Will Obama Be Blamed for Giving Away the Gold

by Steve Hickel

In 1971, the US created a bifurcated currency market forcing the gold and silver market between countries underground. Nixon took the US (and the rest of the world) off the gold standard and set the US dollar as a money based solely on the good faith and credit of the US and other currencies.

When the US did this, it set the stage for the Grand Depression of 2008. When the US forced the gold and silver market underground, it created an immoral market place in which the husband (the US government) hid its gold and silver purchases and sales from its wife (the US people). No democracy can function when the financial system is built on obfuscation and lies.

In fact, this is exactly what happened. The oil countries have always wanted gold and not dollars. When gold and dollars were one and the same, then they were fine with dollars. When Nixon removed the link of gold and dollars, the US scared the Oil countries. The oil countries began to wonder if they should continue to accept dollars or if they should simply go out and bid on gold. I believe they attempted to bid on gold in the early 70’s but were persuaded (if not by diplomacy, then by force) that the US would secretly link the dollar and gold for each barrel of oil sold. That may be why we saw and continue to see a 1 to 10 ratio of gold to oil (1/10th of an ounce of gold will approximately buy one barrel of oil).

Instead of setting an official gold price as was the practice prior to 1972, the US and the UK had to rely on the secretive gold markets to accomplish this feat. This worked for many years until the US started to print money and create deficits in an attempt to make the dollar the currency of choice and become the predominant world power. This concerned the rest of the world, including the Europeans, who were concerned that at some point the dollar would not be able to remain viable.

During the 90’s the US had financially destroyed the Iron Countries, but it had to deal with the saber rattling of Iraq and its attempt to control Middle East oil supplies. A new phenomenon surfaced: to wit, speculators, mostly far eastern, entered the secretive gold market and started redirecting the gold meant for the Middle East towards Asia. This caused great noise in the dollar:gold:oil ratio and threatened to cause a break in the supply of cheap oil supply for the US.

At the same time, the Europeans began discussions (secretly at first) of creating the Euro as an alternative to the dollar, in case the Middle East attempted to bid directly for gold again. Such a bid would drive gold through the roof and disrupt the supply of oil to both Europe and the US. Thus, it appears that one purpose of the Euro was to be a possible replacement or alternative for the US dollar as the world’s reserve currency. In the meantime, the LBMA (London Bullion Market Association, a secretive gold market in London), was seeing huge trades in gold that amounted often-times to more gold than was mined in one year.

Since the US can not trade directly in the gold market, it must work through secret proxies. As you can see, the US would have wanted to control the price of gold in order to control the price of oil. And so it appears that they did. By using its influence and in conjunction with London, the practice of leasing official gold reserves was the primary tool to control the dollar:gold:oil ratio.

The leasing of gold involved the backing of LBMA gold trades with official reserves. Much of these trades were simply paper. Some of the “official reserves” likely did end up in the hands of the Middle East Oil Countries, but much of it was an attempt to control the price of gold and thus oil. As the Asians entered the mix, however, some of these official gold reserves risked being diverted away from oil price control. Most of the trades were settled in paper, but some were not.

Some pundits estimated that this official leasing of gold has put from 10,000 to 15,000 tones (one-half of the official gold reserves of the G-7) of official reserves at risk. So, about 10 years ago, the Europeans decided to limit the amount of reserves that would be sold per year. This caused the US some concern. How would they maintain the price of oil if the Europeans did not want to play ball?

Moving forward to today. As you can see, the entire control of the price of oil depended on two major principals: control the physical security of the Middle East oil supplies and control the price of gold. We all know how the US has secured the physical supply of oil, but what most don’t know is how the US has controlled the price of oil.

Some of this is pure conjecture, due to the lack of transparency in the gold market today. But, it seems that ever since the Europeans limited the supply of their gold to control the price of oil in secretive gold markets, the US has had to resort to even more questionable and secret gold and silver market shenanigans. It appears that the US FED and perhaps Treasury are working through two or three banks, including JP Morgan Chase, to control the price of gold on the US COMEX futures trading market.

Proven by other gold-related papers on the web, the COMEX appears to account for a 92% negative influence on the price of gold. Every time other gold markets attempt to drive the price of gold higher, it is knocked lower in the US COMEX market. This was mathematically proven recently on the gold-eagle.com website editorial section.

Assuming any of the above has any merit whatsoever, the conclusion is that JP Morgan and possibly two other banks control the entire world price of gold (as proven by other gold-related papers on the web). In perspective, up to three or more US-based banks on public commodity-based futures markets now control the price of silver and gold at the apparent behest of the US government.

I repeat, in secret, three US banks control the price of gold and silver to control the price of oil. As we all know, if three or so US banks were to control commodities, the bankers behind such a feat would be in jail. Yet, they are not.

The only conclusion is that the FED or Treasury is behind this gold and silver and oil market manipulation. They have warned off the SEC and CFTC (the two US regulatory bodies that would investigate such matters). As such, these banks (and the traders within) hold INSIDER information about the price of gold and silver and oil and appear to be taking advantage of the information. Instead of being in jail, the deception continues in greater force.

This insider information is also power — the power to control the price of gold, silver, and oil. If you want proof of this control, you might want to explain how the price of oil has dropped 50% in just a few months. You want further proof, look at how commodities of gold and silver lost 30% or more of their value in the same period of time in as many months. So, even if the above is a fairytale explanation of how pricing is determined on these markets, it appears to be the only viable explanation.

