* The title is a quotation from Diogenes
Laertius (fl. 2nd century A.D.)
This was the favorite quotation
of the late Chicago
economist and gold expert Melchior Palyi.
25 years ago I
visited Comex at the World
watching the feverish activity in the gold pit from behind the glass wall in
the gallery. A gentleman standing next, unknown to me, remarked: “One
day this make-believe charade will come to a bad end. All that these guys are
doing down there is creating ever more claims to the same lump of gold
— just as governments have been doing before they met their ignominious
Later that day I went to see the Director of Research of Comex.
During our chat that lasted about an hour he intimated that he was greatly
disturbed by the mystery that the gold basis has been steadily declining year
in and year out. Perhaps it was the fact that he could not solve the puzzle
that bothered him so much that he quit his job a few months later.
must confess that I could not solve that puzzle myself until the Twin
Towers of the World
came tumbling down many years later. For me it was a symbolic event,
conjuring up the unknown gentleman and bringing back his cryptic remark. We
are watching a game of musical chairs. When the music stops, paper claims to
gold will be dishonored, and the gold futures markets will tumble down just
like the Twin
my earlier article The Dress Rehearsal for the Last Contango
I observed that “a very strange phenomenon has been manifesting itself
during the past thirty-five years, since the inception of gold futures
trading. The basis as a percentage of the rate of interest, rather than
remaining constant, has been vanishing and, by now, it has dropped to
zero.” In the rest of that article I drew attention to the apocalyptic
consequences of the prospect of permanent backwardation in gold threatening
the world, which is completely ignored by the makers of monetary policy, as I
had opportunity to convince myself during my recent encounter with Paul
Volcker, the Chairman of President Obama’s Economic Recovery Advisory
Board. As I see it, the Debt Tower
will topple, just as the Twin
Towers of the World
Trade center have, when hit by permanent gold backwardation. The reason is
that the availability of gold is absolutely indispensable for maintaining our
system of irredeemable debt. Only then will bondholders, like the
participants of the game of musical chairs, be satisfied that there is a
goodly number of vacant chairs available, so let’s get on with bond
trading, gold futures trading, and let the music roar on.
once permanent backwardation in gold establishes itself, gold is no longer
available at any price. Bondholders will scramble to sell their irredeemable
bonds before they lose all their remaining value. There is no other way to pacify
bondholders than letting the game of musical chairs go on,
that is, continue the charade of gold futures trading putting ever
more claims on the same lump of gold.
response to my article was overwhelming. I have never realized how many people
out there are following my writings on the internet so closely. I want to
thank every one of you and assure you that I take this responsibility most
seriously. Even if I cannot answer every message I get from you individually,
I will continue to do my best to explain the results of my research in
simple, understandable terms.
me spell out for my readers what the vanishing of the gold basis means from
the point of view of the puppet-masters of the gold futures markets. It means
that they are fighting a losing battle. They are desperately trying to coax
gold out of hiding by offering ever higher bribes — not in terms of the
price but in terms of the basis. A low basis means that they offer to take
your cash gold and let you have gold futures in exchange at a discount price.
(The discount is contango minus the basis, so that
the two are inversely related: as the basis falls, the discount increases.)
This will allow you to invest an amount equal to the price of gold (less five
percent, the margin on the gold future) in any way you want and, having paid
the reduced contango, you can keep the profits. The
point is that you will still benefit from any advance in the gold price, same
as you would if you owned cash gold. You can have your cake and eat it.
Remember, in a full carrying charge market, such as the gold futures markets
were at inception, no such bribe money was offered.
But, lo and behold, people who are willing to take the bribe are few and far
in between. So the pot is sweetened. The basis is lowered. Maybe at one point
gold will be coaxed out of hiding, once the bribe is high enough.
such luck. When the basis gets as low as zero, it means that the discount on
gold futures has gone so high that it is equal to the opportunity cost of
holding gold. Therefore, again, if you give up your cash gold in exchange for
gold futures, you can invest an amount equal to the price of gold (less five
percent) in any way you wish, but now they let you keep your profit in its
entirety. And you can still benefit from any advance in the gold
price, same as you would if you had the cash gold in your hands.
This is where we are now. Indications are that the game fish still does not
bite. What now? Where do the futures markets in gold go from here? Well, the
pot can be further sweetened. The basis can be pushed down into negative
territory. Gold could be forced into backwardation. Let’s see what that
means. It means that you can sell cash gold and buy it back for future
delivery at an outright discount. Somebody wants your gold so badly that
he is willing to pay you for the privilege of holding it for a few days, few
weeks, few months paying your storage and insurance fees. You get your gold
back at a cheaper price. You make a risk-free profit on this deal. If
the gold price goes up in the meantime, you benefit fully, just as if you
have held on to the cash gold.
risk-free profits are a promise of unlimited profits because, if you
are nimble enough, then you can make any number of round trips. However,
opportunities to earn risk-free profits from arbitrage do not last. Other
nimble speculators would jump in and their unlimited action would close the
spread that gave rise to the risk-free profit in the first place. Yet I
predict that, after a period of initial vacillation between backwardation and
contango (due to action by misinformed traders)
gold will settle in permanent backwardation.
Wouldn’t that be loverly? Risk-free profits
galore. No need to bother with storage charges and insurance premiums. Just
sit back and enjoy the ride to riches.
hey, wait a minute! Is the arbitrage really risk-free? You give up
your cash gold, but what if your gold futures contract expires and they
refuse to return your gold? Commodity markets can change the rules of the
game mid-stream. They just declare ‘cash settlement only’ for
outstanding contracts. Unsaid and unstated, not even mentioned in small
print, is the fact that the trap door may be slammed shut. The investor who
has taken the bribe is neatly separated from his gold when the hairy
godfather waves his magic wand. “Gold is pale because it has so many
thieves plotting against it.” There are all too many trap doors,
sprung wide open, ready to devour gold belonging to the unweary.
