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Copyright
© 2008
A. E. Fekete
All rights
reserved
Second, Concluding Part
Antal E. Fekete
Gold
Standard University Live
Introduction
The English language apparently doesn’t have words forceful
enough to describe the pig-headed and ham-handed approach of the gold mining
industry to the marketing of its unique product, the king of metals and the
metal of kings. One is reminded of the words of the late conductor, Arturo
Toscanini, who once publicly upbraided a cellist in his orchestra in these
words: „Lady, you don’t realize that you have a most precious
instrument between your legs, but all you can do with it is scratch it!”
I founded Gold Standard University Live with one main purpose in mind: to
make the producers and long-term holders of gold aware of the importance of
the basis. Mr. Eric Sprott of Sprott
Asset Management, Inc., offered financial support
without my soliciting it. Of course, I gladly accepted the offer and I
thought that we now had a winning combination. Mr. Sprott
sent out a circular to some eighty gold mining executives urging them to
delegate representatives to the Gold Standard University Live Conference in
Dallas, Texa s, where the subject was gold basis
and how it should play a role in marketing. Mr. Sprott
could not attend the conference in person, but he must have received a
negative feedback from the gold mining industry disdainful of my efforts,
because he abruptly withdrew his financial support. As a consequence I felt obliged
to suspend the operations of Gold Standard University Live. There will be
just one more session in Canberra, Australia, November 11-14, 2008, the title
of which is:
Primer
on the Gold Basis ― Trading Tool for Gold Investors,
Marketing
Tool for Gold Miners,
and Early Warning Signal for Everybody Else.
The lectures will be taped and made available to the public together
with the conference proceedings. This seminar will be of special interest to
shareholders of gold mining companies who may feel that the marketing
strategy of the industry is hopelessly antiquated. I make a case for
shareholder revolt against management which should be forced to adopt the
modern strategy for marketing gold with the battle cry:
“Stop
selling the gold price and start trading the gold basis!”
I expect that this last session will convincingly prove Mr. Sprott wrong, who has told me that the results of Gold
Standard University Live do not justify the expenditure.
A tale of two IQ’s
The gold basis is the difference between the nearby futures price of
gold and the price at which the gold mine is selling its product. Thus the
gold basis could vary from mine to mine. The gold miner sells the
basis when he sells cash gold and buys an equivalent amount of futures.
He buys the basis when he buys cash gold and sells an
equivalent amount of futures. Clearly, a gold miner who is short the basis
should strive to cover after the basis has widened. Note that when his short
position is covered, the gold miner’s net change of cash gold is zero,
so in principle he can profit without selling any gold. In practice, some
selling may be necessary, but the measure of good management is that it can
successfully minimize the sale of cash gold. The prevailing ethos in
gold mining executive suites is that they ought to maximize it. What a
profound pitfall! Profits from short covering, rather than from net sales
of cash gold, should be the mainstay of the gold mine’s income. The
gold miner, if he was really smart, could also buy the basis even before he
dug up as much as a bucketful of dirt. It is profitable to buy the basis when
it is wide to sell it when it subsequently narrows ― replicating the
procedure of the grain elevator operator.
There are still some old line grain elevator operators out there whose
marketing strategy is exhausted by selling the grain price. They apparently
do not understand the first principles of modern basis trading, which is the
marketing strategy of the vast majority of grain elevator operators with a
higher IQ. Modern marketing of grain is not about buying from farmers and
selling with a mark-up to processors. Such a simplistic approach is ante-diluvian. Modern marketing is about trading the basis,
that is, buying it whenever it is wide and selling it whenever it is narrow.
It is true that the basis for grain shows a pattern radically different from
that of the gold basis. The former exhibits a pretty regular annual cycle,
the guiding star the grain elevator operator. The latter exhibits a long-term
secular decline which is destined to end in backwardation (“the last contango in Washington”), which should be the
guiding star of the gold miner ― if only he had eyes to see and ears to
hear. Trading the gold basis, however, does not belong to the repertory of
gold miners. This, of course, is not meant to be a flattering comment on
their IQ. If they did trade the gold basis, it would render market
manipulation of the gold price, official or unofficial, real or imagined, a
counter-productive exercise. Indeed, manipulation inevitably shows up as a
widening of the gold basis, which should be immediately countered through
spirited buying of the gold mines. Manipulators are facing a powerful
head-wind: the secular decline of the gold basis, but it would serve as a
tail-wind for the gold miner. This important source of energy is left fallow.
