What is the gold basis? Superficially, the gold basis is the difference between the futures price and spot price of gold. However, there is a refinement to this observation after Carl Menger.
Menger was the first to realise that economic analysis should have its foundation in terms of ‘spread’ as opposed to ‘price’. The price of a good itself does not exist as a monolithic entity but is composed of a spread itself: the bid-offer spread.
The idea of a spread has been transferred to the concept of carry, in particular with regards to gold. There is no such a thing as the carry: the carry itself is composed of a spread the lower bound of which is referred to as the ‘co-basis’ and the upper bound the ‘basis’. Simplistically, the co-basis and basis are analogies in the ‘space’ of carry to the bid and offer in the ‘space’ of prices.
The basis has its origin in the agricultural commodity market. A high and rising basis was indicative of plentiful supplies, a low and falling basis the opposite. The extension of these concepts to the bullion markets was first espoused by Professor Antal Fekete.
Professor Fekete pioneered the importance of observing the gold basis as a sign of global financial distress. All other indicators – such as interbank lending rates or government yields – can and are manipulated to give a distorted picture.
The ‘Gold Basis Service’ and ‘Course of the Exchange’ is a quarterly subscription newsletter that describes current movements in the gold and silver bases and implications about future movements for prices. As well as the gold and silver bases, the commentary relates to general observations from a Mengerian perspective on the current market place for global equities; government paper and other goods.
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Read more about economic activity, spreads and the gold basis here.