To see where gold prices are going next, investors need to understand what’s been happening in both the physical market and the paper market. And from what we see, the outlook for gold prices is quite solid.
Let’s take a look at gold prices in both the physical and the paper market. Right now, spot gold is trading at $1,160.22 per ounce. Gold futures contracts due for delivery in August 2015 trade at $1,159.40 per ounce, the September contracts are trading at $1,158.30 per ounce, the October contracts trade at $1,158.70 per ounce, and the December contracts trade at $1,159.10 per ounce.
You see, when gold futures exhibit this backwardation pattern, there is an arbitrage opportunity. Right now, the spot price for gold is higher than the near-term futures price. An investor who has gold can go to the spot market, sell their gold, get it back a few weeks later in the futures market, and take home a profit. Moreover, the investor could save all the storage costs during this period.
However, if such arbitrage opportunities exist, traders would rush towards it, selling spot and buying futures. Soon the spot price of gold would no longer be higher than the near-term futures prices and the arbitrage opportunity would cease to exist.
So why haven’t traders been taking advantage of this arbitrage? The reason is simple: an investor would rather have their gold today than wait even a few short weeks and get it back on the futures market.
On the counterparty risk front, investors are not sure if the sellers of gold futures would deliver the metal on the delivery date. What’s even more worrying is whether the exchange would have enough registered gold to satisfy delivery requirements.
The world stock market is crashing. Major U.S. stock market indices have wiped out all their gains since the beginning of this year. China’s stock market crashed more than 32% since June 12th, and is devaluing its yuan. The future of Greece and the eurozone is still highly uncertain. With a world economic collapse looming in the distance, investors around the world are turning to “risk off” mode. And they’d rather have the ultimate “risk off” asset (gold) sooner than later.