Thursday, June 29, 2006


'Decision Day' For The US$

The Daily FX has this early update. "The FX markets remained motionless overnight, all but ignoring all of the economic data from Asia andEurope as dealing desks around the world prepared for the FOMC decision at 18:15 GMT today."

"The FX market the focus remains squarely on the Fed with the market keen to know if the Fed intends to move rates to 5.50% or even possibly 5.75% level as early as August. Despite dollar bears’ predictions of imminent doom once rates crossed the 5% threshold, the US economy has remained remarkably resilient in the face of higher rates and persistently higher oil prices. However, greenback shorts may not have been wrong, just early."

"The US housing bubble, like all bubbles before it refuses to pop quickly as buying momentum persists beyond all reason. However, the weekly MBA data clearly shows that this key sector of the economy is experiencing serious problems. Yesterday’s data revealed that both the Market Index and Purchase Index are at new lows for the last 3 years. Another 50 basis points rate increase in the Fed funds rate is likely to drive up the cost of adjustable rate mortgages even higher, making housing less and less affordable for the majority of the US population."

"For now the Fed has been able to tighten monetary policy without any detrimental effects to the US economy, but as it continues to ratchet rates higher, it raises the probability of a sharp contraction in housing, which in turn would lead to a significant slowdown in the overall economy."

"Traders like the ever increasing yield on USD assets but worry that these increases could trigger a US recession. This conflicting sentiment explains the lack of dollar strength versus the euro, given the unit’s substantial interest rate advantage."

"Nevertheless, should the Fed statement strike a hawkish note today, it may well push the EUR/USD below the 1.2500 level and possibly even towards the 1.2400 figure as momentum traders test the resolve of euro bulls. Any hint of hesitation, however, and the euro could see a rally on a classic 'sell the news' dynamic."

Fascinating. The Fed raises, plus signals more possible raises, and yet everything is up. Go figure.
We used to have "irrational exuberance."

Now we just have "irrational."

Are we going to have inflation or deflation? Is the dollar weak or strong? In relation to what? Euros? Real estate? Gold? Soybeans?

And why does the zany conspiracist in me think that the gov't is using the release of new bill designs as a way to feed additional currency into the system? (I know, it couldn't really be that much...)

Bernanke turns out to be a wobbler. He puts out 4 Fed governors to peddle a hawkish message and in the end puts up a wimpish hike with a wimpish statement.

He provides neither direction nor credibility, becuase he has no clue neither courage.

Bernanke is as good as dead and the economy will pay with a slow-mo death with an implosion in the end.

Good for those that buy/hold gold in the last few weeks.
Where are you?
Did you read my response to your basis interest?
This comment has been removed by a blog administrator.
On Basis:
"The basis is the spread between the nearby (rather than distant)futures price and the cash price."
"...while the central bankers are buying time, sand in the hour-glass of the gold basis keeps trickling down. When it runs out, the trickle of cash gold from warehouses will have become an avalanche that could no longer be stopped. The gold futures market will be bankrupt, along with the regime of irredeemable currency."

Fekete believes that the last contango in silver will precede the last contango in gold. I find this interesting in light of the fact that Ted Butler writes that there has been a significant reduction of the silver in Comex warehouses in the last month or so. BTW, Butler is no fan of Fekete, and visa versa.
The above quotes came from the 6/23/06 article "The Rise and Fall of the Gold Basis".

I am reading and re-reading most of what Fekete has written in the last 3 years. See the May 4 2004 article "What Gold and Silver Analysts Overlook". Pay special attention to the section "Abnormal Backwardation". This appears to happening now. He also mentions Butler in this essay.
From: "The Last Contango in Washington" 6/3/2006

"Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount. When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis."

