no deliveriesGovernments and central banks are losing the war against gold behind the curtains.  The recent fall in the price of gold has not taken it out of backwardation but has only intensified it.
This is sending us clear signals that are hidden from the eyes of the majority, who pay attention just to the falling prices and not to something quite more important: the gold Basis and Co-basis.
Backwardation
is a symptom of an apparent “shortage” of gold, an abnormality.  Gold is not physically “scarce” in the market because its inventories have accumulated for thousands of years.  So, this shortage can only be possible if “strong hands”, the ones who keep hoarding it, are every day less willing to sell it at bargain prices in a moment of financial distress, like today.
In other words, this backwardation tends to become permanent and is a sign of distrust in the fiat monetary system. Sooner or later, the collapse of the futures market is unavoidable: the delivery of gold will become impossible.
The warning is very clear: ignore gold, at your own risk.


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Submitted by Guillermo Barba:

The sentiment towards gold has become so negative that it’s the right moment to call attention to it. The warning is very clear: ignore gold, at your own risk.
They are more important than the mere prices, because they express the true value of gold, and over all, the actual weak conditions of the current global monetary system. There’s no recovery, just money printing.
The gold Basis and Co-basis are without any doubt, the best kept secret of the “king” of metals.
This important discovery was made ​​by the founder of the New Austrian School of Economics, Prof. Antal Fekete, and of course it has not yet achieved much diffusion and acceptance by the “mainstream”.
They are very busy trying to “rescue” and stimulate the economy, with their failed monetarist and Keynesian theories which keep sinking the world towards the 21st Century Great Depression.
Fekete’s teachings retake the original method and philosophy of Carl Menger, the cornerstone of the old Austrian School.
Thus, it is assumed the original and indisputable role of gold as money. The reason is that this role was not given by any government or political decision, but by the free and spontaneous will of people in the market. Menger explains this in his book, “On the Origins of Money”.
This way, a demonetization of gold (and silver) by State laws is irrelevant for its monetary essence, which remains intact.
The main reason for that demonetization “by decree” was that governments and central banks wanted a kind of “money” that could be created, and of course, manipulated (debased) at will.
In spite of that, gold will always remain the commodity with the highest stock-to-flow ratio, hence its quality of money is inherent. It means too that it will not be consumed but hoarded, because of its value.
Many detractors who claim that it is “insane” to mine something “useless” as gold, “just to keep it in vaults” ignore this fact.
That’s why almost all of the gold ever mined on planet Earth (175,000 tons) is still here with us in one way or another (jewelry, bars, coins, etc.)
Menger’s genius discovered, analyzed and described the process of discrimination among all commodities ever used as money. He observed this process concluded the same way in different times and places, with the use of the most “saleable” ones: gold and silver.
Responsible for this was the human almost infinite appetite for them, thanks to what they had the least difference (spread) between the bid and ask prices of all commodities, i.e. their “marginal utility” was practically constant.
This feature made them acceptable at almost any quantity, and thus gold and silver became the common medium of exchange in the market, in one word, money.
For this reason those who get surprised that gold, an asset with no cashflow is so valuable, show their ignorance that its main role is just the monetary one, and this way it serves as the ultimate extinguisher of debt.
In contrast, paper (government) “money” is exactly the opposite: a debt in itself, a mere promise to pay that needs to be redeemed as soon as possible acquiring goods and services.
But there is another problem. Unlike gold and silver, paper “money” can be created without limits, which offers an advantage to those who receive it first, but sacrifices those found at the base of the pyramid.
This condition is leading the world into a global economic collapse, by expanding something that cannot be expanded forever: consumption and credit.
The corruption of the system is detected in the initially commented gold Basis and Co-basis.
Both show in different ways the relationship or spread between the gold “spot” price, and futures price.
Menger’s analysis is based upon the study of “spread” as opposed to “price”, because there is no such a thing as “unique” or “equilibrium” prices. There is always a bid-offer spread.
The basis has its origin in the agricultural commodities market. A rising basis indicates that there are more than enough supplies, and a falling basis the opposite.
Prof. Fekete was the first to point out the importance of observing the basis in the gold market, i.e. the real money market, to properly identify the signs of sickness in the financial system.
In simplified terms, the Basis is the difference between the futures price and the “spot” price of gold. The Co-basis, vice versa.
If the basis is positive, which is normal, the market condition is “contango”, and if it’s negative, where we are now in the gold market, “backwardation”.
The graph below (courtesy of Sandeep Jaitly of Feketeresearch.com), charts the basis for the August Gold futures contract.  Notice that as the contract’s expiration approaches, the basis (blue line) declines and even goes into negative territory.
Conversely, the Co-basis (red line) becomes positive.

