The Gold Basis: Pointing the Way Higher?
In our view, the gold basis is indicating that market players are positioning for a move lower in the dollar and higher in gold.
The Gold Basis: Pointing the Way Higher?
Gold normally trades in contango, meaning that the future price is above the spot price. This is not currently the case as the chart below demonstrates.
The green line shows the value of the dollar expressed in milligrams of gold (the reciprocal of the dollar gold price), on the right axis.
The blue line is the basis, the measure in percentage terms of the difference between buying gold at the spot asking price and selling at the front contract bid price (on the left axis). As you can see, the result is a meaningful loss, indicating backwardation, which is uncommon. The backwardation has been increasing since June. The market is saying that it wishes to hold gold.
The red line is the co-basis, the measure in percentage terms of the difference between selling at the spot bid price and buying at the front contact asking price, also on the left axis. This is an unusually profitable trade which should have been arbitraged away by market makers. The fact that this trade is profitable indicates that the market is hoarding gold in expectation of scarcity, higher prices or counterparty concerns. Remember that the co-basis trade involves temporarily trading gold for dollars. The fact that this trade is not being pursued indicates a preference for holding gold versus dollars.
In our view, the gold basis is indicating that market players are positioning for a move lower in the dollar and higher in gold.