This control has not come without consequence. Europe and Asia and the Middle East are all talking about pricing oil in their own currencies. Some countries are banding together to create their own currencies. They all appear to be sick of the US stranglehold on world commodities and the US Policy that ensues from such control.

From the perspective of Joe Sixpack, what they should know is that the US banking system is responsible for controlling commodities in secret government deals. These deals gives these banks preferential treatment and makes them immune from prosecution. It gives the US special pricing on oil by allowing the banks to control the price of gold and silver on publicly traded markets – on which the non-banking traders (not in the know) think it is a non-rigged market. Such deception is no way to run a banking system or Country, for that matter. Such lies end badly.

Proof of ending badly can be seen today in the high demand for gold coins and bullion. The price of gold and silver on non-COMEX deals is rising above the COMEX deal prices – by up to 50%. COMEX is loosing credibility to price commodities. More back-room and off-COMEX deals in gold and silver are now taking place, because COMEX pricing is not to be believed.

If these banks lose control of the price of gold when they hold such large short positions, it could destroy them. This has created a no-win situation. This is why all the stops appear to have been removed for these banks to continue to control the price of gold. But, the cost of doing this will be that the US will have to start (if it has not done so already) giving these banks US gold from Fort Knox. How else can they come up with gold to stop the price of gold and silver (and ultimately oil) from rising?

If I were the incoming President-elect, I would not want to go down as the President who will be blamed for giving away the US gold supply. If I were he, I would call for an immediate inventory and accounting of gold and investigate the manipulation of the gold and silver markets by these US banks. Unfortunately, the husband (the US government) will most likely hide the truth of its affair with these immoral banksters until the wife (the US people) find out and call the husband to task for its illicit affairs. We all know what happens then…

Are You In a Union?

If you are, then read this important new article from A.E. Fekete. Read it again and again until you understand it, and then send it to your labor leader with the highest IQ. As Fekete says, only one in a million will understand this. But we need to start somewhere. And awareness is the key.

This system of dishonest money which started in earnest in 1971 is killing our countries' capital structure, and thereby killing employment. Only the bankers at the very top are reaping the reward of this printing game. The scam lies in the creation of new money when the Treasury prints it's paper, and then the Federal Reserve prints different paper to buy the Treasuries' paper. This feedback loop has been sucking real value from our economy for 37 years and it is coming to a very destructive and deadly head right now.

In the ongoing last-ditch effort to keep their golden goose alive (which won't work, by the way), the Fed will deliver the coup de grâce, the great death blow to US labor. If you think a General Motors bailout will save your job, think again. The only thing that can save what little capital value is left in our economy is a shift from a dishonest currency system to an honest currency with real, worldwide credibility.

November 27, 2008

Thou Shalt Not Crucify Labor On This Cross Of Paper Money
by Antal E. Fekete

A Message To American Labor Leaders

The "crime of 1873"

My title is a paraphrase of the 1896 battle-cry of William Jennings Bryan during his presidential bid. He was talking about 'crucifying mankind on a cross of gold'. Bryan was protesting against the unconstitutional closing of the U.S. Mint to silver. Congress inadvertently suspended the unlimited coinage of the standard silver dollar, which it had no authority to do under the Constitution. Bryan called it "the crime of 1873".

No battle-cry was issued during this year's presidential campaign by the finalists in protest against our present unconstitutional paper money system, even though it has started a wave of unprecedented unemployment that would sweep through the land in the wake of the current financial crisis and the official response to it: further serial cuttings of the rate of interest.

Politicians have long ago vacated the field of warning people about the danger caused by violations of the monetary provisions of the Constitution. It is now incumbent on the leadership of American labor to call the workers to rise in protest against the job-destroying policies of the government. Please take a few moments and bear with me as I go through a simple monetary explanation of the job-destruction process that has been going on in America for the past thirty years through serial cuttings of the rate of interest, that will reach fever-pitch next year.

Serial rate-cuts destroy the wage fund

Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer's capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off -- or forced to take a wage cut of $25,000.

Lemming-like rush into certain disaster

I have news for you. Employers are not in the habit of compensating for the destruction of capital caused by falling interest rates. Rather, they welcome the cut as manna sent from heaven. They are kissing the hand that is strangling them. They are as badly misinformed about the lethal effects of a falling interest rate structure as the rest of society. They confuse a low interest rate structure with a falling one. No less than employees, employers are hurt by the destruction of capital caused by serial rate cuts. After all, it is their capital, too, that is being destroyed. Nevertheless, they accept at face value the official propaganda line that "falling interest rates are good for you". Employers are like lemmings running to their own certain disaster.

The "crime of 1971"

In the euphoria of celebrating the advent of the irredeemable dollar in 1971, politicians and economists have 'forgotten' to look at the untoward consequences of the New Brave World of synthetic credit. Not only was the dollar destabilized by the 'crime of 1971'; interest rates were cut adrift as well. The U.S. Treasury was soon forced to print 16 percent coupons on its 30 year bonds which would not otherwise sell.

This did not present much of a problem to the Treasury, since interest on bonds was now payable in irredeemable dollars. The same paper, the same amount of ink, and the same printing press would produce the coupon at the same cost, whether it carried the figure 4 or 16, with which the obligation would be discharged.

