In over thirty years of looking up economic terms – this is the first time I had to look up “backwardation.” Backwardation is when it is cheaper to buy a futures rather then a current spot priced commodity. In other words, the future price of a commodity, in the instant case, gold, is discounted in relation to the current spot price of gold.
What this means is – traders on the Comex Exchange are willing to pay a premium to take delivery of their contracts for gold rather than roll them over and take delivery in the future, even though the futures price is trading at a lower price [a discount] than the current spot price.
Why? There is a risk that gold in the futures contract will not be delivered. To insure – without risk – the buyer of gold has actual physical possession – he will demand delivery of the gold as per contract even though the spot or current price is higher than the futures price. He could sell at the higher spot price and take delivery in 30 days time at the lower futures price, and lock in a no-risk profit, but the buyer wants to guarantee he has gold in his possession.
Backwardation, if the condition persists for any length of time, will cause the collapse of the Comex market, because commercial traders – trying to preserve their financial future – will take delivery of gold at the current market price, rather than risk of taking delivery in the future and holding paper gold in the interim.
If this abnormal backwardation situation persists, the supply of gold will go to zero, as no one will be willing to sell the gold they have – that is, they will refuse to trade their gold for any currency, and the demand for gold will go to infinity, as an increasing number of investors seek to preserve their wealth by unloading fiat currencies and holding gold.
With the mounting and unpayable debt accumulating in the US and elsewhere, e.g. Iceland and certain Eastern European and Latin American countries, we will witness an increasing flight to hard assets such as gold and a collapse of the world’s fiat currencies. Gold will soon not be for sale at any price. Those who do not hold gold will be up Proverbial Creek.