Since 18 months we have very interesting situation in the market of noble metals. What we can observe is intermittent but stable backwardation. Backwardation is a phenomenon when metal which is available a vista is significantly more expensive than futures contract. To explain this phenomenon I will start from basics

Contango and backwardation are 2 states characterizing ratio between spot price (here and now) and price of an asset in the future. Contango is the situation when price of the future contract is higher than spot price. Backwardation is the exact opposite of this.

Apart from small exemption contango is a standard, when price of an asset here and now is lower than the same asset but in the future. Reason is simple. Any goods need to be stored somewhere. It does not matter whether it is gold, wheat or electronics. You need to store, secure, and sometimes insure them. All this costs money and this adds up to the price of the good in the future. This is standard.

In case of precious metals we see inverse situation – backwardation. This circumstances are with us for over 18 months. In other words, gold available now is more expensive than one you can get delivered in a month or next quarter.

Before 2013 backwardation happened only 3 times in the history and always those periods lasted only for few days. I think about 1999, 2001 (start of 10 year raid) and 2008 year (the slump of prices). As I mentioned now backwardation last for more than a year and still price of gold hover at very low levels.


What are possible reasons behind gold backwardation?

1. Lack of trust towards monetary system.

Question: if gold is generating costs and you can earn on leasing it – why then backwardation happens? Basically gold owners lost trust towards fiat monetary system.

Gold as we see is drifting from West to East in larger and larger volumes. Demand is way above supply so whoever has gold does not want to give it to bullion banks as they could be demanding paying back in cash.

In the past whenever bullion banks need gold there was a lot of willing to instead of paying banks to store metal for them could earn few percent for leasing it to bullion bank. Trust towards banks is dead now.


2. Naked short selling – the dangerous game.

Secured short sell is when seller holds physical asset (gold) or will hold it at the moment of finalizing the contract. This is standard trade situation.

For a change, naked short selling is when investor does not possess and do not arrange for delivery of physical asset for the time of finalizing contract. We are selling something which we do not own. Contract is finalised in dollars and whole transaction has nothing to do with physical metal.

Over 99% of whole gold and silver trade on two biggest exchanges LBMA and Comex is dealt without physical collateral.

Only in case of gold 1 oz per 100 has collateral in form of physical metal. In case of silver the ratio is 1:250. Until players of this game have trust in it, everything works smoothly.

‘Unfortunately’, sometimes a contractor wants to get metal and not cash. In this event seller has only one solution – go and find metal on the market offering price higher than spot price.


3. Third situation when backwardation may occur is lack of metal on the bullion bank’s side.

For years we saw gold being leased. ‘Sovereign’ states leased their gold reserves to bullion banks receiving from 0,25-1% per year in interest.

Next, banks were selling gold onto the market and money from that trades was invested in government bonds paying 4-6% per annum. The difference was clean profit for the bank. Price of gold climbed several times and suddenly it was problematic to buy gold to cover their obligations.

Bullion banks had to pay more to fulfil their obligations and give back gold to Germany, Austria, Finland or France. In situation where whole global production was shipped to China or India and sellers are no longer here to accept today’s prices this raises red flags.

Therefore, to get precious metals from the market bank needs to offer premium over the spot price contracts it needs to fulfill and this causes backwardation.


What else we can read from bullion banks’ reserves?

Elligable reserves are stored property of an investor and cannot be sold. Registered reserves are property of an investor too but can be used for leasing or for closing futures contracts.

We can see significant increase in silver reserve levels. High volumes of silver is not sold but held as security underpinning several futures contracts. Although, 70% hike in 4 years it is nominally just 3 trillion USD. The amount overlooked given scale of global trade.

Gold on the other hand shows the fear of investors. Reserves diminish due to smaller supply and lack of trust towards Comex and affiliated institutions. Registered reserves are below 30 tons worth o nly 1,1 trillion USD. It is enough to satisfy Chinese demand (only!) for 4 days.



Backwardation of precious metals in the past always initiated rise of prices. The bottom line is that lack of physical collateral affects market so much that price of both silver and gold surge. Last 18 months cartel was able to use various tricks to control the price.

Situation benefits countries that import gold like China, India or Russia. Their reserves can enable them to introduce some form of gold standard of their respective currencies.

If gold is truly barbarian relic as we are told than why indebted US, Italy, France and many others do not even think about selling an ounce? Why both Libya and Ukraine lost their gold reserves in the first days of newly introduced democracy?


Independent Trader team