Intrigued by this whole gold backwardation theory doing the rounds in the gold market, FT Alphaville decided to seek some expert opinion on the matter from Evy Hambro, the manager of BlackRock’s $5bn World Mining Fund.
His view on the issue is that there isn’t any backwardation in the market. At all. As he explained:
The backwardation is a function of interest rates falling rather than gold leasing rates spiking. What’s happened is that interest rates have come down, with the borrowing costs of gold remaining roughly the same, so the relative contango over the very near term has shrunk.
To understand the effect it’s best to consider gold prices in other currencies, says Hambro. If you look at forward gold prices in yen, for example, you’ll find the curve has been backwardated for a while. In pounds, euros, Australian dollars etc. (where interest rates are higher) the curve remains in contango.
So even if the below table shows gold slightly backwardated at the front end on the Nymex, it doesn’t necessary reflect or signal any dysfunction in the market.
Hambro thinks the debate surrounding backwardation was most likely fuelled by the shortage of physical gold in the market place. He alludes to the fact that many mints have totally sold out of gold coins, and yet prices on the Comex have failed to clock-up corresponding ’safe haven’ gains - as might otherwise have been expected.
Hambro suggests once again, however, the answer probably lies in gold prices quoted in other currencies. As you can see below, gold’s performance in sterling, for example, has been more than respectable. As he puts it, you wouldn’t criticise a 26 per cent rate of return on the year in another asset class at the moment.
Related links:
The gold backwardation theory - FT Alphaville
Gold prices and charts - Kitco.com
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