Gold Backwardation Explained By James Turk

If you want to know what gold backwardation means, read this article of James Turk. Very interesting.

Let’s say we have two currencies A (euro) and B (USD). Then the following is true:

– A’s interest rate < B's interest rate
– A is in contango against B
– A’s value rises going into the future
– Higher interest rates means a higher risk of debasement of the currency.

Now let’s look at two other currencies A (USD) and B (gold):

– USD’s interest rate < gold's interest rate (lease rate)
– USD is in contango against gold (or gold is in backwardation)
– USD’s value rises going into the future (or gold’s value declines going into the future = negative GOFO)
– Higher interest rates means a higher risk of debasement of the currency.

Now gold’s interest rate is higher than the USD’s interest rate. Which means gold has a higher risk of debasement than the USD. This is virtually impossible because gold cannot be debased.

Which means something has to give. This is a rare event and will mark a bottom in the gold price.