In
Faux Gold Arbitrage I mentioned that Tom makes the case that if anything, backwardation should be the normal state for gold. His paper arguing that case is in the clear on his site
here and was also noted by GATA
here.
Tom's argument is that contango, and not backwardation, should be the natural state for gold and thus the fact that gold has been in contango for "essentially all of the last 25 years strongly suggests central bank interference with the gold market." It is a counterfactual, trying to guess at how gold would behave relative to fiat if there was no manipulation.
It contrasts with those who focus on the short history of gold in the post gold standard world and observe that gold backwardation is rare, like James Turk in
this piece for GoldMoney where he notes that
"Gold backwardation is an abnormal condition" and
"has only happened two times since this bull market in gold began back in 1999, and each prior occurrence lasted only a few days." Tom's article basically says that just because it is rare, doesn't mean it is abnormal.
James' view is based on the assumption that "interest rates are a reflection of risk" and that a currency "has a higher interest rate because it is more likely to be debased by government and central bank policy (i.e., lose purchasing power)". I think this is only looking at the supply side of the equation, and ignores demand for borrowing money. So for an economy with poor prospects there may be little demand to borrow and interest rates can fall even though no fiat is being printed.
James then says that "interest rates today result from heavy-handed central bank manipulations, thwarting real and accurate price discovery by the market" and that "market forces overpowering central bank manipulation can explain what is now happening in gold". But Toms says if contango has existed while markets have been manipulated and backwardation occurs when market forces overpower, then logically isn't backwardation the natural state for gold?
Tom makes a number of other points (including the point that money is often in backwardation, see my post on that
here) and I recommend reading his paper as it will get you to think more deeply about gold, its monetary nature, and what backwardation really means.
