Fool's gold basis
A few years ago I conducted a Seminar on the gold
basis and backwardation in Canberra, Australia. I suggested to my audience
that the gold basis (premium in the nearby futures on spot gold, with
negative basis meaning backwardation) as a "pristine indicator that,
unlike the gold price, cannot be manipulated or falsified by the banks or by
the government. Thus it is a true measure of the perennial vanishing of spot
gold from the market, never to return, at least not as long as the present
fiat money system endures."
That was then. Today we are one year older and that
much more experienced. We now know that the banks and the government have in
the meantime found a way or two to manipulate the gold basis as well. Next
month I have another Seminar coming up in Canberra. I shall address the
problem of gold basis, giving a full account of what we know about the
efforts of the powers that be in trying to falsify this most important
indicator, the guiding star of refugees who have entrusted their fate to a
golden dinghy on a stormy sea. To the government, the gold basis is like the
naughty child who blurts out unpleasant truths. He must be gagged and
silenced at all hazards. Fool's gold basis is even more important than fool's
gold in terms of the number of people victimized.
The "Let's get physical" movement could
trigger a chain reaction
A prime suspect is the gold basis calculated using
COMEX futures prices, or the forward gold price of the London Bullion Market
Association (LBMA). Further suspects are: certain gold Exchange Traded Funds
(ETF's) such as GLD and their weekly updated bar lists; certain central banks
such as the Bag Lady of Threadneedle Street
(nickname of the Bank of England) that has rushed to the rescue of her
agents, the bullion banks, trying to bail them out by offering substandard
(22 carat) gold in settlement of contracts at the verge of being defaulted.
Substandard gold stinks, as I shall explain below.
There seems to be circumstantial evidence that this
month the gold exchanges are unable to honor their expiring contracts for
which delivery notices have been issued in September. It has occurred in
spite of a robust, even increasing, contango.
Furthermore, circumstantial evidence exists that counterparties to these
expiring contracts for future delivery - bullion banks, to be precise, the
name of J.P.Morgan and Deutsche Bank being
prominently mentioned - have offered bribe money up to 125 percent of the
quoted spot price to holders of long contracts if they would take settlement
in paper, on condition that the embarrassing affair will be kept secret. If
true, these maneuvers are motivated by the desire to conceal the real gold
basis, and to deny that gold is in or approaching backwardation. If the truth
were widely known, then there would be a run on the bullion banks. The
"let's get physical" movement would trigger a chain-reaction
culminating in all offers to sell physical gold being permanently withdrawn
around the globe. "Gold would not be for sale at any price",
whether quoted in US or in Zimbabwe dollars - or, for that matter, in any
irredeemable currency - the only kind of money people are allowed to have
nowadays. The curtain would fall on the "Last Contango
in Washington". The day of permanent gold backwardation would dawn. The
chapter on a reactionary episode of history, irredeemable currency, allowing
the Treasury and its central bank to create unlimited liabilities out of
nothing which they have neither the means nor the intention to honor, but
could use them for check-kiting purposes to mesmerize gullible people around
the world, would be closed and become but a bad memory.
"Honey, I've shrunk the bar-list!"
We must guard ourselves against falling victim to
the rumor-mills, while keeping our eyes peeled for the very real possibility
that the growing shortage of physical gold can no longer be papered over with
paper gold (pun intended). Another story is about GLD, a leading gold ETF,
which publishes its bar-list every Friday at the close of business, reporting
the serial number of every bar in inventory. The list is customarily well
over a thousand pages long. But, lo and behold, on Friday, October 2, and on
Friday, October 9, the bar-list shrank to a mere couple hundred pages, with
no explanation offered. Could it be that the management of GLD has taken a
bribe, and replaced physical gold in inventory by paper gold, in order to
save the face and skin of the bullion banks that have gone naked short and
subsequently got cornered?
If so, it won't get very far. The leadership of the
US House of Representatives may well be able to put in deep freeze the motion
of Dr. Ron Paul, seconded by over 250 other congressmen on both sides of the
aisle, to audit the Federal Reserve, but it has no power to stop the auditing
of the ETF's or bullion banks as required by contract law. According to some
reports independent auditors, at the insistence of parties holding expired
forward purchase contracts to deliver gold, are descending on ETF's and check
their vault's contents against their books. The noose is tightening around
the neck of fraudulent banksters caught in the
Reports are circulating that similar audits of
certain Asian depositories have already produced "good" delivery
bars (400 oz or 12.5 kg gold bricks) that have been gutted and stuffed with
tungsten - a metal whose specific weight approximates that of gold, so that
the famous test of Archimedes (fl. 287-212 B.C.) based on the Law of
Buoyancy, designed to expose fraudulent goldsmiths, would be inapplicable.
