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Additional resources for earning interest in gold

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Why earn interest on gold and silver? If you’re short on time or simply prefer to watch instead
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11 responses to “Why does the “Paper Gold” Price Track the Physical Gold Price? Part II”

  1. Great information for my knowledge bag. Thanks.

    I don’t see where the conclusion that the silver gold ration will widen follows from what you have??

  2. I have been interested in the basis in futures since the natural gas collapse in 2008. The contango was very wide before the fall. It turned out that a hedge fund (Amaranth) had driven prices too high and the fund was eviscerated by JP Morgan, along with the gas price. The trouble that I can see with this strategy is alluded to in your paper. Timing is very important. Do you have a sense of how to read the basis for timing? What are normal parameters for contango in the silver market?
    One more question, why is the basis not a part of analysis for all futures markets?

  3. The color coding is reversed between the two charts. Is this intentional or an error? It would be nice if the color codes are consistent, that is, gray for silver, yellow for gold. Thanks for the great site!

  4. How do arbitrageurs make money off this? From what I understand you can leverage commodities, like gold, in the futures market. But if you’re only selling a futures contract against existing physical metal, you can’t leverage the physical metal. Would you have to have a calendar spread on it with both positions being a future contract? Buy on leverage April ’13 and sell on leverage Dec ’13? .5% is extremely low interest.

  5. “In brief, a falling basis indicates rising scarcity and a rising basis indicates declining scarcity.”

    The overwhelming majority of longs that “buy” real metal in this arbitrage never intend to take delivery, so to use this basis analysis as a metric to gauge the status of the physical markets is fundamentally flawed.

    Under 1% of the daily volume at the Comex could possibly reference physical metal.

  6. Thanks everyone for good comments. Let me try to address them briefly here, and if necessary write a follow-on piece.

    tyonker: Timing is not something one can read from the basis itself. I discussed timing in the video (right hand side of this page) “The Coming Silver Correction”, looking at the extreme level of open interest which was last seen Apr 2010 right before the crash from $49 to $34. I agree that all commodities traders should look at the basis.

    samiam: It was a mistake, we intended to make silver silver and gold gold :)

    dak: you borrow money to buy physical and sell futures. How much equity vs how much borrowing determines your leverage. The world is moving towards the black hole of zero interest. 0.5% is low, but it’s not as low as Treasury bonds of the same duration!

    mossmoon: I agree, the longs are mostly “naked” without means nor intent to take delivery. I discuss this in the video, the longs must inevitably sell. That does not invalidate the basis as a method of analysis.

    flvp: I will write a short piece that presents the logic in more detail.

    1. “I discuss this in the video, the longs must inevitably sell.”

      This rise in the OI could be the addition of shorts, no?

      My other point is that if the basis spread relies on naked contracts then it is NOT an indicator of physical demand, as you say it is.

      It will be interesting to see if your call is correct.

    2. The silver basis could not have been rising in Aprill 2011, as silver was in full backwardation. But you are predicting a silver correction based on a rising basis (and a rising OI). I do not follow you.

      Do you have a silver basis chart for 2011?

  7. You mention 1).. 2) and (3) a rising basis, we know that the price is being driven by speculators bringing …
    Shouldn’t be narrowing basis since i buy spot gold and sell future short? Please advise!

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