James Turk: Something ''fundamentally different'' is up with gold

Section:

London Outshines New York in Gold Rally

By Arindam Saha
Economic Times / The Times of India
Gurgaon, India
Friday, November 18, 2005

http://economictimes.indiatimes.com/articleshow/1299592.cms

MUMBAI -- A buying spree in the London gold spot market has stunned
the New York futures market. It has unfolded a rare event in the
history of gold trading: backwardation -- where the spot price (in
London) has exceeded the futures price (in New York). The trading in
these global bourses has also impacted the local futures price.

The trend, which could well be a temporary phenomenon, reflects a
mounting uncertainty in bullion supply and a bullish market. The
gold price -- internationally as well as locally -- is again inching
toward a new peak.

Backwardation is even more pronounced in the local market. In the
overseas markets, the spot price crossed futures for a brief spell
and then maintained a wafer-thin difference for the rest of the day.
(The New York exchange is open for 23 hours).

The local market witnessed a higher degree of backwardation, since
the spot price immediately factors in the current rupee-dollar
exchange rate. The spot price further hardened with the dollar
gaining against the rupee.

As always the Indian futures market shadowed the international
prices. The gold futures contract traded at the local bourse MCX and
several spot markets across the country demonstrated a similar
trend. The MCX near month gold contract was trading at Rs 7086 per
10 gm, while spot gold at Mumbai's Zaveri Bazaar was offered at Rs
7175 per 10 gm on Thursday.

Continuing its uptrend that started a fortnight ago, global traders
took the yellow metal to a new peak in the London market. Gold was
seen trading at $482.5 a troy ounce in London spot, while the New
York Comex near-month futures was trading at $481.7 around the same
time.

Such a situation is always short-lived as it triggers arbitrage
activities that generates quick profits for traders.

Thursday's backwardation situation opened an ideal arbitrage
opportunity for the spot market trader who is also active in the
futures market. Many such traders with physical possession are
selling the gold in the spot market and are putting the sales
proceeds in the bank or other quick investment form to earn
interest.

At the same time they are locking in a trade in the futures exchange
as a buyer at a lower price than the spot to take delivery of
physical gold at a later date. At the maturity of the futures
contract they will take back the gold with the money kept in the
bank.

Though traders in the spot market continue to be bullish, traders on
the futures exchanges are betting on a price drop within a few
months. All distant futures contract (until October 2006) at Nymex
are showing a price tag of less than $500 until midday.

"In the spot market gold can soon touch the $500 mark thanks to
major fund interests in the US market and political disturbance in
France," said B.N. Vaidya, a local bullion analyst.

"Forget supply constraint and inflation fears. Bullion traders today
are psychologically tuned to a price level of not less than $500,"
said a spot trader from the Ahmedabad bullion market.

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