However, bringing down the rate of interest from 16 percent to its normal level of 4 percent was a different story altogether. It meant that the rate had to be halved twice from 16 to 8 and from 8 to 4 percent, destroying three quarters of the wage fund. Is there any wonder why so many well-paid American industrial jobs were driven offshore in the intervening years, as production was being outsourced?

Academia and media were silent on the real cause of the de-industrialization of America: the destruction of capital through serial rate-cutting. They are still silent as they expect that the Federal Reserve will do more money magic and pump still more money into the economy, causing rates to fall still more. They are oblivious to the fact that this will destroy still more capital in the process, pulling more rug from underneath employment.

Vanishing capital

The problem is vanishing capital. During the past thirty years capital was destroyed across the board as the long-term rate was pushed down from 16 to 4 percent, and the short-term rate from 22 to 1 percent. The process is insidious: only one in a million can identify the causal relation between vanishing interest and vanishing capital. As a result the captains of industry are not aware of what is happening to the capital of their enterprise until it is too late and they are forced to fold tent. Even then, they have no idea what has hit them. It would never cross their mind to blame irredeemable currency and the serial cutting of interest rates for the disaster. Hat in hand, they go to Washington to beg for bailout money with which they can shore up their capital structure. They don't realize that Washington will claw it all back just as soon as the next round of rate cuts are announced.

Make no mistake about it: vanishing capital does not disappear without a trace. It is being siphoned away clandestinely from the capital account of businesses, to benefit the issuers of irredeemable dollars and their cohorts. These honorable gentlemen cut rates with their right hand and grab the obscene profits thus generated on their bond portfolio with their left hand. It is legalized embezzlement. Keynesians say that the government can turn the stone into bread through driving down the rate of interest to zero. It would be more accurate to say that the government, in a vampire-like fashion, sucks the blood of labor through the bleeding of their wage fund.

The fate of the auto industry

As a result of vanishing capital the American auto industry, not so long ago the envy of the world, is tottering at the brink. The statistical likelihood of the three giant auto-makers running out of capital at the same time is nil. The fact that they do is the evidence of outside interference. The capital of the auto industry has been eroded and ultimately destroyed by the serial rate cuts of the Federal Reserve. It is true that the industry has been adding new capital in the form of state-of-the-art technology. But it could not keep up with the relentless serial rate-cutting. The Fed can cut rates faster than the auto industry can build and equip new factories.

The blame for the suffering should be put squarely on the criminal check-kiting conspiracy between the Treasury and the Federal Reserve. They issue and swap liabilities which they are neither willing nor able to meet. It is a charade, pretending to serve the interest of the national economy when, in fact, they are destroying the nation's capital.

The destruction is not visible to the naked eye. The details are in the book-keeping. That's why the sabotage is so hard to detect. As the rate of interest is being pushed down, it makes inroads on the wage fund. Employers are unable to meet their payroll because the falling interest-rate structure calls for ever larger capital to fund it. Unemployment is the result, which is becoming widespread and chronic.

Under a stable interest rate structure none of this would happen. The auto industry and its workers would have a bright future, as they did before the 'crime of 1971' hit them. Every worker who is being laid off should be reminded of that fact. They should know that they are being sacrificed on the altar of Mammon. They should understand that they are being crucified on the cross of paper money.

Capital destruction at an ever faster rate

Please also note that the rate of capital destruction is accelerating as we are getting closer to the black hole of zero interest. In principle halving the rate can continue indefinitely. In reality, ever smaller absolute cuts will have ever greater destructive effect on the wage fund. While in the 1980's it took an 8 percent decline to wipe out half of the wage fund, right now a 2 percent, and thereafter a mere 1 percent cut will do the trick, causing the same amount of damage to employment. This means that the level of economic pain increases ever faster, soon reaching the point where it will become unbearable.

The situation is more than desperate. The political process has failed. The president-elect has committed himself to the status-quo. He will not challenge the unlimited power usurped by the Fed, as his nomination of the president of the Federal Reserve Bank of New York to the post of Treasury Secretary indicates. This nomination evoked the comment, echoed in the New York Times on November 25, that "Geithner deserves retirement, not promotion". (He is 47.) Obama's utterances during the election campaign seem to suggest that he believes in Keynesian prestidigitation, turning the stone into bread through serial cuts in the rate of interest, and in Friedmanite money magic of the printing press.

Labor's finest hour

The only remaining hope the country has is that labor will not tolerate the ongoing destruction of capital. It will not take it lying down any more. It will take to the streets and confront the small reactionary elite running our monetary regime, including Geithner. This is the most destructive system ever devised: the regime of irredeemable currency. Every time it has been tried in history it failed miserably. As the current crisis clearly shows, this time is no different. What is different is that this time the entire world is on irredeemable paper money. That has never happened before. Accordingly, the stakes are immeasurably higher as irredeemable currency is getting ready to self-destruct.

Labor must take the initiative and demand that Congress put an immediate end to the mindless destruction of capital. Congress should stop the Federal Reserve from pursuing a monetary policy of open-ended deliberate interest-rate cuts. The economy is now like a runaway train with brakes disabled, entering a downhill section of tracks. Crash is certain. At the end of the run the country could be completely denuded of capital, with a large part of its labor force idled.

Labor could be the savior of the country in forcing a return to constitutional money at the eleventh hour, by demanding that the Obama administration open the U.S. Mint to gold and silver. That measure would enable the brakes on the money-train. It would stabilize foreign exchange and interest rates and stop the shredding machine, now spinning out of control, from destroying capital. This would be labor's finest hour: saving the United States from financial ruin and ignominy.

