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.

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Copper turns back to backwardation

It seems that copper is going back into backwardation, so that's good for equities, oil and commodities.

Chart 1: Copper Contango

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Copper turns back to Backwardation

It seems that the red graph is going down, which means it is likely that copper goes into backwardation again. So the copper price should rise if all goes well, together with the S&P.

Chart 1: Copper Contango

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Copper Price VS. Contango Report

I decided to start monitoring the contango-backwardation curve of copper (Chart 1). In a previous article I noted a pretty significant correlation between contango and price of copper.

We see that the negative correlation between copper price and 1 yr futures contango is still existing. But it's difficult to predict the price of copper, because the contango curve and the price curve are almost exactly following each other. We could say we almost have a 100% correlation here.

But, something weird happened on 14 May 2012 though, where the copper price was in steep backwardation, but the copper price didn't go up... So there still are discrepancies in this correlation.

Let's see if this monitoring of the copper contango will bring new ideas.

Chart 1: Copper Price-Contango (USD/lb)

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Copper Turns Back to Contango: Bearish for Copper Price

In a previous article I pointed out how copper contango/backwardation correlates with the copper price. Since June 11th 2012, copper went back into contango which isn't boding well for copper prices (Chart 1). The China PMI is also going down lately, which means demand for commodities from China will be sluggish.

As copper correlates with the S&P, I would imagine that stock markets will go down as well in the future. So investors should act accordingly and sell equities at this moment.

Chart 1: Copper Contango Curve

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Copper turns to backwardation, prices poised to rise

I have been monitoring the copper warehouse stock levels in previous articles and today I came across an interesting article on Seekingalpha talking about copper futures contango. In that article the author gave a historical chart of the premium or discount for contracts extending about a year to 18 months in the future.

We will see that backwardation will have a positive effect on copper prices and much more. The Chinese have been doing very odd things with their copper warehouse stocks.

To read about this go to: Copper turns to backwardation.

Chart 1 and 2: Copper futures contango and copper price

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