The cycle for the grain basis shows an annual peak at harvest time when the
new crop is being brought in and cash grain is available at the farm gate in
abundance. It shows an annual trough at the end of the crop year, just before
the new harvest, when operators are scraping the bottom of their elevators.
In practice, there are many cross-currents making the grain basis more
unpredictable, although it would never be as unpredictable as the grain
price. The end-game is critical: every elevator operator would love to be the
one selling the last truckload of the old crop, but if he waits too long,
then the arrival of the new crop may make him suffer losses. Bottom-picking,
at least in this instance, does not pay.
Mesh marketing and basis trading
The gold basis, no less than the grain basis, is also subject to a
number of powerful cross-currents. These should be analyzed and studied in
order to develop a profitable trading strategy. The gold mining industry is
in a unique position to take advantage of the fluctuation in the basis. The
opportunity is spurned. If gold mines meshed their trading strategy with
their marketing strategy, they could greatly increase profitability while
reducing attrition at all the producing sites.
Why is this important? Ideally, the gold mine should sell a minimum amount of
gold from its mining operations, and cover its operating expenses from
profits derived from trading the basis. The objective of prolonging the
working life of the gold mine should be an over-riding consideration. Ore
deposits should be treated with almost religious respect. They are worth far
more than their meager gold content. But to get that extra value out, the
gold miner must be trading the basis. You cannot recycle tailings, but you
can recycle ore deposits after you have extracted value from it through basis
trading again and again.
Depletion of ore deposits should be reduced by all means available. The
industry is doing the exact opposite: it seeks salvation in increasing its
tailings heap by hook or crook. I can tell you, the market for gold shares
does not like it a bit.
Any marketing strategy that results in a premature exhaustion of the gold
mine is wasteful and indicates gross incompetence. It shows that managers
either do not use basis trading or, if they do, then they don’t do it
adroitly. In either case management should be fired and new managers should
be hired who understand the importance of maximizing the working life of the
gold mine, and are willing to learn the intricacies of basis trading, which
is the number one tool to achieve that goal.
Mistaking money for frozen pork bellies
The question arises why gold miners ignore the modern methods of
marketing, through trading the gold basis, and prefer to stick with the
old-line method of selling output hot from the shaft, with the result that their
gold mine gets exhausted prematurely while the shareholder gets a pittance.
My answer to this question is that mining executives are oblivious to the
fact that gold is a monetary metal.
Shortly after the U.S. government defaulted on its gold obligations to
foreigners in the early 1970’s, and started babbling about the
desirability of “demonetizing gold”, futures trading started in
Winnipeg, Canada, for the first time in history. The un-Austrian Austrian
economist Fritz Machlup, professor at Princeton
University, hailed that event saying that, at the long last, gold has become
a commodity just like frozen pork bellies (he could not think of a more
derogatory or more insulting example) and the two commodities are being
traded in the same way, in the same market, sometimes in the same pit. The
good professor did not know what he was talking about. He was blind to the
fact that it is not the government but the market that makes gold money, and
if you deliberately confuse gold and frozen pork bellies, you will suffer the
consequences.
There are two kinds of mindset. The first looks at gold as money regardless
what the government may say or do. The other fails to see any difference
between gold and frozen pork bellies. It urges producers to dig the gold out
with all deliberate speed and throw it on the market regardless of conditions
prevailing there, and invest the proceeds in government securities for the
yield they fetch. The first mindset realizes that, under the regime of
irredeemable currency, bonds are just “certificates of guaranteed
confiscation” (a phrase we owe to the late Dr. Franz Pick), and gold is
the only life-saver available in turbulent times. The second springs from a
servile ideology worshipping government omnipotence. An extreme polarization
has taken place between the two, and no meaningful dialogue is possible
between the protagonists.
