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Gold Backwardation Gets More Extreme

|Includes:SPDR Gold Trust ETF (GLD)

Today, the gold backwardation went into an extreme. The 12 month GOFO rate went to 0.06, a new historic low. At this rate we will be in backwardation on the 1 year GOFO rate in a few days. The fundamentals get better and better. Also the gold premiums are rising again on APMEX. And I can't imagine what will happen when the Russian situation escalates. And don't forget that the yuan is collapsing to new lows as we speak. Japan has the highest inflation in a decade. Unemployment in Europe is hitting new highs. Stock market bubble in U.S. is about to collapse. Etc...

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GOFO

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So gold is likely to move higher, but as I pointed out earlier, silver is even a better deal.

Remember this post:

It is time to take a look at the U.S. Mint sales of gold and silver again to see if we can get some interesting conclusions out of it. We know that the U.S. Mint sales are a good proxy for global gold and silver investment demand.

Here is the data:

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Chart 1: U.S. Mint gold and silver sales (ounces) (april 2014 extrapolated)

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What immediately surprises me is that the two trends are in reverse (Chart 1). Gold sales (blue) have been hitting lows while silver sales (red) are booming. This urges me to look at the ratio between gold and silver sales.

Apparently, for every ounce of gold sold, they sold 90 ounces of silver in 2014, which cannot last forever (Chart 2). This is because annual silver supply is 1 billion ounces and gold supply is 130 million ounces. This is a ratio of 1 billion / 130 million = 8. So there is only 8 times as much silver available as compared to gold.

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Chart 2: Ratio silver to gold ounces sold

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So, how can it be that people are buying 90 times more ounces of silver than ounces of gold? Supply and demand will eventually go to equilibrium. Which means either gold goes down or silver goes up in price.

This is why I still think silver is grossly undervalued to gold and that's why I will buy silver and silver mines, waiting for a surge in silver.

Stocks: GLD