Gold in backwardation again

Watching the tape on Bloomberg, I noticed gold went into backwardation again--the condition where the near-term futures contract price is lower than the spot price. This is a rare anomaly, as spot prices are usually lower than future delivery prices, a condition called contango. The reason why futures prices are normally higher is due to the storage, insuring and security costs of holding physical inventory.

When the spot price is higher, that means inventory is tight, and sellers need to scramble to find inventory for buyers who demand delivery. I went into detail on the probable causes of backwardation last year, usually revolving around the artificial suppression of the price of precious metals by commercial banking shorts. It's in the best interests of the big money centers, central banks, and sovereign funds worldwide to manipulate the price of gold down, as soaring gold prices are a sign of economic distress and lack of confidence in our financial systems. Capitalism is based on the aggregate trust of the population, and when that trust is shattered, well, you've seen examples of it recently and in generations past.

The problem with backwardation is that demand for physical delivery eventually exposes the artificial naked short selling of gold and silver. Normally, when futures contracts expire, settlement is via cash, and the other contracts are rolled over to the next month. However, when the seller doesn't have inventory (hence, "naked"), and combined with the buyer demanding delivery instead of cash, the seller has to find physical bullion wherever he can get it. And with physical inventory tight, the seller must pay a premium to buy the bullion for delivery to the counterparty of the futures contract (the original buyer). When enough buyers demand physical delivery, then the short manipulation gets exposed, and the roof gets blown off the top of the house. It's similar to the Bear Stearns and Lehman blow ups, when they took on too many positions on the CDS derivative trade--once the gig was up when home borrowers defaulted, all those contracts imploded, as did their balance sheets.

The street price of gold and silver carries a premium over the futures contracts on the COMEX. Once that becomes common knowledge, the gap will narrow, and there will be a run on demand for gold and silver. That's what happened in the 70's when we experienced inflation, as there was a general distrust of our government's deficit spending.

Gold bugs will declare this time it will be much worse, as the Fed continues to borrow and print trillions of dollars. I've read predictions of gold prices between $1,500 to $10,000 over the next 5 years. I believe gold will peak around $2,500 an ounce over the next 5 years, as that is equivalent in today's dollars what the 1980 peak of $850 was.

What's even more intriguing is how undervalued silver is at $14 an ounce. Based one some metrics, including the gold/silver ratio, silver should be at least $60. It's a hybrid metal--it serves as a store of value like gold, but it also is a base metal used for industrial purposes. It is also used in jewelry like gold. And with base metal mines being shut down due to last year's meltdown in demand, silver inventories are very tight. Physical gold bullion has recently carried a premium of 3 - 15% over the spot price, but silver's premium has been as high as 80%! If that isn't a clear indicator that COMEX silver prices are being manipulated, I don't know what is.

Silver has also recently broken out above resistance at $14. Next stop looks to be $17.50, before the shorts try to hammer it back down. Long-term, the shorts are going to lose their shirts once the floodgates are open. The silver COMEX market is manipulated even more than the gold exchange, because it is much smaller. And because silver tends to trade in tandem with gold, manipulating silver is a cheaper proposition.

Big hedge funds are stockpiling gold ETF positions and snapping up gold mining shares, even as retail demand plummets due to higher prices. The net effect is that gold holdings are being transferred from weak hands (retail jewelry users in India) to strong hands (big institutional funds) intent on hedging themselves against imminent hyperinflation.

With commodity prices across the board climbing (energy, precious metals, base metals, crops, grain), the markets are trying to tell us something, even while the government still harps about deflation, and relying on fraudulent consumer price index data. Government economists are busy looking in the rearview mirror, intent on declaring deflation is our worst enemy, while our economy is speeding towards a huge, concrete wall of hyperinflation.