click to enlarge
This is a symptom of an apparent “shortage” of gold, an abnormality. Gold is not “scarce” in the market because their inventories always pile up.
So, this shortage can only be possible if “strong hands”, the ones who keep hoarding it, are every day less willing to sell it at bargain prices in a moment of financial distress, like today.
In other words, this backwardation tends to become permanent and is a sign of distrust in the fiat monetary system. This way sooner o later, the collapse of the futures market is unavoidable: the delivery of gold will become impossible.
We cannot know with certainty when it will happen, but there is enough evidence to anticipate this event.
This backwardation can also be viewed in the form of high premiums in the physical market.
Some people are preferring to pay more and take delivery of the metal today rather than to acquire a cheaper promise of delivery in the future. Even so, they know they are getting high value at a bargain price.
After all, governments and central banks are losing the war against gold behind the curtains. This is true even when they are trying by all means to diminish people’s preference for gold over their currencies.
It does not matter if they make it impossible to buy gold in India or some other places, the physical demand will grow up in other countries, even in black markets if necessary.
In summary, our monetary system is directed into the abyss, in silence, while the “mainstream” and opponents of gold try to hide the seriousness of its esoteric message: this time the fall in prices have not taken it out of the backwardation, but it is now more pronounced.

Let’s make more eyes see, and ears hear. Tomorrow, it could be too late.

Silver Buffs Generic Add2

  1. “The basis has its origin in the agricultural commodities market. A rising basis indicates that there are more than enough supplies, and a falling basis the opposite.”
     
    Actually in ags the basis is the difference between the price the elevator will pay you for corn and what the chicago board of trade (paper) price is.  Futures + Basis = Cash (Spot). Reading more I think the PM people do this equation differently. Basis = Futures – Spot. Somehow the equation got a bit misinterpreted, but the end result people are trying to watch is the same, relative tightness of the underlying markets… which in PMs is not coinage and small bars (bullion products), but large oz bars.

  2. I think there will always be gold to deliver, I just don’t think you’ll always be able to get it at todays price.  Paper will rise, price of ‘real’ gold will rise, and there will always be the ‘basis’ on both bullion products, and on the bulk metal that underlies the paper contracts.  
     
    Seeing the basis on bullion products is crystal clear.  Being able to see the basis on the bulk metal would yield real insight… as it stands we have to watch the futures mkts for things like backwardation and drawdown/upticks in stocks for guidance.

  3. Excerpt: “Menger’s analysis is based upon the study of “spread” as opposed to “price”, because there is no such a thing as “unique” or “equilibrium” prices. There is always a bid-offer spread.”

    This is one tenet I don’t quite share with Prof. Fekete, nor the Austrian school in general. I say not ‘quite’, because, while I admit no STRICT equilibrium in rationality between goods (the fact of life is constant variation, after all), there is … tendency … toward equilibration providing logical ground to arbitrage, itself giving rise to ‘bid-offer spread’.

    Put another way; without a natural rational relationship between, say silver and gold, of 9 to 1, there is no conceptual foundation on which to attach any other variables to estimate a reasonable bid-offer than pure serendipity

    Thus, while Mengerian ‘Spread’ derived ‘Basis’ is undoubtedly a key indicator for onset of mis-valuation due to frivolity in distribution (in the present case, extreme failure of circulation due to suppressed rational expression juxtaposed against all other goods comprising the grand matrix), it can’t be divorced from elemental componentry giving rise to its very manifestation.

    I have a great admiration for Prof. Fekete, his student Mr. Barba and Austrian Economics, so none of this is to disparage the tools of ‘Basis’ and ‘Backwardation’. I estimate them as extremely beneficial to meticulously follow; only that the Austrian ‘doctrine’ of holding ‘bid-ask spread’ in a kind of vacuum, on a pedestal, misses a fuller comprehension of the larger phenomenon at work.

  4. Pat, your fuller comprehension of the larger phenomenon is valid. Halbinger’s “Equilibrium Matrix” support’s your view. What is your opinion of his Universal Matrix (ie not his earlier Closed loop Matrix)?

  5. andyz
     
     
    For all my contemplation of what I call the ‘goods matrix’, maybe I should be embarrassed to admit, but I’m not at all familiar with Halbinger’s “Equilibrium Matrix”. Can you give me a ‘Cliff’s Notes’ on it?

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