I read this some time ago:
In a sense, even today in 2010, credit can still be said to mature into gold, albeit at a variable price. But if the gold basis goes negative and stays negative, in other words permanent backwardation of gold strikes*, it will herald the advent of Armageddon. The overwhelming majority of working economists don’t see that gold still plays an indispensable role in the credit system. The U.S. Treasury bond market has a sine qua non adjunct in the gold futures market. Without it, bonds would be irredeemable: they would be promises maturing into more promises, maturing into more promises, etc., ad libitum. But once permanent gold backwardation strikes, the prop of gold futures is removed, and the U.S. Treasury bond market will succumb to the sudden death syndrome. For the time being it is supported by speculative demand, but the demise of the gold futures market will make the bond speculators scurry for cover. Nothing will save the “super-safe” investments in the “full faith and credit” obligations of the U.S. government.
As long as confidence in the monetary system is unimpaired, gold will be widely available and the credit system will work properly. Increasing unavailability of gold indicates the threat of a breakdown of the credit system. Gold is going into hiding. Watch for the day when it will not be for sale at any price. When this happens the credit system, and along with it trade, will collapse. It is not a matter of equilibrium or the lack of it. It is a matter of life or sudden death.
Saw this this morning:
James Turk continues:
“But the real story is playing out in the interest rates. On each push below $1,800, gold’s interest rates go out of whack. What’s happening, in effect, is gold is moving toward backwardation every time it moves below $1,800. I don’t think you can rely on the GOFO rate, the gold forward rate, any longer for an accurate picture of gold’s interest rates.
All of this, of course, relates to yesterday’s Fed announcement, which confirms they are going to keep dollar interest rates exceptionally low through mid 2013. In this present low interest rate environment, it is very easy for gold to slip into backwardation, and clearly central banks don’t want that outcome. Everybody knows that when gold goes into backwardaton, it’s game over for national currencies.
Every once in a while you see a moment in the gold market when all of the factors impacting the gold price are screaming, ‘Buy now!’ Each and every time gold breaches the $1,800 level to the downside, we see one of those rare moments. ...
I don't know how to check or verify what Mr. Turk is saying here with regards to backwardation, but I have been reading Harvey's blog and its quite apparent that something is going on because all month long, the open interest in September has been rising even as deliveries have been steady. The demand for physical gold (redeeming paper contracts) has been extraordinary for a September month.
Watching the spot charts for both gold & silver over the last week or so has been interesting. Every time there is major news that should be supremely bullish for PMs (like the Swiss pegging their currency to the Euro, French banks' credit rating downgraded, Greece default news, slow motion run on the Euro banks, etc.), the PMs get hammered. This is happening pretty transparently lately (over the last week or so) during London trading as soon as the Asian markets close.
There is evidence that politicians are getting nervous (I'm guessing that US politicians aren't the only ones in the world who are aware of the "tradition" war ala the wikileaks Chinese cables). First it was China a few years ago repatriating their gold (tungstengate). Then more recently Venzuela demanded their gold repatriated. Now the Dutch are worrying about their gold holdings. France and Austria are both enacting laws to restrict the public's ability to buy physical gold.
I get the sense that the dam is beyond stress tolerances.