Instinctively, shareholders are of the first mindset, while gold mining
executives are of the second. This bunch of usurpers has long since ceased to
represent the interest of the shareholders. They have betrayed their trust. I
may leave the question aside whether the managers have been bribed or backmailed by the government. Their action of pursuing
blatantly anti-conservationist policies at the expense of the shareholders
condemns them. They should be fired and replaced by new guys who are loyal to
shareholders and are willing to learn modern efficient methods of marketing
through utilizing the basis. This is the telltale that the shockingly low
gold mining share prices are telling you.
Shareholder revolution
The challenge to the gold mining industry is enormous, but there are
no signs that it is up to it. In retrospect, the industry has been selling
gold for the past sixty years at ridiculous prices. It has frittered away the
patrimony of shareholders, the top brass has been
lining its own pockets and helping government profligacy. Shareholders are
confused. They were hoping against hope that higher gold prices would
ultimately change all that. Well, higher gold prices have come, but the
wasteful exploitation and the rip-off continues. There is no noticeable
change in the pittance gold executives dish out as dividends.
The
best little whorehouse in Nevada
Gold mining executives would do anything to blow money on irrelevant
construction projects. They build tire-factories, power-plants, even
bordellos in Nevada. But they would not do the one thing they ought to do:
conserving gold-bearing ore through basis trading.
Shareholders are disenfranchised. There is only one thing left they can do to
protest against the gap between gold prices and gold share prices: vote with
their feet. They should sell their gold-mining shares and put the proceeds
into cash gold. In this way they can start a revolution to overthrow usurpers
in the gold mining executive suites. But be warned: the gap will widen if a
Lehman-size collapse of the gold mining industry is in the cards, so do the
switch at your early convenience. If you wait, you will have to pay a steep
price for procrastinating.
If there is a way to resuscitate the goose to lay the golden egg, this
is it.
Calendar of events
New
York City, October 16, 2008
Committee
for Monetary Research and Education, Inc., Annual Fall
Dinner.
Professor
Fekete is an invited speaker. The title of his talk
is:
The
Mechanism of Capital Destruction.
Inquiries:
cmre@bellsouth.net
Santa
Clara, California,
November 3, 2008
Santa
Clara University, hosted by the Civil Society Institute
Professor
Fekete is the invited speaker. The title of his
talk is:
Monetary
Reform: Gold and Bills of Exchange.
Inquiries:
ffoldvary@scu.edu
San
Francisco, California,
November 4, 2008
Economic
Club of San Francisco
Professor
Fekete is the invited speaker. The title of his
talk is:
The
Revisionist Theory and History of the Great Depression ― Can It Happen
Again?
Inquiries:
ifkbischoff@yahoo.com
Canberra,
Australia, November 11-14, 2008
Gold
Standard University Live, Session Five. (This is the last session of GSUL
since our sponsor, Mr. Eric Sprott of Sprott Asset Management, Inc., has withdrawn his support
saying that in his opinion the results do not justify the expenditure. Come
along and judge for yourself.) This 4-day seminar is a Primer on the Gold
Basis ― A Most Important Trading Tool, Mining Tool, and Early Warning
System. Inquiries: www.feketeaustralia.com.
A more detailed description of this seminar is found at the end of my article
Cut Off Your Tail to Save My Face! September 1, www.professorfekete.com
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics, Missoula, MT
59806, U.S.A.
Gold Standard
University
aefekete@hotmail.com
Professor Antal E. Fekete was
born and educated in Hungary. He immigrated to Canada in 1956. In addition to
teaching in Canada, he worked in the Washington DC office of Congressman W.
E. Dannemeyer for five years on monetary and fiscal
reform till 1990. He taught as visiting professor of economics at the
Francisco Marroquin University in Guatemala City in
1996. Since 2001 he has been consulting professor at Sapientia
University, Cluj-Napoca, Romania. In 1996 Professor Fekete
won the first prize in the International Currency Essay contest sponsored by
Bank Lips Ltd. of Switzerland. He also runs the Gold Standard
University.
DISCLAIMER AND
CONFLICTS
DISCLAIMER AND
CONFLICTS
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
ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND
SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.
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