Gold Backwardation Explained

http://www.fgmr.com/gold-backwardation-explained.html

July 29, 2013 - In an interview on July 8th in King World News I noted how gold that day had slipped into backwardation. Since then I have read a lot of commentary on various websites about backwardation, which made clear to me that this term and, more importantly, the implications to the gold price when backwardation appears are widely misunderstood. So I have prepared this brief note to explain backwardation, of which there are two types – money backwardation and commodity backwardation, and as I explain below, both apply to gold.
The following table presents the dollar’s exchange rate against the euro and British pound for different time periods ranging from spot to one year in the future. These future prices in the over-the-counter market are called “forwards”. These prices were taken from the July 26th Financial Times.

Note how the euro’s exchange rate to the dollar rises going further into the future, climbing from a spot rate of $1.3265 to a forward rate of $1.3290. In contrast, the pound’s exchange rate to the dollar falls over this same time period. Why is that?
There is only one reason – interest rates. The euro’s interest rates over this period are less than the dollar’s interest rates, so the euro is in a state called contango against the US dollar. In contrast, the British pound’s interest rates over this same period are higher than those of the dollar, so the pound is in backwardation against the dollar.