We theorised on the possibility of some investors playing the contango trade in gold — perhaps from the moment they realised that financing costs would become low enough to make the trade profitable.
And while we stress this is just a theory – here are some interesting charts from Bloomberg showing a big contraction in the spread between the first month contracts and the second month contracts, as well as the second and the third from Lehman onwards — presumably as the arbitrage is eroded.
Part of this will naturally be reflective of lower interest rates post-Lehman, but part of it could also be the result of some institutions capturing a healthy contango trade at a very opportune moment.
First here’s the second month contract versus the third — whose spread reduces just as gold begins its mega rally:
Here, meanwhile, is the first month versus the second month (you’ll note that the more staggered nature of the spread is related with monthly expiry of the front month future):
And here’s the clincher… what has happened between key calendar spreads (which usually trade on a two month spread) in the last week. For example note the differential if you take the third future versus the fifth (GC3 versus GC5):
And here’s the GC3-GC6 spread:
Which to us suggests a large repositioning further down the curve in the last week — although we’ll leave it to the gold experts to explain it more thoroughly. We become stumped at this point.
For further amusement, though, here are recent volumes in calendar spreads. First the August, December calendar spread:
And here’s August, October:
And for some historical context, here was June and August:
For the record, it all appears to normalise by the time you get to GC8 GC10 (the eight future forward versus the tenth):
Theories, explanations and criticisms on a postcard to FT Alphaville or in the comments section below please.
Gold backwardation fears revisited, uh oh! – FT Alphaville
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The gold backwardation theory – FT Alphaville
Getting to the bottom of negative gold-leasing rates – FT Alphaville