Turk: “The big news, Eric, is that gold slipped into backwardation again this morning. Gold’s forward rate for one month is negative. This is the first time we have seen the LBMA report any backwardation since May….
“However, I believe that backwardation has been prevailing for some time, particularly when dealing in size. In other words, for the past several weeks a buyer might not have seen negative forward rates when being quoted for $1,000,000 of physical gold. But if the buyer wanted a ton of gold – which is worth more than $40 million – he needed to wait a week or more for delivery, which, in effect, is saying the same thing as backwardation.
Whenever backwardation occurs – which in theory should not happen at all because of the arbitrage opportunity it represents – it is a sign of stress in the physical market for gold. Basically, it means that there is not sufficient metal on hand at current prices, or to put it another more meaningful way, people would rather own physical gold and pass up the profit available from the arbitrage by selling their physical metal and owning a national currency instead.
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