Art Cashin - Watch Plunging Gold Inventories & Backwardation

"Today 50-year veteran Art Cashin warned about major concerns in the gold market because of declining gold inventories.  Cashin, Director of Floor Operations at UBS ($650 billion under management), also cautioned about the backwardation in gold, and noted the massive global demand as well.

 

Art Cashin:  “All That Glitters Is Not Arbitrage – Monday, spot gold spiked up $45 and the media pundits pointed to things from China to the FOMC.  While all the cited may have been factors, veteran traders saw the bulk of the move resting in a conspiracy story.

In my mid-day email to friends I had noted this:

Gold soars as NYT story on metal warehouses fans flames of conspiracy theorists that gold warehouse

 

stores have been "lent" out.  That theory also aided by backwardation (spot price far above near future).

If you haven't been following gold closely, let me expand on that a little.  For several months “physical gold” (bracelets, coins and small bars) have seen near riotous demand with long lines stretching into the streets.  At the same time “paper gold” (ETF's, futures and nominal spot) have seen sharply falling prices.  That dichotomy has sparked more than a few conspiracy theories.

 

The worst (and most strained) claims the world's central banks have put a bear raid on gold.  That rumor claims that they are trying to cover the fact that they have sold/lent the gold they were supposedly safeguarding for their citizens.  A plunging gold price would reduce the urge to look behind the curtain (or into the vault) and discover this misfeasance.  A more pervasive form of the  rumor/hypothesis substitutes the global banks for the central banks but with the same, theoretical, abuse of custody.

 

A key support of these theories is the backwardation in gold – the spot price is higher than the near future contract.  That's unusual.  It could normally be resolved by selling spot gold and buying the cheaper future one month out.  Thus, in a month, you would reap an apparent locked-in, riskless profit.  Yet no one seems to be doing it.  Is there doubt that there is gold in storage that will be deliverable in a month?  So, the theorists assume. 

Now add in the front page NYT story, hinting chicanery and manipulation by the big banks of warehoused metals.  Was this the smoking gun?  Some folks seemed to think so as a short covering stampede exploded the gold price.  The next five days will be key.”

 

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