorts of theories about gold shortages, gold leasing, and price suppression.

However, the charts provided by Nick at Sharelynx and Bron at Gold Chat show that claims of backwardation are essentially nonsense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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China Manufacturing PMI Declines at Quickest Pace Since Last August

The HSBC Flash China Manufacturing PMI shows China Manufacturing PMI Declines at Quickest Pace Since Last August.

Key points

• Flash China Manufacturing PMI™ at 47.7 (48.2 in June). Eleven-month low.
• Flash China Manufacturing Output Index at 48.2 (48.6 in June). Nine-month low.

PMI, Production, Exports



Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“The lower reading of the July HSBC Flash China Manufacturing PMI suggests a continuous slowdown in manufacturing sectors thanks to weaker new orders and faster destocking. This adds more pressure on the labour market. As Beijing has recently stressed to secure the minimum level of growth required to ensure stable employment, the flash PMI reinforces the need to introduce additional fine-tuning measures to stabilise growth.”

Fine Tuning Needed?

Regarding Hongbin Qu's comment that "China needs to introduce additional fine-tuning measures to stabilise growth".

Mish says "please be serious".

China is supposedly growing at 7-8%. Such growth is not sustainable with or without "additional fine tuning".

Belief in central planners runs high. Such belief is foolish.

We do not need fine tuning, we need to eliminate fine tuners.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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99% Believe the Economic Situation in Spain is Bad; How Much Worse Can This Get?

According to the latest Eurobarometer, 99% believe that the economic situation in Spain is bad.

Via Google translate from La Vanguardia.

79% of Spanish unemployment considered as the main problem of the country and 99% believe that the economic situation in Spain is bad, according to the latest Eurobarometer survey published today. In comparison, 51% on average in the European Union (EU) believes that the main challenge for the country is 72% unemployment and the economic situation is bad.

Regarding the future, almost half of the Spanish respondents, 46%, believes that the country's economic situation will remain the same over the next twelve months, compared to 15% who think it will improve and 37% who think it will be worse.

62% do not believe that the economic crisis has already had its biggest impact on the labor market and therefore the economy is recovering slowly, and, on the contrary, they think that "the worst of the crisis is yet to come".

How Much Worse Can This Get?

The good news is 99% negative consensus has little room to drop.

However, 15% think the economy will improve, 37% think it will worsen, and 46% think it will remain the same. 2% don't know.

That score can worsen, and it probably will.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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About that Austerity in Spain: There Isn't Any

I have long contended there is little austerity in Spain and there certainly isn't much reform either. I now have some numbers to back that up.

Via Mish-modified Google-translation from El Economista, please consider personnel costs rise despite full state salary freeze.

Despite the 5% snip in public salaries in 2010, the subsequent wage freeze in 2011, the elimination of extra pay in 2012 and the current freeze in Administration salaries, the overall payroll became cheaper by a only 2.1% year-over-year to December last year.

The budget of expenses and monthly payments, which has been updated recently by the General Comptroller of the State Administration (IGAE), casts doubt on the effectiveness and / or proportionality of adjustments labor.

For example, until the end of May, the state paid 14.17 million euros to its temporary staff, an increase of 9.5% over last year.

This upward trend in payments to temporary staff is constant from the beginning of this exercise. since, January 31, 2013, these state payments increased 21.3 percent (4.13 million total) about 3.4 million higher than the same month a year earlier.

It may seem paradoxical, but in the last two two years, the State Administration has virtually the same costs for temporary staff. What it cut one year, it added back the next, in nearly the same amount.

Similarly, spending on senior positions in May 2012 was 29.7 million euros. It is now 29.86 million euros, an increase of 0.5%.

According to the General Comptroller, remuneration to civil servants decreased 2% from a year earlier.

However, despite this saving palpable in payrolls of officials, the State has not been able to lower their personnel costs, since payments until May totals amounted to EUR 10.184 million (10.139 million last year) , an increase of 45 million, representing an increase of 0.4%.

When Keynesian clowns point to Spain and say "austerity doesn't work", ask them "where is the austerity?" Also ask "where is the labor reform?" Then ask "where is the pension reform?"

Then kindly point out there is little to no austerity, and little to no reform, but there has been massive tax hikes, exactly the wrong thing to do.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Scranton Needs 117% Property Tax Hike to Balance Budget; Simple Truth: Scranton is Bankrupt

Those looking for the next city to go bankrupt should consider the possibilities in Scranton.

The Pennsylvania Economy League projects Scranton could be looking at $18 million deficit, 117 percent tax hike in 2014.

Scranton taxpayers could face a 117 percent increase in taxes next year as the city's finances continue to spiral out of control.

A new analysis by the Pennsylvania Economy League projects an $18 million deficit for 2014, an amount so massive it outpaces the approximate $17 million the struggling city collects annually in just property taxes.

Though council members did not extensively discuss the PEL letter Thursday, council Finance Chairman Frank Joyce said after the meeting, "The tax increase they (PEL) recommend is far too expensive for taxpayers to handle."

Mr. Joyce suggested that perhaps the city could refinance debt to implement a financial maneuver called a "scoop," in which higher debt service payments due next year are scooped out of the budget and swapped with lower payments due in future years. The city implemented such a scoop for the 2013 budget by refinancing debt to have lower debt-service this year than it otherwise would have had, Mr. Joyce noted.

"The city's definitely going to need help," Mr. Joyce said. "Maybe we can refinance debt to lessen the tax impact through a scoop. It may be viewed by some as kicking the can down the road, but it may prove to the state that we need a (countywide) sales tax."

