|
The music has stopped on the players of ‘musical chairs’. Those
who have no gold in hand are out of luck. They won’t get it now through
the regular channels. If they want it, they will have to go to the
black market.
By Antal E. Fekete
December 9, 2008
December
2, 2008, was a landmark in the saga of the collapsing international
monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2, at the Comex in New York,
December gold futures (last delivery: December 31) were quoted at 1.98%
discount to spot, while February gold futures (last delivery: February
27, 2009) were quoted at 0.14% discount to spot. (All percentages
annualized.) The condition got worse on December 3, when
the corresponding figures were 2% and 0.29%. This means that the gold
basis has turned negative, and the condition of backwardation persisted
for at least 48 hours. I am writing this in the wee hours of December 4, when trading of gold futures has not yet started in New York.
According to the December 3
Comex delivery report, there are 11,759 notices to take delivery. This
represents 1.1759 million ounces of gold, while the Comex-approved
warehouses hold 2.9 million ounces. Thus 40% of the total amount will
have to be delivered by December 31. Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.
Already
there was a slight backwardation in gold at the expiry of a previous
active contract month, but it never spilled over to the next active
contract month, as it does now: backwardation in the December contract
is spilling over to the February contract which at last reading was
0.36%. Silver is also in backwardation, with the discount on silver
futures being about twice that on gold futures.
As those who attended my seminar on the gold basis in Canberra
last month know, the gold basis is a pristine, incorruptible measure of
trust, or the lack of it in case it turns negative, in paper money. Of
course, it is too early to say whether gold has gone to permanent
backwardation, or whether the condition will rectify itself (it
probably will). Be that as it may, it does not matter. The fact that it
has happened is the coup de grâce for the regime of
irredeemable currency. It will bleed to death, maybe rather slowly,
even if no other hits, blows, or shocks are dealt to the system. Very
few people realize what is going on and, of course, official sources
and the news media won’t be helpful to them to explain the significance
of all this. I am trying to be helpful to the discriminating reader.
Gold going to permanent backwardation means that gold is no longer for sale at any price,
whether it is quoted in dollars, yens, euros, or Swiss francs. The
situation is exactly the same as it has been for years: gold is not for
sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn,
whether it concerns newly mined gold, scrap gold, bullion gold or
coined gold. I dubbed this event that has cast its long shadow forward
for many a year, the last contango in Washington ―
contango being the name for the condition opposite to backwardation
(namely, that of a positive basis), and Washington being the city where
the Paper-mill of the Potomac, the Federal Reserve Board, is located.
This is a tongue-in-cheek way of saying that the jig in Washington
is up. The music has stopped on the players of ‘musical chairs’. Those
who have no gold in hand are out of luck. They won’t get it now through
the regular channels. If they want it, they will have to go to the
black market.
I
founded Gold Standard University Live (GSUL) two years ago and
dedicated it to research of monetary issues that are pointedly ignored
by universities, government think-tanks, and the financial press,
centered around the question of long-term viability of the regime of
irredeemable currency. Historical experiments with that type of
currency were many but all of them, without exception, have ended in
ignominious failure accompanied with great economic pain, unless the
experiment was called off in good time and the authorities returned to
monetary rectitude, that is, to a metallic monetary standard. It is
also worth pointing out that the present experiment is unique in that all countries of the world indulge in it.
Not one country is on a metallic monetary standard, under which the
Treasury and the Central Bank are subject to the same contract law as
ordinary citizens. They cannot issue irredeemable promises to pay and
keep them in monetary circulation through a conspiracy known as
check-kiting. Not one country will be spared from the fire and
brimstone that once rained on the cities of Sodom and Gomorrah as a
punishment of God for immoral behavior.
In
all previous episodes there were some countries around that did not
listen to the siren song and stayed on the gold standard. They could
give a helping hand to the deviant ones, thus limiting economic pain.
Today there are no such countries. If you want to be saved, you must be
prepared to save yourself.
You
cannot understand the process whereby a fiat money system
self-destructs without understanding the gold and silver basis. The
Quantity Theory of Money does not provide an explanation, because
deflation may well precede hyperinflation, as it appears to be the case
right now.
For
these reasons I placed the study of the gold and silver basis on the
top of the list of research topics for GSUL. These can serve as an
early warning system that will signal the beginning of the end. The end
is approaching with the inevitability of the climax in a Greek tragedy,
as the heroes and heroines are drawn to their own destruction. The
present reactionary experiment with paper money is entering its
death-throes. GSUL has had five sessions and could have established
itself as an important, and even the only, source of information about
this cataclysmic event: the confrontation of the Titanic (representing
the international monetary system) with the iceberg (representing gold
and its vanishing basis) as the latter is emerging from the fog too
late to avoid collision.
Unfortunately,
this was not meant to be: GSUL has to terminate its operations due to a
decision made by Mr. Eric Sprott, of Sprott Asset Management, to
terminate sponsoring GSUL, saying that “results do not justify the
expense.”
I
sincerely regret that our activities did not live up to the
expectations of Mr. Sprott, but I am very proud of the fact that our
research is still the only source of information on the vanishing gold
basis and its corollary, the seizing up of the paper money system that
threatens the world, as it does, with a Great Depression eclipsing that
of the 1930’s.
Let
me summarize the salient points of discussion during the last two
sessions of GSUL for the benefit of those who wanted to attend but
couldn’t. The gold basis is the difference between the futures and the cash price of gold.