Isn't it strange that criminal law punishes the fraudulent stuffing of gold
bars, but allows the stuffing of gold assets in the balance sheet with paper
gold? After all, the specific value of tungsten is much higher than that of
According to a well-known anecdote, King Hiero II of Syracuse ordered his goldsmith to make him a
new crown in the shape of a laurel wreath out of solid gold. When the
finished crown was delivered to him, the king had reasons to suspect that he
had been short-changed by the goldsmith who presumably diluted the gold with
base metals. He called upon Archimedes to make the determination but without
damaging the crown. After some hard thinking Archimedes solved the problem.
He could determine the volume of the crown by submerging it in water, and
from the volume and weight he could calculate the crown's density. Comparing
it to that of gold, the fraud would be exposed if the density of the crown
were lower. It is evident that, if the goldsmith had had a metal at his
disposal of the same density, but cheaper than gold, then Archimedes' test would
have been inconclusive. It is this property of gold that makes it second to
none among the metals, along with other similar fine properties, explaining
why it is a most desirable form of wealth.
The revenge of the looted coins
In 1933 F.D. Roosevelt did not stop at the mere
confiscation of the constitutionally mandated gold coins of the realm. He
sent them to the refinery in order to melt them down. He wanted to expunge
the evidence from history that this great republic once had the largest pool
of circulating gold coins anywhere, ever. Roosevelt betrayed his oath that he
would uphold the U.S. Constitution and went ahead to rob the citizenry by
calling in the gold replacing it with Federal Reserve notes, the value of
which he promptly cried down by 56 percent, under the disguise of monetary
reform. The melted gold was given the shape of gold bars and was stored in
Fort Knox, West Point, and other depositories.
Careful as though Roosevelt was to cover his trail
in getting away with the loot, he has made one major blunder. He failed to
make the looted gold fungible. The coins were not made of pure gold: they
were an alloy 22 carat in fineness. The reason was to make them stand up to
wear and tear better in circulation. All countries striking coins for general
circulation employed an alloy. Roosevelt thought that he could save the cost
of refining the melted gold to the international standard of 995 fine (24
carat) so the gold bars in Fort Knox are only 22 carat fine. In consequence
these gold bars are not fungible. They are easily identifiable as contraband,
the proceeds of the Great Gold Heist of 1933. The shear
quantity of this looted gold makes it impossible to refine it at this late
hour. The U.S. gold stinks, and will keep on stinking.
The memory of the Crime of 1933 comes back to haunt
the government that committed it. For 75 years nobody suspected that one day
these gold bars may be needed to pacify the market. Everybody thought that
they could rest in peace in the depositories till doomsday. But then, as the
proverb says, ill-gotten goods seldom prosper. The Great Financial Crisis of
2007 struck and the dollar got into hot water. The U.S. Treasury ran out of
fungible gold and had to dip into its hoard of looted gold. It is too late
now; the bad odor cannot be expurgated from the U.S. gold hoard. Should this
gold ever show up at an audit, or as bribe money, it will immediately be
recognized. Everybody will see that it originated from the Great Gold Heist
of Roosevelt and that the shame of the U.S. government is attached to it.
Worst of all, it will also reveal that the U.S. has fallen upon hard times.
The looted gold was released in desperation, in trying to stem the tide of
burgeoning gold backwardation.
The result is that every time 22 carat gold pops up
anywhere in the world, for example, as an offer to pacify angry possessors of
expired gold futures contracts, it will be new evidence of the fact that
Uncle Sam is cornered and tries to bribe his way out of the corner with
looted gold. If Uncle Sam is trying to pay the blackmail on behalf of his
cohorts the bullion banks, in offering 22 carat gold in settlement of
contracts calling for 24 carat fineness, then the world will immediately know
what's up, even if the substandard gold is offered through intermediaries.
Everybody will know that Uncle Sam is trying to cover up, or fend off,
backwardation to prevent the gold basis from going permanently negative. The
telltale sign will haunt him and make the gold crisis worse, not better. Most
of the possessors of expired gold futures contracts will refuse to take
substandard gold for settlement, but neither will they keep Uncle Sam's
secret. Apparently there are already two known instances where the looted
gold turned up. Central banks, in coming to the rescue of their agent bullion
banks that were caught red-handed in being naked short in gold, offered
22-carat gold to bail out their agents. This fact in itself makes the
quantity of gold available for resolving the gold crisis smaller. Permanent
backwardation in gold, the Nemesis of irredeemable currency, cannot be
postponed much longer.
Blight on Humanity
Rob Kirby, the best sleuth we have to uncover
government hanky-panky in the gold market, has castigated the cover-up of
what he considers a severe backwardation in no uncertain terms. He calls
central banks for their complicity in the cover-up a blight
on humanity. In his opinion, the central banks are aiding and abetting the
plunder of the sovereign assets of their countries to bail out their agents
or friends in an attempt to "sweep the whole bloody mess under the
carpet". This assessment is apt. It is no exaggeration to say that the
regime of irredeemable currency is a blight on
humanity. The Uncle Sam will never be able to live down his shameful role in plunging
the whole world into the monetary abyss.