That’s it. That’s why more people do not fall for the bribe even
when tickled with promises of risk-free profits. The promise is mendacious.
There is a risk: the risk that you lose your gold and you may never be able
to buy it back at any price. There is no other explanation for the fact
that the promise of risk free profits does not eliminate the discount on the
futures price of gold. This is the true explanation for the coming
permanent backwardation in gold.
Gold futures trading is clearly a con-game, but it is in a
symbiotic relation with the regime of irredeemable currency and irredeemable
debt, on which our ‘democracy’ is based. So we have a double
con-game. We have a smaller con-game of gold future trading inflicted upon
gullible people who want to have their cake and eat it and, then, we have the
much bigger, all-embracing con-game of irredeemable currency, inflicted upon
the rest of us, innocent bystanders. It is inflicted by the United
States government that stoops so low as to
trample on the Constitution mandating a metallic monetary system for this
country precisely in order to outlaw all Ponzi-schemes. The government could
never muster the moral courage to propose an Amendment that would make the
Constitution conform to its monetary system — as it would open
Pandora’s box. Rather, it would live with the onus of being in contempt
of the Constitution. The government of the United
States had looted gold from its own subjects
in 1933. It looted even more gold from people not under its jurisdiction in
1971. It continues to operate in the same tradition.
larger con-game of the irredeemable dollar could not have gone on so long, but
for the smaller con-game of gold futures trading from which it takes its
strength. Historically, every regime of irredeemable currency has met its
Nemesis in no more than 18 years. The present experiment with irredeemable
currency has been going on for twice that long. Of course, gold
futures trading is a relatively new invention that was not available
to the managers of the assignats, mandats, or the Reichsmarks.
Nor was it available to the managers of the most recent experiment with the Zimbabwe
dollar. But, as the relentless fall in the gold basis clearly shows, people
cannot be conned forever. The clock is ticking. Sand in the hourglass keeps
dropping. When it runs out, the present experiment with fiat dollar will also
meet its Nemesis, as all the earlier experiments have. That’s the good
bad news is that the government of the United
States persists in continuing the double
con-game and Ponzi-scheme through thick and thin. It is callous to the
economic damage it is causing world-wide, and it disregards the danger of
permanent gold backwardation that would inflict utter economic pain on the
innocent people of this country, to say nothing of the people of the rest of
the world. As explained above, it would make the runaway debt-tower of Babel
topple, burying people under the rubble as the Twin
Towers of the World
buried people working inside.
When that happens, the government of the United
States will not have the excuse that it has not
been warned. I have delivered the message in person to the Chairman of
President Obama’s Economic Recovery Advisory Board, Paul Volcker, when
we met at the Santa Colomba Conference last July. I
also consider it my moral duty to warn all the people who are willing to
listen of the danger lying ahead. It is incredibly naïve to believe that
gold can be removed from the international monetary system with impunity at
the stroke of a pen, as they pretended to do it in 1973. The gold corpse
still stirs. When it rises from its prostrate position it will, like
Gulliver, dust off the Lilliputians who like ants have been scurrying all
over his body. The day of reckoning will have dawned.
Keynesian and Friedmanite economists bear a special
responsibility for the disaster. They dug in and monopolized their positions
at universities and research institutes. They never allowed a free discussion
on the gold standard. They did everything to aggrandize and perpetuate their
own power as the sole advisors on government policy. They will not be able to
live down this shame in a thousand years.
Masters Gold Fund
In my previous
article More Dress Rehearsal of the Last Contango
(see References below) I mentioned the unique Masters Gold Fund, soon to come
on stream, structured to take advantage of the permanent backwardation in
gold when it comes, which would ground all other gold funds. I have acted as
advisor from inception and during the incubation period. In that article I
listed seven exclusive features spelling out how the Masters Gold Fund would
operate in these perilous times. It would take its clues, not from the gold
price that is open to manipulation, but from the gold basis which is a
pristine indicator telling you about the willingness of gold holders to carry
on in playing the game of musical chairs and putting their gold at stake.
response to subsequent inquiries that I have received, I provide the name and
e-mail address of the manager of the Masters Gold Fund, who will be happy to
send the prospectus to interested parties upon request:
Sandeep Jaitly (Sandeep.Jaitly@soditic-cbip.co.uk)
If you come to our
Seminar in Canberra, Australia, in November, then you will be able to meet Mr.
Jaitly in person, and ask him questions directly.
I have not been paid by
Masters Gold Fund or its parent company for writing this article, or any
other article representing it. My interest in the project is purely
intellectual. I want to demonstrate that, under the regime of irredeemable
currency, it is possible to have gold locked up in a vault and still make it
bear a return in gold — to disprove Aristotle’s dictum: pecunia
pecuniam parare non potest (gold does not beget gold).
What we have here is an historical anomaly. Never
before could one earn a return on gold in gold unless one surrendered
control, thus incurring a risk. The risk in investing in the Masters Gold
Fund is that the gold price stabilizes, that is, the world willy-nilly goes
back to a gold standard. However, this is a risk that anybody should be glad
Antal E. Fekete
San Francisco School
all the other articles written by Antal E. Fekete
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL
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IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
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STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
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© 2002-2008 by Antal E. Fekete
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