A dislocation in the gold futures market indicating that demand for physical delivery of the metal is now far outweighing supply has intensified in recent weeks, increasing concern in the market that the change may not be a momentary blip and participants may have become over-leveraged. Gold went into backwardation in comparison to the three-month futures contract in early January, meaning the spot price rose above the short-dated future contact. Backwardation is a concern in gold markets because in theory demand for physical delivery should never outweigh supply, since the amount of available gold is a known, fixed quantity. The high demand lately for spot physical delivery has played a part in the yellow metal's recent rebound from its low of US$1200 per troy ounce at the end of June to US$1283 on July 18. But analysts say it is difficult to determine both the cause of the backwardation and whether it will persist. "With the gold market you don't find out the reasoning or explanation for an event until days, weeks, or even months after the event. What's strange here is that a time of seasonal demand weakness we have strong physical demand and backwardation." said Robin Bhar, commodities strategist at Societe Generale.
The contrast between the Shanghai Gold Exchange (SGE) and the COMEX is put into clear focus by this collection of charts from Stacy Herbert. Though volume on the COMEX dwarfs that of the SGE, it's clear from the massive disparity between these two exchanges, as far as deliveries of physical metal are concerned, that one is a paper market and the other a real market for physical gold. More and more, the bullion markets are beginning to focus on Shanghai to find out what the real demand is like for physical metal.
The chart above is one of a series of fantastic long-term gold and silver charts that Nick Laird of ShareLynx has painstakingly put together over an extended time period. He has made them available to nonsubscribers to his work, and they make fascinating viewing for anybody interested in precious metals. Any chart that goes back EIGHT CENTURIES can be relied upon to give a pretty good perspective, in my opinion, and these charts do just that.
and Finally a chart of the DJIA, which has more or less been stuck in a position almost level with the May highs for some time. This chart has no timeframe, just a maximum of 315 Million of volume per bar (however long that takes), using daily closes, which roughly equates to 2.5 days per bar, so it tightens up the bars somewhat into a vague sort of half weekly chart. Note the tight clustering of closes at the May high, & the recent 100 (1 Billion) up is the highest up wave volume is the highest since those highs, and is potentially a bullish change in behaviour. However it has been stuck here for a while now, which can be difficult to read. The tight clustering of closes at this level, with a potentially bullish run up behind it, may suggest potential absorption of supply from the left.
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