This country has an intelligent, dedicated, and industrious labor force. The best in the world. It should step into the breach. Time for street action has come, if we want to prevent blood from flowing in the streets later.

References:

By the same author:

Revisionist View of the Great Depression, May 11, 2002
The Central Banker, Quartermaster General of Deflation, January 1, 2003
Gold Is the Cure for the Job-Drain, September 23, 2003
Real Bills and Unemployment, September 26, 2005
Unemployment: Human Sacrifice on the Altar of Mammon, September 30, 2005
Is Our Accounting System Flawed? June 16, 2008
Revisionist Theories of Depressions: Can It Happen Again? November 4, 2008

These and other articles of the author can be accessed at the website www.professorfekete.com.

Note that the Fed is planning to cut interest rates in half next month, from 1% to .5%. In nominal terms, that is only a 50 basis point cut. In real terms, that is a 50% cut, and a 50% destruction of the wage fund. This is the danger as we approach zero.


Here are some more articles on this subject from Fekete:

The Gold Standard Strikes Back (Part 2 of 2) Especially the section on Capital Destruction!

The Mechanism Of Capital Destruction

Happy Thanksgiving!

Moving Backward?

If anyone understands this well, help me out here. But isn't this backwardation right now? Look, Dec. '08-June '09 gold costs less than cash-now gold. It wasn't even like this on Friday when Lance Lewis made his post. Compare the "Last" price column with the "Previous Settlement" column, which should be from Friday. Am I wrong? Or do we have more backwardation today? Is this normal for this chart?

Click image to enlarge!


Here's the live link.

Backwardation

If I understand Fekete correctly, "backwardation" (in gold) is the signal the market gives us that the sellers of gold (the CB's, the BB's, the shorts, and the naked shorts) have realized that there truly is a shortage of physical gold. And they have realized it will be more beneficial to them in the near future if they keep their physical gold and settle any outstanding contracts in dollars.

This development is evident right now in the European CB's recent statements about reducing gold sales, other region's buying of gold, rising gold lease rates, and the reduction in short positions on the COMEX. And then Friday morning it showed up as a backwardation in the basis.

The scary part of this is that A.E. Fekete says that backwardation in the monetary metals market will usher in hyperinflation. He says that hyperinflation is not simply a function of the quantity of money, it is also a function of shortages.

Think about that while you read this. It is well worth the effort to read the whole thing. But here are some snippets to get you going:

As the regime of irredeemable currency threatens to crumble under the weight of the inordinate debt tower of Babel, people increasingly take flight to gold. Supplies will get tight and the gold basis will fall. The gold futures market may even go to backwardation briefly at the triple-witching hour, i.e., the hour when gold futures, as well as call and put options on them expire together. Later, flirtation with backwardation may occur even more often, at the end of every month when gold futures expire. Gold will get caught up in a storm.

Backwardation in gold has a perverse effect. In the case of agricultural commodities backwardation provides a most powerful incentive for traders to sell the cash commodity and buy the futures. Not so in the case of gold. Rather than bringing out deliverable supplies of gold, backwardation tends to remove them. The more the gold basis falls the less likely it becomes that owners will exchange their cash gold for futures. Please remember that you have seen it here first. This perversion of the gold basis constitutes the self-destroying mechanism of the regime of irredeemable currency. The longs tend to take delivery on their gold futures contracts in ever greater numbers, and refuse to recycle cash gold into futures, regardless how low the gold basis may go. As it is not set up to satisfy demand for delivery on 100 percent of the open interest, the gold futures market will default. Exchange officials will declare a “liquidation only” policy to offset long positions in gold. At that point all offers to sell cash gold will be withdrawn. Gold is not for sale at any price. The shorts are absolved of their failure to deliver on their gold futures contracts.

Previous descriptions of hyperinflation purporting to explain the descent of a currency into the abyss of worthlessness do so in terms of the quantity theory of money. My explanation of the hyperinflation that is staring us in the face is very different. I dismiss the quantity theory of money as a linear model that is not applicable. Every previous episode of hyperinflation took place in the context of a war replete with shortages caused by the destruction of stockpiles and productive facilities. In this situation it is not possible to sort out the effects of an increasing demand (due to a flood of printing-press money) and a decreasing supply (due to the destruction of stockpiles and production facilities). We want to show that prices may also explode in the presence of unsold stockpiles and ongoing production.

Moreover, previous episodes of hyperinflation affected isolated countries which had embraced the regime of irredeemable currency out of desperation, while the rest of the world stayed the course of monetary rectitude. In the present situation the entire world has been inflicted with irredeemable currency. There are no gold standard countries around that could lend a helping hand to countries that want to stabilize their currency. My description of hyperinflation is not in terms of the quantity theory of money, but in terms of a model where the relentlessly declining gold basis leads to backwardation destroying the gold futures market. When all offers to sell cash gold are withdrawn, producers of essential commodities such as grains and crude oil refuse payments in dollars, and demand gold in exchange for their product. The dollar and other irredeemable currencies will go the way of the assignat.

Backwardation in gold should therefore be considered the self-destroying mechanism for the regime of irredeemable currency that “only one man in a million may identify and understand” (my thanks to Keynes for the felicitous phrase). This is where supply/demand analysis is utterly useless. The huge stocks of monetary gold are still in existence, yet zero supply confronts infinite demand.

