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When basis disappears you have a precise early warning signal for hyperinflation. Yesterday basis disappeared. See the carryover paragraph from page 5 to page 6.

http://www.professorfekete.com/articles/ AEFItsNotADollarCrisisItsAGoldCrisis.pdf

Basis is the difference between the price for gold (or any other item) delivered now, immediately, and gold delivered in the future. Normally the future price is slightly higher than the current price, the difference reflecting a time component, or what we call interest. But earning interest only makes sense if there is stability, if the money you receive is worth at least what it was when you lent it. When basis disappears in gold and silver that means the present price is equal to or higher than the future price. Gold becomes the currency of choice, if you can get it.

We do not know if what happened yesterday will continue. There will be a myriad of explanations, probably none of which will speak to basis and what basis means. We do not know if the futures market will recover or have any function at all as a "price discovery mechanism." My guess is that this will be a protracted affair and that basis will reappear, disappear, reappear, i.e., flip from back and forth between contango to backwardization until the entire futures market collapses.

As of yesterday the precious metals markets went into backwardization to the extent that the market price for immediate deliver exceeds the futures price by anywhere from 10% to 25% from what I see at the moment. The question is whether this condition will become the norm, in which case we are looking at hyperinflation because no one with a real asset will sell it voluntarily at any price for an irredeemable currency.

The usefulness of the futures market as a "price discovery mechanism" for all commodities, everything from oil to hogs and soybeans, now is in jeopardy. In other words, until you try to buy something and take possession you won't know the price. Looked at another way this is an early signal that we are moving toward barter or the use of some medium other than the dollar as the universal means of quoting and understanding prices.

If the voices warning about Government intervention in the markets are correct, and I think they are, then we also are seeing an "unintended consequence."

Intervention begins innocuously with the idea that you can influence private decisions by influencing private perceptions of price. It proceeds to "painting the charts," and as long as doing so has the intended effect the central planners are happy. At some point they make the false assumption that they actually are setting the price. That is what is happening in gold and silver. I think it also is happening in oil and to some extent in agricultural prices. After all what seems to be killing the real economy is the price of gasoline and the price of food. If, as a central planner, you try to control prices instead of addressing the cause, an excessive increase in money (credit) supply, then if you have the hubris to think you can determine prices intervention is what you do. To your shock and amazement at some point intervention ceases to have an effect on the real prices, the prices people actually pay.

I do not expect this to be clean or easy to discern. The markets are huge. They are complex. GLD and SLV are apparent hybrids, part physical metal, part future price. I have no idea how they will respond. There is supply. There is demand. There is intervention, sometimes pulling the string, sometimes pushing it. While I do not think the outcome in doubt, the path will be treacherous, and painful.

Yesterday culminated a series of interventions to bring down the price of gold and to push up the dollar. The purpose, I think, is to moderate or even reverse price increases in the real economy. The unintended consequence is that when you read today's Wall Street Journal the quoted price for gold and silver no longer has any meaning, if you intend to buy or sell some.

Pushing up the dollar will have some effects though they will not be clear nor will they be immediate or across the board. Some effects will be positive, some negative. Most are not predictable. Most will be harmful because currency gyrations create instability and what we need is stability. As long as the Renminbi is coupled with the dollar, for example, any reduction in the cost of goods imported from China will first have to work its way through a reduction in Chinese costs for energy, transportation energy costs, and so forth. This takes time. And, if basis disappears in oil it will matter not how high the Dollar goes with respect to the Euro.

In looking for a link accessible without subscription I found a recent article about silver basis. Note in particular the first two paragraphs on page 5. http://www.professorfekete.com/articles/ AEFPuttingLoinClothOnTheNakedBogeyman.pdf

For those with more time, and interest, check out The Last Contango in Washington http://www.professorfekete.com/articles/ AEFTheLastContangoInWashington.pdf
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