Confusion in Gold


The collapse in interest rates has led to a very unstable environment as far as the traditional interest and carrying cost for gold and other commodities. Of course people have made a big deal out this BACKWARDATION claiming it is a sign of real bullishness and manipulation. In truth, it is simply the interest and carrying costs. In the 1970s, we showed our Arab clients who could not earn “interest” that they could buy gold and sell it forward and collect the spread that was effectively the interest rate plus costs. This is what gave depth to the future market as it was in its infancy in 1975.

The problem we have now is the interest rates have collapsed and we are getting wild swings in the spread. Using the standard method of calculating “spot” gold; full movement was always a matter of taking the spot closing and subtracting that spread to the nearest futures closing from the open, high, and low.

June 28th, 2013 was one of those wild days. The spot actually closed at 1192 that day and the August closing was 1223.7 producing a crazy spread of $31.70. Since the August low was 1179.40 would actually produce 1147.70 as a low. If we look at July gold, the low was 1183.20 and the close was 1223.80. Subtracting the spot closing of 1192 produces a spread of $31.80. Subtract that from the July low produced 1151.40.

By the method we have always employed taking the nearest futures (July) and subtracting the spot produces the “interest free” price. So on this basis, the target of 1150 was developed. It is very debatable if the June 28th low is the real low since August gold was 1179.40 lower than the July or is the December 31st low really it? This is causing two different cyclical perspectives for turning points.