Friday, February 18, 2011

Gold and Silver Backwardation

In normal futures markets the spot or cash price is less than the price for delivery of the goods at some distant time. This normal condition is called “contango” in futures terminology. In contango the price of further out futures contracts is higher than nearby or closer in time contracts. For example, the price of a contract for delivery of goods in April is more than a contract for delivery in March and so on. This condition reflects the carrying costs of warehousing and maintaining the goods until delivery in the future.

The opposite condition, where the spot price is higher than the price of future delivery contracts is called “backwardation.” Backwardation occurs when buyers are willing to pay a higher price to have the goods now. Backwardation is a sign that buyers anticipate shortages of the goods in the future due to immediate demand.

Backwardation in gold and silver is very rare. Silver is now in complete backwardation or “zero contango.” This condition exists out till 2015. That is, the silver price of every contract month is lower than the next further out month. Backwardation is bullish for silver price and indicates demand by retail investors and industrial users is strong. The Silver price leads the gold price in a bull market. Will gold also go into backwardation? If so, that would be extremely bullish for the gold price.

Sunday, February 13, 2011

Gold and Silver Options Expiry

The gold price and the silver price movements near options expiry dates have attracted attention from some analysis. These analysts noticed a pattern where gold price and especially silver price regularly declines before options expiry. Such a price move causes many call options to expire worthless. They claim these moves are orchestrated to benefit the sellers of call the options.

Gold and silver options are options on gold and silver futures contracts. Gold and silver futures and options are traded on the New York Mercantile Exchange (NYMEX) and the Tokyo Commodity Exchange (TOCOM). NYMEX gold futures contracts (symbol GS) are for 100 troy ounces of 9995 gold. NYMEX silver contracts (symbol SI) are for 5,000 troy ounces of 999 silver.

NYMEX gold and silver options expire on the fourth business day prior to the future contract’s delivery month. The settlement type of the option is the physical metal underlying the futures contract. Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month.

2011 gold and silver options expiration calendar:

Contract MonthExpiry Date
January12 December 2010
February26 January 2011
March23 February 2011
April28 March 2011
May26 April 2011
June25 May 2011
July27 June 2011
August26 July 2011
September25 August 2011
October27 September 2011
November26 October 2011
Decemeber22 November 2011