.it is true that a radical deflationary environment would bring backwardation pressure. However, the point at issue is that the arbs will ALWAYS step into the gap for the short term locked in profit......, if they can find someone to lend them the gold. As you are aware, there is an active leasing market for gold as there is for all commodities, and a more extensive one for gold and silver because of their monetary use. So, what is keeping me from BORROWING the gold (leasing it), selling it, and buying the discounted futures? Easy 3% return, right? Only if you have confidence you will be able to get your gold back that you sold. Look at the leasing rates for gold. Look at the amounts leased. Why is no one running into the gaps here?
It looks an awful lot like a confidence thing to me.
Thank you for your reply, though. The longer I am in the markets the more convinced I am that I don't know a thing.
You will be interested in this blog on the subject of gold backwardization:
http://globaleconomicanalysis.blogspot.com/
And this is from a guy who owns some gold.