Spreads in the gold market are telling traders two things—first, that demand for physical gold continues to soar and secondly, that we are facing the biggest gold roll in the history of futures markets.
To the first point, it would seem intuitive that demand for physical gold is up—explosive growth in the gold ETF certainly a factor.
But, what we are seeing now is a demand for physical gold that is pushing the market into a short-term backwardation. The gold EFP or, Exchange-for-Physical as quoted by Newedge is currently negative $0.55 to—$0.60.
What that means is that physical gold deliverable in 2 business days is trading at a premium to gold in the future. While this is somewhat unusual for the gold market, it is usually a short-lived situation. However, Mike Frawley, Global Head of Metals at Newedge says it might be different this time. “As long as investment and physical demand remain, it could continue,” he says.
The second point is important to investors with a position in gold via the futures market. Based on current open interest, traders are facing the "mother of all gold rolls". Open interest in December gold futures is roughly 352,000 contracts, putting the potential roll of outstanding positions from December to February gold futures at a record high. Investors and traders should be watching spreads and also, volatility.
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