What’s the Meaning of “Backwardation” & What Does 
2013-08-18 18:11阅读：
What’s the Meaning of “Backwardation”
& What Does It Mean For the Future Price of Gold?
The implications to the gold price when
backwardation appears are widely misunderstood so I have
prepared this brief note to explain backwardation, of which there
are two types – money backwardation and commodity backwardation –
and, as I explain below, both apply to gold.
So writes James Turk (fgmr.com)
in edited excerpts from his original article* entitled Gold
Backwardation Explained.
Dollar “Forwards”
The following table presents the dollar’s exchange rate against the
euro and British pound for different time periods ranging from spot
to one year in the future. These future prices in the
over-the-counter market are called “forwards”. These prices were
taken from the 26 July Financial Times.
|
EUR/USD |
GBP/USD |
| spot |
$1.3265 |
$1.5371 |
| 30-day |
$1.3266 |
$1.5367 |
| 90-day |
$1.3269 |
$1.5361 |
| 360-day |
$1.3290 |
$1.5347 |
Note how the euro’s exchange rate to the dollar rises going further
into the future, climbing from a spot rate of $1.3265 to a forward
rate of $1.3290. In contrast, the pound’s exchange rate to the
dollar falls over this same time period. Why is that?
Contango vs. Backwardation
There is only one reason – interest rates. The euro’s interest
rates over this period are less than the dollar’s interest rates,
so the euro is in a state called
contango against the U.S.
dollar. In contrast, the British pound’s interest rates over this
same period are higher than those of the dollar, so the pound is in
backwardation against the dollar. Thus, backwardation and
contango are a mathematical result that reflects the cost of money
(sometimes called the “cost of carry” or the “time value of
money”), as measured by the interest rates of one currency relative
to another.
Interest Rates
The above
observation leads to a bigger and more important
question:
Q. Why are euro interest rates less than those of the dollar, while
pound interest rates are higher than both of these
currencies?
A. The answer is straightforward. Interest rates are a reflection
of risk. The interest rate structure in the above table implies
that the pound has a higher interest rate because it is more likely
to be debased by government and central bank policy (i.e., lose
purchasing power) than the dollar, which itself is more likely to
be debased than the euro. (Carrying this concept one step further,
the pound is in contango (as are the dollar and euro) against the
Indian rupee and South African rand for example, both of which have
higher interest rates than the pound because they have a greater
risk of being debased by government and central bank
mismanagement.)
The interest rates of all national currencies need to be viewed
cautiously. As Chris Powell of GATA.org famously declared in 2008:
“There are no markets anymore, just interventions” so rather than
being a reflection of true market conditions, interest rates today
result from heavy-handed central bank manipulations, thwarting real
and accurate price discovery by the market.
Central banks, however, can only push so far before market forces
prevail, a limitation often described as
“pushing on a string”, which explains why the rupee
and rand interest rates remain relatively high. If those countries’
central banks tried to lower interest rates, holders would sell the
currency causing its exchange rate to drop because at lower
interest rates the risk of holding those currencies would be
perceived as being too great relative to other opportunities to
place one’s liquid capital (i.e., their money). Thus, there are
limits to what central bank intervention can accomplish, or in
other words, the body of people we call the “market” stands as a
guardian that carefully watches central bank tinkering and responds
to it by moving their money around to better suit their risk
preferences.
Importantly, market forces overpowering central bank
manipulation can explain what is now happening in gold.
The U.S. government does not want gold to go into
backwardation because it means that people would rather hold
physical gold than dollars, which undermines the power that comes
with being the world’s reserve currency,
but… market forces are prevailing to some
extent over the Federal Reserve’s attempts to control interest
rates.
Gold’s Interest Rate or Lease Rate
Like the euro, pound, dollar and all the other national
currencies, gold has an interest rate (usually referred to as
“GOFO”) at which it is borrowed or loaned. Gold has an interest
rate because it is money, which is a statement that may
surprise some people, because gold did not stop being money after
5,000 years just because in 1971 governments, central bankers and
some economists said so. The best this group could do was confuse,
obfuscate and mislead to perpetuate their myth that gold had been
demonetised. As a result, central bankers today call gold’s
interest rate by a politically correct term, its “lease
rate”.
