Friday, August 7, 2020

Gold: I Fear Izabella Kaminska Has Gone Over To The Dark Side

Here's our quick-n-dirty primer on the topic she's about to dive into, from 2013's:

Commodities: Backwardation vs. Normal Backwardation
We're going to be hearing these terms a lot in the next few weeks.
Even very sharp people can have trouble integrating the concepts into their investing worldview so that the relationships are seen automatically and you can use your brain for other, important, things.
First up, the framework:
contango: CURRENT spot price < future price
backwardation: CURRENT spot price > future price

normal contango: EXPECTED spot price < future price
normal backwardation: EXPECTED spot price > future price
That's it.

If a person can get the picture at a subconscious level they have a chance at making it in commodities....MUCH MORE
And now, with trepidation and one of those guys in the snazzy vestments on speed dial should we need an emergency exorcism, Izabella Kaminska at FT Alphaville, August 7, AD 2020:

What’s with gold backwardation? 
With so much going on, the revival of the gold price in recent weeks hasn’t really got the attention it deserves.
Yet in historical terms, the rally has been noteworthy:...
... The fact the gold price is zooming in the face of record monetary expansion and debt issuance is hardly surprising though. It is, after all, precisely the sort of economic environment that should bring out gold enthusiasts who have long predicted the dollar-supported western financial system is due a collapse.

But could they — at least this time — have a point?

Here at FT Alphaville, we tend to refrain from goldbuggist views about the superiority of gold-backed monetary systems. We have long pointed out the flaws in this shiny metal-centric view of monetarism. These include everything from cross-of-gold vulnerabilities to the impracticalities of metallic money in a digital age, and the fundamental debt-based nature of money. There’s also gold’s dicey record as an anti-inflationary store of value.

But as with most things, there is a time and place for gold.
Occasionally the gold markets, especially those related to gold-financing and leasing, offer interesting insights into what is happening in money markets.

In that regard, one particularly arcane area of goldbuggism relates to the analysis and interpretation of the gold forward structure. This, the theory states, is indicative of wider monetary system stability.
A particular signal of distress is said to be the rare emergence of backwardation. Both backwardation and its opposite, contango, are descriptions of the structure of commodity futures curves. If prices of forward or future commodity prices (especially relative to spot prices available today) ascend the more we move into the future, the curve structure is said to be in contango. If they descend, it is said to be in backwardation.

Backwardation nation
The concept of gold backwardation first came to the attention of the gold investing community back in 2008 when Professor Antal E. Fekete, a self-described “renowned mathematician and monetary scientist” and advocate of New Austrian economic thinking, posted a red alert about the structure manifesting in the gold market for the first time ever. The appearance, however, was only temporary. It disappeared shortly after.

But thanks to Covid-19, gold backwardation (at least when measured as the difference between the spot price and the front-month future price) made a decisive, albeit fleeting, return in March. What is noteworthy this time is that it seems to be continuously retesting the return:...

Before following the link, if one is desirous, this seems to be a good price for Holy Water, get the 6-pack of 32 ounce bottles for 21 bucks, cheaper than  Amazon.

Previously from Izzy on curve structure (there are many, this one stuck in my memory) also 2013:

The Trouble With Gold (GLD) 
FT Alphaviller Izabella Kaminska has a personal blog where she talks about--
the same stuff she talks about at Alphaville-- but a little less edited, a little more stream of consciousness and a little less tolerant of morons.
In this installment she teaches a masters class in commodity price dynamics....

And a couple on Keynes:
Keynes in the Commodities Markets
John Maynard Keynes: Money Manager (Couldn't Trade Lard to Save His Life)