The only way to fend off this outcome is for the government of the U.S. to come up with a credible plan to stabilize the dollar in terms of gold. Presently there is no hint that contingency plans for the rehabilitation of the gold standard exist. It doesn’t matter. Any country, e.g., China, India, Iran, could do it through the back door by opening the Mint to the free and unlimited coinage of gold and silver. The alternative may be mass starvation in the midst of plenty as world trade comes to a halt for want of a universally acceptable medium of exchange.

Here is a question for the U.S. President and Treasury Secretary to contemplate: How many innocent lives are they willing to sacrifice on the altar of doctrinaire purity in defense of their untenable gold policies?

How many indeed. The following is a good podcast which discusses hyperinflation. It is an interview with Steve Hanke of Johns Hopkins and the Cato Institute. He is an expert on hyperinflation and is currently studying Zimbabwe.

He says that our current deflation could switch very quickly to inflation and catch most people off guard.

The statement that caught my attention was that once hyperinflation starts, there is no tax base for the government to subsist on. So the only tax they can take at that point is the inflation tax. This forces them to accelerate the inflation to suck a constantly shrinking amount of value out of the population.

And if Fekete is correct, we may only be a few months away from hyperinflation.

All I can say is... got gold?

FOFOA

Is This It?

Yesterday, Lemetropolecafe.com explained gold's $50 up move as follows:

From Lance Lewis this am:
8:50 EST: Gold Officially Goes Into Backwardation

This morning, gold officially went into backwardation for the first time since the announcement of the Washington Agreement in 1999, which sent gold shorts scrambling to find physical metal after the world's major central banks agreed to limit sales of gold going forward and ended the one-way trade to the downside in gold that had been in place in the late 1990s.

We know gold is now in backwardation because the gold forward offerred rate (GOFO) has now gone negative. The 3M GOFO has fallen 12 bps to -0.07%, and the 1M GOFO has fallen 20 bps to -0.1167%.

Unlike other commodities, gold very rarely goes into backwardation, and only when 1) the market fears a collapse in the currency, and/or 2) the market is worried about counterparties making good on their promise to deliver gold (which was briefly the case in 1999, when the Washington Agreement was announced and shorts were squeezed).

Translation: Gold is about to meltup, and the dollar is about to have an accident.

Buckle up, gold bulls. Gold is set to blow its top soon in my humble opinion.

From Wikipedia:

Backwardation is a futures market term: the situation in which, and the amount by which, the price of a commodity for future delivery is lower than the spot price, or a far future delivery price lower than a nearer future delivery.

The opposite market condition to backwardation is known as contango, in which the spot price is lower than the futures price. Different from contango, backwardation ... is unlimited.

On June 3, 2006, Antal E. Fekete wrote:

People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: "watch for the last contango in silver".

It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount. When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis.

More from Wikipedia:

Some argue that backwardation is abnormal, and suggests supply insufficiencies in the corresponding (physical) spot market. [FOFOA: This argument refers to monetary metal] This is empirically false: many commodities markets are frequently in backwardation, specially when the seasonal aspect is taken into consideration, e.g., perishable and/or soft commodities. [FOFOA: Gold is not a perishable or soft commodity. In fact, I would argue that gold is not a commodity at all. And that backwardation in gold is akin to negative interest rates in Treasuries. It doesn't make much sense, and therefore it is a signal that something deep is happening. Comments anyone?]

Backwardation very seldom, if ever, arises in money commodities like gold or silver, except one situation in the early 1980's when there was a one day backwardation in silver while some metal was physically moved from COMEX to CBOT warehouses. [FOFOA: I believe this refers to the Hunt Brothers. Comments?]

Then on August 30, 2008, A.E. Fekete touched on this again in a new article. Here's a snip:

That will be the most dramatic event in the entire history of money, an event that I have, tongue in cheek, called "The Last Contango in Washington". The basis will give you an early warning signal...

...The basis will tell you well in advance when all the offers to sell real gold or silver are about to be withdrawn in all the markets of the world. Once that happens, infinite demand will confront zero supply. Don't say it can't happen here. It has happened locally in France in 1796, in Germany in 1923, in China in 1947, to mention but three episodes. This time it will happen globally.

So I ask again, is this it? Is this the beginning of the end for the dollar, and the opening round of Freegold? We will have to watch the COMEX action for the next four weeks to know. Will there be a default in a large delivery of physical metal? Will a buyer ask for physical gold and get only paper fiat money in settlement? If this happens, I would expect the future price of gold on the COMEX to head down toward $0/ounce, the intrinsic value of paper, while face to face exchanges of paper for physical gold become difficult to make happen, and very expensive when they do happen.

I expect the COMEX price of gold to continue rising for a while. Perhaps "the Cartel" will allow it to rise in hopes that the longs will be tempted to take their paper profits or roll over their long positions into the future. But if the basis is saying what I think it is, some of those longs will say "screw your paper, gimme my GOLD!" Let's hope enough of them do this to "break the bank" at the COMEX warehouse and the "warehouses" of the naked short sellers like JPMorgan.

As ANOTHER said, "We watch this new gold market together, yes?"

I say yes!

FOFOA

FreeGold.com

[UPDATE]

July 17, 2009 - Apparently the Freegold.com domain is no longer linked to this blog and is, in fact, for sale.

The mention in "Call Me Contrarian" that read: "Here at Freegold.com we like to call it FREEGOLD" has been changed to read: "Here at FOFOA..."

