Regarding gold backwardation

Here's a mail exchange from yesterday with regular reader 'TM'. He sent me this link to an article by a certain Antal Fekete who is predicting gold prices to go up sharply due to backwardation. By the way, the link includes a easy-to-get primer on that subject for those already confused by the gobbledygook...don't worry, it's just another case of people inventing strange words for logical situations and making them sound special and important.

Anyway, here's what I wrote back to TM regarding the subject. Consider this mis dos centavitos on the subject.

However much i try, i can't get myself to be a goldbug. My problem with Fekete's technical arguments about the imminent rising of gold due to backwardation are twofold:

1) Gold is not a commodity. It's money, and the vast, vast majority of the stuff is hoarded, not used. It makes the dynamics of its spot market vastly different to that of copper, zinc etc..even silver, in fact. I get annoyed by the goldbug community that points out that "gold is special" etc etc ad infinitum but then changes its base philosophy on a whim when a "gold is prone to the same market forces" argument is published that makes for a bullish story.

2) Gold is, in the end, a tiny market compared to the amount of currency that's moved around. The small technical indicators in the specific gold sector can be squashed at any given moment by a Central Bank or Fed decision. I think Fekete's argument is valid from a technical standpoint, but it's the story of a flea on the back of an elephant.

Chart of the day is............

...the US dollar to Gold ratio.

The remarks scribbled on the chart should be enough, but just to make it clear methinks we just hit a short-term bottom for the ratio and I expect it to rise. The most likely scenario is the Dollar upping and gold downing. But also keep in mind that it's just a chart and these things are too revered by too many people...they only work til they don't.

Don't tell the Jim Sinclair sheep brigade that somebody dares to suggest a gold downturn, though. And the first person to use the phrase "gold backwardization" in a mail gets turned into a frog. These people want to believe that....

a) yes, there's deflation in currencies
b) gold is a currency
c) but deflation doesn't affect gold

.....which is what normal people call 'having your cake and eating it'. A smart friend of mine read a goldbug analysis of gold backwardization yesterday and called it "like a tealeaf reader obsessing over one tealeaf" which I thought was pretty accurate....and funny.