This is
a brief follow up on the Supply and Demand Report of 30 November. In that
report, we observed an extraordinary development in the gold market. We made
several predictions, which came true almost immediately. We don’t always
expect this to happen, but today we think it’s worth looking at what we said
and what happened.
Regarding
the gold-to silver ratio, we said this:
“[W]e
will stick with our call for likely further upside in the ratio. We could see
80 or higher.”
On
Sunday (Arizona time) when the market opened, the ratio briefly spiked to
80.94.
Regarding
the incredible backwardation in four contracts (Dec, Feb, Apr, and Jun), we
said this:
“We
suspect that this time, it’s a matter of price. We believe that when the
price rises enough, this backwardation will subside.”
The
price of gold closed at $1,167 on Friday. As I write this on Tuesday morning,
it is $1,200. This is a gain of $33. The backwardation in the Feb contract
has dropped by more than two thirds. It is gone entirely, in the Apr and Jun
contracts.
Regarding
the spikes in the cobases last week, we said this:
“Thursday
was Thanksgiving, a major holiday in the US and Friday was a shortened
trading day and probably had poor liquidity. So we might be somewhat inclined
to take this development with a grain of salt. Only somewhat.”
In
hindsight, the poor liquidity of a shortened holiday week was almost
certainly a factor, in three contracts going into backwardation so suddenly.
A price change of $33 isn’t all that big, and it’s hard to attribute the
change in the cobases this week just to price action.
Regarding
the price of gold, we said this:
“This
might be a good time to go naked long gold, especially if you like to jump on
the leading edge.”
The
price of gold went up to $1212 by close on Monday. Assuming you did not use
leverage, you made 3.9%. Or more, if you bought futures on margin.
Regarding
the collapse in open interest in gold futures, we said:
“…[it]
looks like it may be a major capitulation in the gold market. This doesn’t
mean that there couldn’t be a bit more selling, especially when the market
wakes up to the news from Switzerland.”
There
was a selling frenzy on Sunday evening. The price of gold was down to $1,142
at one point.
We said
the price could drop due to the “bad” Swiss news and it could go up to cure
the backwardation in three contracts. Both price moves happened and the
backwardation was almost entirely cured also.
© 2014
Monetary Metals