[/UPDATE]


The owner of FreeGold.com has graciously linked that domain directly to this blog. That owner is GoldForum.com and I would like to thank GoldForum for the link. You can now access this blog by simply typing freegold.com into your browser...

Gresham's Fractal

Gresham's law states that "bad money drives out good". What this means is that bad money drives the good money out of circulation. Think about silver coins, pre-1965. If someone had $50 in silver coins and $50 in paper money, they would put the silver in a jar in the closet and they would spend the paper money. So the paper would stay in circulation and the silver would go into hiding.

In our current environment, legal tender laws do not allow gold to function as money. Nevertheless, central banks around the world still hold gold as a "foreign reserve". So the world has not forgotten its "money function".

Also, in our current environment, it is a widely held belief that the value of physical gold is greater than the price of paper gold. So in a way, it is behaving like a competing currency. If you have $700 in cash and one ounce of gold, you are more likely to spend your cash and stash your gold.

This explains the apparent shortage of physical gold right now. It is Gresham's law in effect, even though gold is not legal tender.

But on the national scale, we hear stories about China, Russia, the Middle East and others "diversifying" their reserves into gold, and away from the dollar. So are we seeing the large scale fractal pattern of Gresham's law?

One thing we know from Ender is that the dollar gains value from usage. In other words, the USDX will rise when the dollar is being used in great quantities. The USDX does not go up if everyone is stuffing greenbacks in their mattress.

And the flow of value from unreal derivatives to real things, like gold, must pass through dollars. So that explains the recent rise of the dollar on the USDX. It doesn't mean that people or nations are stashing their dollars in the closet... it means they are SPENDING them. All the trashy derivatives in the world cannot be used to directly purchase real things like real estate or gold. They must first be sold for dollars, then those dollars can be used to buy real things. This is happening right now.

So let's go back to Gresham. The "good money" disappears into a glass jar in the closet. This is gold. It is not available on the open market in great quantities right now because those that have it are net-hoarders, not net-sellers. On the other hand, the "bad money" is spent. This is the dollar, in which an increase in transactions is reflected in a rise on the USDX.

So I propose to you that we are currently witnessing the fractal pattern of Gresham's law being played out on the largest scale. The close view of this will seem confusing, or "chaotic". But the long view makes perfect sense.

Look at Hugo Salinas Price's graph again. Foreign paper reserves (which are mostly dollars) are declining at $30 billion per month. At that rate, they would reach $0 in 20 years. That's pretty fast when you consider that they took 40 years to reach this height. Also, that would be a completely linear decline. But we had a parabolic climb. So it is likely that we are just seeing the topping right now, and the steep decline is yet to come. In any case, these reserves don't have to go to $0 to cause major problems for the dollar. In fact, just by not increasing exponentially, the dollar dies, simply because this change causes the inability of the US to keep paying its mounting interest payments with new debt. This would mean either a crushing economic super-depressionary collapse, an outright payment default, or a hyperinflationary printing default, a la Zimbabwe. These options are unavoidable in this situation, which is almost assured at this point.

So the bottom line is that Gresham's Law is killing the dollar right now. And it is an exponentially accelerating process. So I will go out on a limb here and predict that given the G20's impotence this weekend, we should see gold over $1,000 possibly by December 1st, and probably by Christmas. I give it a 25% chance for Dec. 1 and a 50% chance for Christmas. In other words, some unknown, unpredictable human action is required to stop this from happening, and I give that unpredictable event a 50% probability.

Further, I believe we will see a major sea change taking us in the direction of FreeGold possibly by January 20th, and probably by February 20th. Personally, I put a 25% probability on this. Increase that probability to 40% by the April G20 meeting and 50% by July 1st. I give FreeGold a 75% probability by the end of 2009. So please, by all means, be sure to "diversify" your financial portfolio accordingly.

Best,
FOFOA

D17, E18, F19...

It's just a feeling I have, but I sense a subtle shift in The Matrix over the past few days. Anyone else feel that?

“If we can’t print money fast enough to fend off another deflationary Great Depression, then let’s change the value of the money.”

ANOTHER
" How can they reprice gold to $30,000? "

Mr. Sharfin,
This question from you, it proves for my eyes what I have said. Indeed, if I viewed as a western person, gold money as $30,000 paper dollar credits, my thoughts would also show " this cannot be"! But, from another world, I view this US$ and say "how can it be of such value to all and have numbers as the stars in heaven"? Please understand, money as paper or metal is as "perception of value in the minds of people". If all the gold held by earth were placed in the hands as money, it would be used to revalue every "real thing" at a fair price. A tiny fraction of gold would buy much production of goods and services, on a basis equal for all men, not as a debt for later settlement, as currencies are now!

Thank you - Date: Sat Apr 04 1998 22:42

If you think this weekend’s G-20 meetings in Washington are only about designing short-term fixes to the financial system and regulatory reforms for banks, hedge funds, brokers, mortgage companies and investment banks … think again.

Behind the scenes, a far more fundamental fix is being discussed — the possible revaluation of gold and the birth of an entirely new monetary system.