More precisely it is the price of the nearby active futures contract in
the gold futures market minus the cash price of physical gold in the
spot market. Historically it has been positive ever since gold futures
trading started at the Winnipeg Commodity Exchange in 1972 (except for
some rare hiccups at the triple-witching hour. Such deviations have
been called ‘logistical’ in nature, having to do with the simultaneous
expiry of gold futures and the put and call option contracts on them.
In all these instances the anomaly of a negative basis resolved itself
in a matter of a few hours.)
In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation.
Contango implies the existence of a healthy supply of the commodity in
the warehouses available for immediate delivery, while backwardation
implies shortages and conjures up the scraping of the bottom of the
barrel. The basis is limited on the upside by the carrying charges; but
there is no limit on the downside as it can fall to any negative value (meaning that the cash price may exceed the futures price by any amount, however large).
Contango
whereby the futures price of gold is quoted at a premium to the spot
price is the normal condition for the gold market, and for a very good
reason, too. The supply of monetary gold in the world is very large
relatively speaking. Babbling about the ‘scarcity of gold’ reflects the
opinion of uninformed or badly informed people. In terms of the ratio
of stocks to flows the supply of gold is far and away greater than that
of any commodity. Silver is second only to gold. It is this fact that
makes the two of them the only monetary metals. The impact on the gold
price of a discovery of an extremely rich gold field, or the coming on
stream of an extremely rich gold mine, is minimal ― in view of the
large existing stocks. Paradoxically, what makes gold valuable is not
its scarcity but its relative abundance,
which evokes that superb confidence in the steadiness of the value of
gold that will not be decreased by a banner production year, nor can it
be increased by withdrawing gold coins from circulation. For this
reason there is no better fly-wheel regulator for the value of currency
than gold. The same goes, albeit to a lesser degree, for silver.
Here
is the fundamental difference between the monetary metal, gold, and
other commodities. Backwardation will pull in stocks from the moon as
it were, if need be. The cure for the backwardation of any commodity is
more backwardation. For gold, there is no cure.
Backwardation in gold is always and everywhere a monetary phenomenon:
it is a reminder of the incurable pathology of paper money. It
dramatizes the decay of the regime of irredeemable currency. It can
only get worse. As confidence in the value of fiat money is a fragile
thing, it will not get better. It depicts the paper dollar as Humpty
Dumpty who sat on a wall and had a great fall and, now, “all the king’s
horses and all the king’s men could not put Humpty Dumpty together
again.” To paraphrase a proverb, give paper currency a bad name, you
might as well scrap it.
Once
entrenched, backwardation in gold means that the cancer of the dollar
has reached its terminal stages. The progressively evaporating trust in
the value of the irredeemable dollar can no longer be stopped.
Negative
basis (backwardation) means that people controlling the supply of
monetary gold cannot be persuaded to part with it, regardless of the
bait. These people are no speculators. They are neither Scrooges nor
Shylocks. They are highly capable businessmen with a conservative frame
of mind. They are determined to preserve their capital come hell or
high water, for saner times, so they can re-deploy it under a saner
government and a saner monetary system. Their instrument is the
ownership of monetary gold. They blithely ignore the siren song
promising risk-free profits. Indeed, they could sell their physical
gold in the spot market and buy it back at a discount in the futures
market for delivery in 30 days. In any other commodity, traders
controlling supply would jump at the opportunity. The lure of risk-free
profits would be irresistible. Not so in the case of gold. Owners
refuse to be coaxed out of their gold holdings, however large the bait
may be. Why?
Well,
they don’t believe that the physical gold will be there and available
for delivery in 30 days’ time. They don’t want to be stuck with paper
gold, which is useless for their purposes of capital preservation.
December
2 is a landmark, because before that date the monetary system could
have been saved by opening the U.S. Mint to gold. Now, given the fact
of gold backwardation, it is too late. The last chance to avoid
disaster has been missed. The proverbial last straw has broken the back
of the camel.
I
have often been told that the U.S. Mint is already open to gold,
witness the Eagle and Buffalo gold coins. But these issues were neither
unlimited, nor were they coined free of seigniorage. They were sold at
a premium over bullion content. They were a red herring, dropped to
make people believe that gold coins can always be obtained from the
U.S. Mint, and from other government mints of the world. However, as
the experience of the past two or three months shows, one mint after
another stopped taking orders for gold coins and suspended their gold
operations. The reason is that the flow of gold to the mints has become
erratic. It may dry up altogether. This shows that the foreboding has
been evoked by the looming gold backwardation, way ahead of the event.
Now the truth is out: you can no longer coax gold out of hiding with paper profits.
If
the governments of the great trading nations had really wanted to save
the world from a catastrophic collapse of world trade, then they should
have opened their mints to gold. Now gold backwardation has caught up
with us and shut down the free flow of gold in the system. This will
have catastrophic consequences. Few people realize that the shutting
down of the gold trade, which is what is happening, means the shutting
down of world trade. This is a financial earthquake measuring ten on
the Greenspan scale, with epicenter at the Comex in New York, where the
Twin Towers of the World Trade Center once stood. It is no exaggeration
to say that this event will trigger a tsunami wiping out the prosperity
of the world.
Antal E. Fekete is a renound professor of Mathematics and Statistics at the Memorial University of Newfoundland. He is a sought after expert in monetary science and gold. He currently resides in Romania.
|