Central banks are also guilty of corrupting the
young - a crime that was punishable by death in Athens at the time of
Socrates. They have hijacked monetary economics lock, stock, and barrel. They
have commissioned scribes for hire to rewrite it as a eulogy of their sordid
trade, the creation of fiat money. Graduates of our universities are no
longer taught that this regime has a 100 percent mortality rate through the
sudden death syndrome, pauperizing the population in the process. The role of
gold in history is falsified and distorted. People are told that harking back
to gold money is a sign of backwardness and reactionary thinking. Modern
money is managed money - as long as they themselves are entrusted with its
management. In this view the U.S. Constitution is a backward document not
worth bothering with, so they don't bother with proposing a constitutional
amendment changing its monetary clauses to conform it to present practice.
Aristotle on alibi
An axiom of Aristotle states that no substance can
be present at two different places at the same time. The reason for gold's
monetary role is rooted in this very axiom. The same paper promise can be
present in the asset column of the balance sheets of any number of
individuals. The same gold coin cannot. This eliminates the possibility of a
miraculous proliferation of money - putting latter-day money changers out of
business. But once gold is removed from the monetary system, the miraculous
proliferation of money starts in earnest. Central bankers will distribute it,
if need be, from helicopters hovering overhead. The proof that this is
beneficial to society is ad hominem. In this way, so the argument
goes, the niggardliness of nature to release only so much gold per annum from
the gold mines can be overcome. Money will get into the hands of those who
need it most. They will certainly spend it. Never again will the economy
seize up because of shortage of money.
The Quantity Theory of Money is a false doctrine
because it describes the economy in terms of a linear model, when in reality
the world runs on a highly non-linear pattern. Therefore we need a better
theory to show that the miraculous proliferation of money is bound to come to
a sorry end. It has been my ambition to construct a better theory. I am
pleased that my theory of the vanishing of gold basis,
and the ultimate permanent backwardation of gold under the regime of
irredeemable currency has found resonance in some blogs and discussion
groups, even if it is still taboo in the media and academia.
We have made great progress since last year's
Seminar in Canberra. This year's Seminar will discuss the gold basis in the
light of the very latest developments. The gold basis is not dead, it just needs to be correctly interpreteded.
I shall show it to my audience how to do that through uncovering the hidden
premium in the price of 24 carat gold available for immediate delivery;
through the spread between the share price and the NAV of the gold ETF's;
through the popping up of 22 carat gold bars offered as bribe money, and
other miscellaneous signs of a very real physical short squeeze in the market
for monetary gold.
See you in Canberra in November!
A.E. Fekete, Red Alert:
Gold Backwardation!!! www.professorfekete.com, December 5, 2008
Rob Kirby, Backwardation: Facts from Fiction, www.financialsense.com,
December 8, 2008
Rob Kirby, Central Banking: A Blight on Humanity, www.financialsense.com,
October 9, 2009
Rob Kirby, Blight
on Humanity, Addendum, October 15, 2009
Calendar of Events
Auckland Club, 34 Shortland
Street, Auckland City, New Zealand,
7 p.m., 28th of October, 2009.
Fund-raising dinner for the benefit of Ficino
School. Invited guest speaker: Professor Fekete,
The Forgotten Centenary of the Introduction of Legal Tender Currency in
Further information: www.goldstandard.co.nz
University House, Australian National University,
Canberra: November 1, 2009.
Gold Investment Day, Common Room, from 9 a.m. to 5 p.m . Admission is free.
University House, Australian National University,
Canberra: November 2 - 5, 2009.
The Vanishing of the Gold Basis and the World Financial Crisis, a
Seminar of Professor Fekete with other invited
speakers, sponsored by the Gold Standard Institute,
Further information: firstname.lastname@example.org
Cara Bahamas 2010 Conference, Lucaya Resort, Freeport, Grand Bahamas:
January 15-20, 2010.
Professor Fekete, Sunday, January 17, Hedging
non-gold investments with gold.
Further information from Cara Trading Advisors (Bahamas) Ltd., email@example.com,
Martineum Academy, Szombathely,
Hungary, in March 2010.
Stay tuned for further announcement.
Professor Fekete on DVD: Professionally produced DVD recording of the address before the
Economic Club of San Francisco on November 4, 2008, entitled The Revisionist
History of the Great Depression: Can It Happen Again? plus
an interview -- with Professor Fekete. It is
available from www.amazon.com and from the Club www.economicclubsf.com at $14.95 each.
DVD's of the Gold Standard University Sessions
Session 3 (Adam Smith's Real Bills Doctrine and Its Relevance Today)
Session 4 (The Bond Market and the Market Process Determining the Rate of
Session 5 (A Primer on the Gold and Silver Basis)
Session 6 (Encore Session: The Great Depression)
are now available. For details how to order, see the announcement on the
upper left corner of the website www.professorfekete.com.