I’ve been studying this issue in great depth, all my life. And given the speed at which the financial crisis is unfolding, I would be very surprised if what I’m about to tell you now is not on the G-20 table this weekend..... Link

"It seems more than likely that the world's central bankers will eventually convene to reprice gold to a level sufficient to persuade a world of paper skeptics that the metal must be reinstated as the numeraire."
- John Hathaway, Tocqueville Asset Management L.P.
November 18, 2003

Some Thoughts from Steve Hickel on this subject:

What should Gold be valued to to relinquish National Debt…?
Per article below, $60T is amount of US debt. US holds 8,000 tons of Gold (we think) plus or minus a few tons. US would want 1/2 of its Gold reserve remaining after the pay down, so here is the math:

60 trillion divided by 128 million = four hundred sixty-eight thousand seven hundred fifty dollars per ounce. $468,750/ounce of gold (and growing).

Funny how the last three digits is where gold is now… $750(ish). Only $468,000 to go.

Immediate action:

Inventory US gold.

Link Dollar to gold at $500,000/ounce (overnight and swiftly with no leaks).

Peoples’ jewelry would then pay off all personal debt. Peoples’ wedding rings and teeth will pay for cars. (the heck with chewing)

Fire all Wall Street insiders in government or prevent them from going back to wall street after their jobs are up.

Fire all upper management on all major banks.

Change rules of public firms such that fate of profits is the fate of salaries and bonuses at the public firm. Put skin back into the game.

I am sure there are more ideas you have…

But....

The uptick in gold to $500K/oz must be secret until done…

Any leak on that would cause a run extraordinaire…

All this talk about gold may go to $10K would not satisfy debt and cause a depletion of all gold reserves. The debt and notional derivatives around debt is simply too large. It will take over $100K/oz or more to do the trick and any such move would have to be a secret until done, imo.

The Group of 20:
1. Argentina 54.7 Tonnes of gold
2. Australia 79.8 Tonnes of gold
3. Brazil 33.6 Tonnes of gold
4. Canada 3.4 Tonnes of gold
5. China 600 Tonnes of gold
6. France 2562.3 Tonnes of gold
7. Germany 3417.4 Tonnes of gold
8. India 357.7 Tonnes of gold
9. Indonesia 73.1 Tonnes of gold
10. Italy 2451.8 Tonnes of gold
11. Japan 765.2 Tonnes of gold
12. Mexico 2.9 Tonnes of gold
13. Russia 402.8 Tonnes of gold
14. Saudi Arabia 143 Tonnes of gold
15. South Africa 124.3 Tonnes of gold
16. South Korea 14.3 Tonnes of gold
17. Turkey 116.1 Tonnes of gold
18. United Kingdom 310.3 Tonnes of gold
19. United States 8133.5 Tonnes of gold
20. European Union 563.6 Tonnes of gold (ECB)
(Source: World Gold Council)

The 100 Year Clearing

Let's start with this article. In it, Hugo Salinas Price points us to an observation he makes that he hasn't seen mentioned anywhere else. And that is the sudden decline in the non-gold reserves held by the Central Banks of the world.

He concludes the article with this question:

What is the significance of the drastic change in the growth-trend of International Reserves, from explosive growth, to the sudden beginning of a contraction?

I hope others, more competent than myself, address this question. I believe it is quite important that we have an authoritative answer to it.

I certainly don't consider myself more competent than Mr. Price, nevertheless I will take a shot at addressing his question with a little help from the most perspicacious A.E. Fekete.

First, let's take a look at the graph in Price's article because it is a little misleading:


If you notice the first 80% of the graph goes parabolic, then it levels off for the last 20% with a slight decline. What is misleading is the x-axis of time. The first 80% covers 60 years of time, and the last 20% covers only 3 months of time. So in reality, if we were to compress that last 20% so that it matched the time progression it is not a leveling off at all, it is the very beginning of a sharp decline.

This is important to understand because any parabolic function like this cannot be maintained for very long. What goes straight up, must come down very quickly. A good example of this kind of parabolic rise and subsequent crash is this chart of the price of gold, which peaked in 1980:


So the question is, what is going on with the Central Bank "paper" reserves? To find the answer, I turn to some history and theory from Antal E. Fekete. On Monday, he spoke to the Civil Society Institute at Santa Clara University in California. In his address I found a thought that leads me to what may be happening with the decreasing Central Bank reserves. You can read Fekete's paper here.

The issue I am focused on is the clearing mechanism of the entire world's economy. A smaller, fractal example of this is a clearing house for stock market trades. By the end of each day, all buy and sell orders are cleared either internally or through a trade on the floor of the exchange. There is a time limit to the clearing mechanism. It must be done each day. The orders fly around all day, but by the end of the day the net of all the orders must be settled, or cleared. And once this is done, the bills, or orders just disappear because each party has received his net of money and/or stock. You could say that these orders to buy or sell throughout the day were "self-liquidating" by the end of the day.

Fekete takes us back to the Middle Ages with a fine example of self-liquidating credit, clearing, and final settlement:

A ‘fairy’ tale

Let us look at another historical instance of clearing that was vitally important in the Middle Ages: the institution of city fairs. The most notable ones were the annual fairs of Lyon in France, and Seville in Spain. They lasted up to a month and attracted fair-goers from places as far as 500 miles away. People brought their merchandise to sell, and a shopping list of merchandise to buy. One thing they did not bring was gold coins. They hoped to pay for their purchases with the proceeds of their sales. This presented the problem that one had to sell before one could buy, but the amount of gold coins available at the fair was far smaller than the amount of merchandise to sell. Fairs would have been a total failure but for the institution of clearing. Buying one merchandise while, or even before, selling another could be consummated perfectly well without the physical mediation of the gold coin. Naturally, gold was needed to finalize the deals at the end of the fair, but only to the extent of the difference between the amount of purchases and sales. In the meantime, purchases and sales were made through the use of scrip money issued by the clearing house to fair-goers when they registered their merchandise upon arrival.