Inane Discussion

PEL's proposal to raise property taxes is absurd. So are proposals for a countywide tax to bail out Scranton.

City bureaucrats and the PEL can hem and haw and piss and moan, but can-kicking exercises, "scoops", and tax hikes will only make the problem worse.

It's time for Scranton to face the simple truth. It is bankrupt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Fools Say "Sell the Gold Rally"

Lee Munson of Portfolio LLC says "Sell the gold rally".

The question for investors and speculators alike is if gold has at long last marked the end of a wrenching nearly two-year pullback from the 2011 highs over $1,900. Lee Munson of Portfolio LLC says any rally marks a chance to make a graceful exit from their positions.

"Investors are confusing the fact that [gold] holds its value super long, hundred-year periods of time versus inflation versus making actual growth," Munson says in the attached video. "It just holds its value. That's not a reason to hold anything."

Those who quibble with that analysis, parsing the numbers to maximize the apparent returns of gold versus stocks are missing the point. Gold has worked over shorter periods as a speculative vehicle but the die hard goldbugs have seen minimal returns at best and dramatically underperformed stocks.

Since 1940 adjusted for inflation the only period over which gold has outperformed stocks is 2000 - 2010; and that lead is slipping fast. History suggests gold is extremely volatile in shorter terms but dramatically lags U.S. equities for the truly committed gold enthusiasts.

Munson has simple advice for gold investors enjoying the terrific rally from the recent lows. Sell. "Exit out of the trade. Get serious. Get real."

Disingenuous or Clueless?

I do not profess to know what the price of gold will be at any time, but Munson seems to think he does, so much so that he screams sell after a measly rally.

Munson is certainly clueless about the fundamentals of gold.

If you don't understand the fundamental driver (and it's not jewelry or central bank selling) please consider Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

Gold outperformed between 2000 and 20010 for a reason. And that reason is global central bank debasement of currency. Gold also outperformed in the late 70s for the same reason, but it did get ahead of itself.

Additional Reading

1. Ritholtz on Gold and on Making Predictions; How Secular Bull Markets End; Winning vs. Investing
2. Nouriel Roubini Seriously Misguided on Gold, on Equities, on Economic Growth, on Money
3. Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse

Cash, Bonds, Equities, or Gold?

You have to put your money somewhere (and somewhere includes cash).

This is not about being a "die hard gold bug". This is about understanding the case for gold as it exists now.

The fundamentals of gold are strong, yet sentiment is so extreme that bears says "gold is unsafe at ANY price". Now Munson says this puny rally is a chance to exit.

With sentiment this extreme in the face of strong fundamentals and a rally, I like my chances here.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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How to Lie Without Saying a Thing

There are rare exceptions, but the general way to tell when a politician is lying is if his lips are moving.

Another way to tell is if the politician's lips aren't moving.

Chancellor Merkel and finance Minister Schäuble have said Germany will not agree to a transfer union. But what about mountains of unrepaid southern European debt held by public creditors?

By now, both Merkel and Schäuble know that debt cannot and will not be paid back. They also both know that German taxpayers will soon be on the hook.

But as a matter of political expediency, Schäuble keeps quiet on mounting cost to Germany of Europe’s woes.

When Mr Schäuble visited Athens last week, the leftist Greek newspaper Avgi welcomed him with the abrasive headline: “Hail Schäuble! We who are about to die salute you.”

Aware of the acrid political atmosphere in Athens, Mr Schäuble came bearing gifts: €100m in state-backed loans for small and medium-sized Greek businesses. But what Greece really needs, to kindle a flame of hope in its future, is another restructuring of its foreign debt.

Conventional wisdom holds that it would be suicidal for Mr Schäuble, or any German politician, to speak this unpalatable truth to voters before Germany’s September 22 national election. Unlike the Greek debt haircut of March 2012, which clipped private sector lenders, any future restructuring would shear the locks of official creditors, including Germany, which now hold over 90 per cent of Greece’s debt.

So far, the bailouts of Greece, Ireland, Portugal, the Spanish financial sector and Cyprus have cost German taxpayers much in loans and guarantees, but not one cent in hard, unrecoverable cash. Indeed, the €110bn EU-International Monetary Fund rescue of Greece in May 2010 was as much about protecting German banks, which had lent recklessly across southern Europe, as it was about restoring Greece’s financial health.

A second Greek debt restructuring would not shock German taxpayers and destabilise the political scene, although legal hurdles might need to be jumped at the nation’s constitutional court.

More dangerous, for its impact on German political and public opinion, would be the dropping of a different penny: the growing possibility that debt write-offs, or extra financial aid, will have to be made available not just to Greece but to Portugal and Cyprus. Spain’s banks are not wholly out of the woods, either.

As for Cyprus, the duration and intensity of its economic and social collapse are unmeasurable.

The question, then, that threatens to dominate German public debate is: “Greece, Portugal, Cyprus . . . Where will we Germans draw the line?” The only certainty is that no answer will come before September 22.

Certainties

1. Chancellor Merkel and finance Minister Schäuble will continue to lie, before, during, and after the election.
2. German taxpayers will be on the hook for bailouts in Greece, Cyprus, Spain, and Portugal. 
3. The entire mess will unravel soon.

The major uncertainty is the trigger country is not yet known. It could be Greece, Portugal, Spain, Italy, or even Germany (the latter if Germans come to their senses and vote for AfD in a huge way).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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