Two questions on gold

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Could someone please answer these questions for me. Both are taken from last weeks' Economist article "Buttonwood, Snug as a Bug"

1.) Every time the Federal Reserve cuts interest rates, the opportunity cost of gold is reduced. Why?

2.) When spot prices are higher than forward prices (a market condition known as backwardization) that is normally a sign that users are desperate to get hold of a commodity and are willing to pay a premium for immediate delivery. Why?

Thanks

[DcifrThs]

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Could someone please answer these questions for me. Both are taken from last weeks' Economist article "Buttonwood, Snug as a Bug"

1.) Every time the Federal Reserve cuts interest rates, the opportunity cost of gold is reduced. Why?

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holding gold now costs less in terms of the interest you could have earned had the fed not cut rates...that is the opportunity cost.

this makes gold relatively more attractive. lower interest rates (or more generally higher liquidity) make gold more attractive.

additionally, since lower dollar rates relative to the rest of the world weakens the dollar, gold's attractiveness as a dollar hedge and inflation hedge asset increase.

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2.) When spot prices are higher than forward prices (a market condition known as backwardization) that is normally a sign that users are desperate to get hold of a commodity and are willing to pay a premium for immediate delivery. Why?
Thanks

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there are a few possible reasons for this, one is that convenience yield is very high (i.e. the immediate demand pushes down futures prices relative to spot prices).

another could be that it is impossible, or extermely costly to store/borrow/or otherwise execute an arbitrage with the commodity.

during perioeds of huge growth, metals are highlyd emanded. further out on the curve, when growth is expected to slow, the futures prices will likely be lower than the spot prices since the metals are needed now to build things. the need for the metals now pushes up the convenience yield by so much that it overwhelms the contango inducing interest rate effect (high interest rates lead to higher futures prices. they are then corrected for storage costs/borrowing costs convenience yields etc.)

or, there could be an immediate shortage or disruption of supply in one commodity for a brief period of time. if that commodity is needed for productino of stuff and things, producers don't want to hold off production of those stuff and things and therefore are willing to pay a higher price now for the commodity.

Barron