A
new name does not change the underlying principle
involved, however, so gold’s interest rates can be used to
calculate its forwards, which in the table below
are
presented against the U.S. dollar because most gold activity occurs
in dollars. The interest rates I used to calculate these forwards
are reported by the
LBMA.
|
oz/USD |
| spot |
1,331.00 |
| 30-day |
1,330.29 |
| 90-day |
1,330.69 |
| 360-day |
1,333.22 |
We can see that gold is in backwardation 30 days and 90 days
forward, but in contango one year in the future. Also, the
backwardation is deeper 30 days forward than for the 90-day period,
but it is backwardation nonetheless. This means that gold’s
interest rates for 30 and 90 days are higher than those of the
dollar for these durations…
The above
leads to one remaining question that needs to be
answered.
Q. Given that interest rates reflect the risk of debasement, and
that physical gold cannot be debased as national currencies are
debased by “printing” too many of them, how can gold’s interest
rate be higher than those of the dollar?
A. The answer is that it cannot, or at least not in a market
unfettered by government intervention.
Gold vs. Commodity Backwardation
Gold backwardation is an abnormal condition, but theory
and practice are different things. It is extremely rare for gold to
be in backwardation, but it does happen when governments intervene
in the market process…[and their] intervention loses its desired
effect, meaning that market forces are overpowering government
attempts at manipulation…
Gold is different from crude oil, soybeans and all other
commodities, any and all of which can be – and frequently are – in
backwardation. Gold has an interest rate. Lumber, sugar, corn and
all other commodities do not. Their “cost of carry” to determine
their future price is based mainly on warehousing fees that need to
be paid for their storage.
More to the point, gold is money because it is accumulated.
Essentially all the gold mined throughout history exists in its
aboveground stock, whereas commodities get consumed and disappear.
They are not money…
Gold Backwardation
While commodity backwardation is not a unique event, gold
backwardation is rare…Until now gold backwardation has only
happened twice since this bull market in gold began back in 1999,
and each prior occurrence lasted only a few days. In both instances
market forces briefly overpowered government interventions aimed at
manipulating interest rates….This time, however, gold has remained
in backwardation against the dollar since July 8th… The duration of
this backwardation is unprecedented in the 4+ decades that I have
been following the gold market.
Clearly,
something noteworthy is happening, which I believe in turn is
signalling that something significant may yet
happen.
An indication of what that event may be can be discerned from
the definition of “backwardation” on the LBMA
website: “A market situation where prices for future delivery are
lower than the spot price, caused by shortage or tightness of
supply.” The LBMA is defining commodity
backwardation, and not the backwardation that occurs between
different monies as a result of interest rate differentials, but
their definition can be applied to physical gold, which is both
money and like commodities, a tangible asset.
A
“shortage or tightness of supply” means that unless demand slackens
or supply increases, the price must rise. Given the strong demand
for physical gold at the moment, a decline in demand at current
price levels seems unlikely.
In contrast to national currencies, the supply of which can be
increased to any quantity by mere bookkeeping entries, physical
gold comes from two sources – new mine production or the existing
aboveground stock – but mine production is relatively fixed. As I
explain in The Aboveground Gold Stock: Its Importance and Its Size,
the aboveground stock of gold grows consistently year after year by
1.8% per annum, which is not rapid enough to satisfy current
demand.
Conclusion
Consequently,
the present “shortage or tightness
of supply” of gold can only be relieved from its existing
aboveground stock…[by having] the gold price rise high enough to
entice people to exchange their physical metal for
dollars, which is what happened the last two
times gold was backwardated.
In summary, when gold backwardated in 1999 and in 2008,
it marked important lows and key turning points in the gold price,
which thereafter began multi-year uptrends.
expect the same outcome to be repeated now given
that gold is once again in backwardation.