Here are Comex Futures links for Gold and Silver:
Correction to my comment above regarding Abnormal Backwardation: it is NOT happening now.
I have read Mr.Fekete's articles.
Is pasting Fekete's commentaries to each other, the form of discussion you want to lead?
If so, I pass.
No, I only do so to form a starting point for discussion. Perhaps you or others can point out important points. I am trying to understand how he correlates the shrinking basis and backwardation to an imminent monetary crisis or collapse. Perhaps it's because the market will be telling us that the futures are worthless (default), and that demand for monetary metal is exceeding supply. In other words, monetary metal is not available at any price?
The way I understood his message is: once we will see gold futures backwardation, the fiat money is over and hold on to your metals, because it will be only money. And it doesn't have to be constant backwardation like in other futures markets. It could be just temporary, intraday.
I admit that Mr. Fekete's reading is sometimes hard to follow for me. It seems that he operates on much higher monetary and economic knowledge level and I got some learning to do before I will understand him fully.
His articles caught my eye, because he is the only one who talks about basis. I have read about basis observation as helpful indicator years ago in Mr. Bruce Gould writings on agricultural futures trading, so I am intrigued by idea of applying basis as an indicator, which is almost unknown. And whatever is not wildly followed it appeals to me.
Just recently I started to collect spot and futures prices and it is hard to do, but I will continue and hopefully it'll help me to detect price movements in advance.
I was confused by his 5/4/2004 discussion of supply/demand, that he seemed to contradict himself by stating supply and demand are not a good indicator for gold and silver price trends. He seems to be saying that backwardation occurs when hoarding is occuring at a faster rate and this will be seen in the futures markets. His "bull in bears skin" analysis is to me, more plausible an explanation for the large short interest (naked shorts that aren't really naked)in the silver and gold markets. What do you think about this? BTW, I would have responded earlier but I think the server was down.
"more plausible an explanation for the large short interest (naked shorts that aren't really naked)in the silver and gold markets. What do you think about this?"
I think I am not in a position to judge if it's true or not. I take it the way Fekete is laying it out.
Actually, I believe in many forms of manipulation of the markets, so it may be true and it make a lot of sense to me.
If it comes to backwardation.
Spot prices are immediate delivery. Even nearest futures month contract promise delivery some time from now. When you see spot prices much higher than front month delivery that means there is a serious shortage of metal at that particular moment.
In other commodities where normal backwardation is a natural state the rising basis is the possible sign of supply/demand unbalance.
According to Fekete: gold is different. Contango is monetary metal natural state, so if spot prices will rise very aggressively basis will be negative.
But I still don't understand reasons why backwardation in gold is such a big deal.
Another thing I don't understand is why those big short sellers have to take their positions in order to buy the real thing. Perhaps you can help me.
It's a ploy to trick the longs. Sorry, but I'll cut and paste from:
See the section "Are the Shorts Really Naked?"
I think this makes a lot of sense, especially if your a government (China or Russia) trying to quietly acquire mass quantities of physical metal at the lowest price.

As to your question why backwardation is such a big deal, I have no real knowledge in futures, but I think what he is saying is that when backwardation occurs, never to return to contango, it means that "the market" or insiders have knowledge of an imminent monetary/financial crisis, and that all available physical gold has been purchased, and none is available at any price.
If you could buy buy futures gold at a lesser price than today, and you were currently a large holder of physical gold, you could make money without any risk, i.e. selling at today's higher price and buying at a lower price on the futures market. But there is risk: a default of the futures contract and "collapse" of the market. The gold can't be delivered. I don't know what the implications of a default on Comex gold or silver futures might entail, but I'm sure it would cause some commotion and be news..
"And it doesn't have to be constant backwardation like in other futures markets. It could be just temporary, intraday."

How much gold could one sell today at a higher price than the nearest futures price, while simutaneously buying futures at a lower price? If I were a large holder, I don't think I'd want to give up my physical for a futures contract. So I'd think that the negative basis spread and the elapsed time or duration of the state of being negative would be more indicative of an imminent crisis. Just a WAG.
If you think about it, insider trading on the spot market (and not the futures market) would be a logical indication of an imminent financial collapse. If you worked at NSA and had knowledge of a bio-attack that was about to occur in your city, you'd call your wife and tell her to leave town..
One of the reasons I hold an ill-advised percentage of my net worth in physical monetary metal is because I don't trust that Wall Street/Government/Fed/SEC/UST/PPT insiders will do the right thing when it matters most, and I believe a time is forthcoming when it will matter.
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