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Gold has begun an irreversible movement into strong hands that will hold on to it, and will not relinquish it, even in the face of steeply rising prices. Fallen prices since September 2011 have been a blessing in disguise for physical gold accumulators. A lower price for paper gold has made it easier for participants to demand delivery on maturing futures contracts; exchange balances are being siphoned; ETF balances are being raided, recast and sent to Hong Kong as kilo bars before disappearing into China forever; central banks are scrambling to repatriate gold back within their physical control; mine supply is being earmarked well before it reaches the surface; and Gresham’s law together with gold’s Veblen good characteristics means higher prices will not necessarily tempt the general public to feed the scrap supply monster.

As these, and other similar trends, converge and continue apace, the price of the nearby futures contract will drop to previously unimaginable depths, relative to the cash price, making backwardation worse. Ultimately this will make backwardation irreversible and only those that have acted in advance will be positioned to transition well to Bretton Woods II.

Permanent gold backwardation

As we reach the end of the year the outlook for gold in 2015 remains uncertain. Gold has been in backwardation 40% of the time during 2014 and remains there today. Given the uncharted financial territory in which the global economy currently finds itself it seems likely we will continue to witness the same market participants continue their accumulation of physical gold, creating further physical tightness in the gold market in 2015.

141231 GOFO YTD

We wish all our readers a happy and prosperous 2015!