It is important to note that while gold backwardation lasted a few days in 1999 and again in 2008 -- both of which marked major bottoms and key turning points in the price of gold -- we now have 31 trading days of backwardation and a gold price that has already risen $135 from when the backwardation began. What we are seeing today is truly unprecedented and historic. - James Turk, from King World News interview - LINKJust for reference, after 13 years of researching, studying, trading and investing in the precious metals markets, James Turk is one of the very few analysts who I still consider worth reading for insight and facts.
"Backwardation" is when the spot price of gold is higher than the next month futures' price. It means that the market is assigning a higher value to physical gold that can be delivered immediately than to cash.
About a month ago I wrote an article that discussed the significance of the negative gold forward interest rate (GOFO) that was being observed in London and is published by the London Bullion Market Association (LBMA). The GOFO is the interest rate charged for a dollar/gold swap, which is when someone who owns gold needs a short term dollar loan and he collateralizes the loan with his gold. When the rate is negative, it means that someone wants his gold more than he wants to borrow dollars and it signifies an extreme shortage in physical gold that can be immediately delivered to large buyers who are forcing the issue of delivery and it is another form of "backwardation."
I wrote an update for Seeking Alpha because the GOFO rate has been negative now for a historically unprecedented 28 days. You can read the article here: Update On The Negative GOFO: Gold Has Bottomed
The only conclusion that can be drawn from this situation is that the bullion banks in London are scrambling to find physical gold that can be delivered into the massive demand coming from Asia, specifically China. I also believe that the duration and severity of the negative GOFO will translate directly into a commensurate move higher in gold that will shock everyone.
Unfortunately, the best we can hope for is that the next move in gold does not culminate with the cataclysmic currency reset that we all know is coming - i.e. the dollar is replaced as the world's reserve currency, which will render the U.S. largely destitute:
I'm not worried about how high in price gold is going, I'm worried about what the world around us will look like when it gets there.