http://www.reuters.com/article/2013/07/ ... CB20130719
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Backwardation is a concern in gold markets because in theory demand for physical delivery should never outweigh supply, since the amount of available gold is a known, fixed quantity. The event is not unprecedented, as it also happened during the financial crisis of 2008 - and corrected itself the following year.
The current dislocation indicates that holders of gold futures have begun demanding delivery. But because of the large amount of leverage in the market, participants are not able to deliver on their obligations.
"More and more people want their gold today, at a higher price, no matter that they can buy a future much cheaper," said Guillermo Barba, economist at the New Austrian School of Economics in Mexico.
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"The actual message of the backwardation is that there is behind the curtains a lack of confidence in the fiat monetary system, a de facto rejection of paper money by some people who prefer the real money (gold and silver)," said Barba.
"That's why a fall or rise in gold prices is not so relevant anymore. The monetary 'fire alarm' message, courtesy of the relationship between spot and futures prices, is: run for your gold, there is not enough for all."
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CREEPING OUT THE CURVE
Some believe the current dislocation is only a blip, as in 2009. After all, only the spot versus three-month futures relationship is currently in backwardation, as opposed to spot compared to longer-dated futures contracts.
But since January, the short end of the curve has gone into backwardation increasingly earlier and earlier, indicating the trend may soon start to move further out the curve.
The April 2013 futures contract went into backwardation 30 trading days before April 1, while the June contract went into backwardation 42 trading days before June 1. The August contract turned over 55 days before August 1, and the October contract flipped on July 8, 61 trading days before October 1.
Over the short term, some expect backwardation will spark a squeeze on paper investors in the gold market as the physical demand will force traders looking to cover short positions to bid up the spot price in an effort to shore up inventories.
"The bullion banks want to get gold back into contango and stop the movement of the remaining inventories by shaking the market lower, using paper leverage to do so," wrote Naylor-Leyland.
Contrary to what others have postulated here, it's not quite true that the Fed and the big banks are one and the same. There is a relationship, but they are not part of a unholy trinity. The banks pretend to be subservient to the Fed but actually it is the Fed that is subservient to the banks. As others have noted here I'm not convinced the bullion banks desire contango at this time - they may be loading up on cheap physical while they can. They Fed may be unhappy with this, but they can't control it.
