The Back Alley Archives

Gold futures currently cheaper than spot price...is this simply a manifestation of the market's fears over a COMEX default in the next few weeks or is something deeper rippling through the econosphere?

Seems like it either has to be 1) fear that the futures won't be delivered if demanded, 2) the London gold bullion dealers are out of gold/not selling any or 3) the big boys are scared like hell of paper currencies at the moment.

I believe the past few days are the first time gold's ever been in this circumstance. Scares the bajeezus out of me.

It's funny you should write about this AA...Bill and I have had this discussion many times...it is so hard for me to put my arms around why gold is so valuable. I know, I know, it's what most currency is based on, but to me it's worthless...it's not even all that attractive in jewelry anymore...unless you're talking about white gold (I guess). It doesn't provide energy or anything that you can DO anything with...I just don't get it.

Thus, I am not very good at commenting in this forum. But it is just so weird to me. I know that Bill has been bugging me about investing in gold since this whole thing started...guns and gold. Whatever.

Don't worry m7...most of this stuff doesn't make a whole lot of sense to me either. Many times when I'm researching economics stuff I feel like I'm a kid wading into the crashing waves at the beach...I can handle it on my ankles and feet but once it creeps up my legs I feel the urge to run back to safety.

In the end, I think the only reason gold is a worthwhile asset at all is that it's been used as a store of wealth for so damn long. At this point it has very little industrial value (outside some narrow tech uses, I believe) so it's only practical contribution to the market is its use as jewelry. All I know is that it's a pretty big market that involves ALL of the big boys. Every single one of them. That in itself makes me interested in its workings.

And, like anything else, gold is only worth what someone will give you for it. It's quite possible that the gold bugs are wrong and that in the event of an economic collapse, people would turn away from gold like all other currencies. The only reason I can see for believing there's a meaningful distinction between gold and paper currencies (most currencies no longer have any ties to gold these days I don't think...but I'm also not sure about all of them) is that gold can't be printed (or, more importantly, entered arbitrarily as a new entry on a bank's ledger, as most of our new money is created). Gold's limited supply and the cost involved in 'creating' more gold for the market may, in the long run, help gold to maintain its value even in the face of hyperinflation.

My only question about gold right now centers around Bernanke's thoughts....he's spoken glowingly before about the act in 1932 of devaluing the dollar against gold and how that was the fundamental shift that got us out of the GD. But now that the dollar is no longer tied to gold and is the world's reserve currency, does he believe a similar move would get any sort of the same effects? It's easy to see the argument against such a proposal, I think........the global implications for our currency may be catastrophic (because we rely on being the world's reserve currency and a steep devaluation may trigger EVERYone to flee the dollar) given today's environment. I dunno...I may sound like I know what I'm talking about....but this stuff truly makes my head spin.

I'd have to see what you're looking at, AA. I just took a quick look at the current gold futures market and saw only one future contract that was trading below spot prices. If that's the case, that scenario is probably going to get arbitraged real fast: sell the spot short and buy the cheaper forward contract and take the difference as profit.

Maybe it has reverted at this point a1...some of the commentary I've read claimed that the only times they've seen this in gold before, it was at the triple witching hour when the markets can get pretty out of whack for a few hours while all the trades are settled. Last week, I believe it was backward for several days.

I'm not sure I understand the arbitrage. I thought arbitrage required the same asset/instrument.

And here are the best charts I can find...haven't found raw numbers from last week
Futures (Jan Delivery I think)


Spot: