A bird in the hand….

Posted | 08/08/2014 / Views | 2049
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We haven’t talked about backwardation for some time but it is now happening again, the first time since May.  As a reminder, the following is a nice little summation by James Turk:

“Whenever backwardation occurs - which in theory should not happen at all because of the arbitrage opportunity it represents - it is a sign of stress in the physical market for gold. Basically, it means that there is not sufficient metal on hand at current prices, or to put it another more meaningful way, people would rather own physical gold and pass up the profit available from the arbitrage by selling their physical metal and owning a national currency instead.
Backwardation is eventually eliminated when sufficient physical metal turns up to bring the market back into balance. This generally means that the metal has to come from existing stocks because physical metal cannot be conjured up out of thin air with bookkeeping entries, which occurs all the time with national currencies. This reality conveys one of physical gold’s key strengths, and why it has served so well as money for 5,000 years.”

Any holder of real, physical gold and silver should take great comfort in these sorts of forces at play.