On Sunday evening during Asian trading gold (AMEX:GLD) was trading in backwardation, a state where the front month cutures contract was trading at a higher price than future month contracts. Both silver (AMEX:SLV) and gold were in mild backwardation then. Fast forward to Wednesday’s trading on the COMEX and those conditions have been alleviated. The significance of this is that normally the precious metals trade in contango, the opposite of backwardation where the current futures contract is trading lower than the future ones.
Since more than 90% of futures contracts in both gold and silver are settled in cash backwardation is then indicative of stress in the physical market as those short are willing to pay a higher price in the near term to entire longs to settle in cash than in physical metal. Hey buddy, I really don’t have the metal I sold short would you be willing to take a couple of extra bucks per ounce to not crash the exchange please when I can’t lay my hands on the physical object?
Wednesday gold and silver both exploded to the upside after very strong buying in Asia Tuesday evening pushed prices back above $1580 and $26.80 per ounce respectively. For those looking at gold long term a weekly close above the 288 daily EMA, currently $1604, would be very bullish. Once gold puts in a definitive breakout from the 144 EMA at $1625 (and falling) silver will follow in sympathy and it will explode when it does. JPMorgan (NYSE:JPM) will not be able to hold it down this next time.
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