Those who would call scrip money “credit created out of nothing” were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.

You see the clearing mechanism, the scrip money, figured the final settlement of gold. At "the end of the day", the trades were netted out and those who were owed received a final payment of gold. I say this payment was final because it didn't require the future performance of any counterparty. You took your gold home and you were done.

But what's important, is that all debts were cleared on a regular time basis. Fekete also talks about the Real Bills Doctrine in which debts are cleared within 91 days of creation. This time restraint is based on the length of a season, because that is a sufficient amount of time for seasonal products to get from a producer to a final user. The Real Bills Doctrine originates with Adam Smith.

Thousands of years ago, all debt was cleared every 7 years through debt forgiveness. This worked because it was known by everyone and was therefore figured into the lending practices of the day. Christopher Laird of the Prudent Squirrel put it well in his latest excellent article:

The second thing that might get the world out of this impending economic depression and a collapse of the USD later would be to forgive all debts. Possibly that would wipe out the USD too anyway. But that would set the stage for a huge world economic recovery.

The trouble with debt forgiveness is it never seems to happen. Believe me, I am not talking hogwash about debt forgiveness. The Bible, for example, talks about how every 7 years and every 70 years there is to be total debt forgiveness. It’s called the Jubilee. The idea is a legitimate concept that can work and has worked.

You don’t think that’s viable? Well it can work because all that happens is that the lenders who offer credit have to factor in either payment in full or forgiveness over a 7 year period. This can be done and would actually result in the biggest sustained world economic boom ever imagined.

Perhaps this is where we get our 7 year bankruptcy laws?

Fekete goes on to explain how this periodic clearing mechanism was surreptitiously eliminated by the passage of legal tender laws in France and Germany in 1909. This was done in preparation for WWI, but what it also did was to set in motion a sea change in which debt was now required by law to be settled in non-self-liquidating bills issued by governments, rather than the self-liquidating bills previously issued by private banks which were periodically cleared by a settlement in gold.

So now, because these government bills did not disappear upon the final consumer paying for the final product in gold coins, they would start to accumulate. This was a slow process that happened over many years. People would not notice a difference right away because gold coins still circulated in the system.

But on the largest scale, the worldwide scale, these legal tender bills began to pile up, or accumulate as the final settlement of any net national trade deficit or surplus. In our modern world this happens as a Chinese exporter is paid in US dollars for his shipment of goods sent to the US. Then he takes those dollars to his local bank and trades them in for his local currency. The bank then trades those US dollars with the Chinese Central Bank for freshly printed currency and the Central Bank uses those dollars to buy US Treasury bills to hold in reserve. The Treasury bills are preferred because they pay interest.

Up through the 1960's this was accepted by the world because it was thought that this debt could be cleared at any time through the final settlement of gold from the US Treasury. But in the late 60's, the French tried to clear their accounts and take final payment and the "gold window" was promptly closed.

Ever since then, the world has somewhat reluctantly accepted the continuation of this system because they could still use the dollars to buy cheap oil and gold on the open market, even if there wasn't an official clearing mechanism any more.

But as you can see from Price's graph, their holdings of our paper debt products has greatly exceeded their need to spend it, and has gone parabolic, an unsustainable rise.

So now, 100 years after legal tender laws eliminated the periodic clearing mechanism at the smallest scale, the fractal pattern of debt has grown to it breaking point on the largest scale. We have arrived at the forced clearing of debt on a worldwide scale. And because there is no official clearing mechanism, this will happen on the open market.

Of course it is a little more complicated than that. For one thing, the ultimate debtor/purchaser, the American consumer, has run out of "scrip money". Imagine if Fekete's Medieval Fair went on for a really long time without it's daily clearing function. As time went by, the paper scrip money would pile up with the sellers, and the buyers would be going farther and farther into debt, until finally the fair would stop issuing new scrip money to the buyers, and the sellers would demand a clearing, a final settlement.

That is what is happening right now on a worldwide scale. The creditors are forcing the clearing of the debt. This is probably intentional, though it could easily be a natural response to that parabolic rise in reserves. From 1909 through 2000, the US debt rose to $1 Trillion. Then from 2000 to 2008 it rose from $1 Trillion to $10 Trillion. That is a parabolic rise that directly matches the rise of reserves in the world's Central Banks.

And because this debt must now be cleared on the open market, the only outcome that I can possibly see is a world where FreeGold prevails. This debt will be cleared by the purchase of "real things", of which gold is a major component. I'll end with a quote from FOA which speaks about the "world's massive trade settlement":

During the events directly before us, any and all contracts will be swept along on this raging river of economic turmoil. Be they contracts for, gold, currencies, bonds, stocks or commerce, all of them will lose credibility as the worlds massive trade settlements shifts from one medium to the next....when the armies invade they grab the rare coins, art work and gold. Forget the currency!

FOFOA

More on Chaos Theory

The financial and economic landscape today is so complex, so massively complex, that it is impossible to deduce what exactly is coming next. There are billions and billions of individual influences all working in concert to shape our future from one day to the next.

We have a shifting political landscape, moving in different directions at different speeds in every corner of the globe. We have unknown and unseen moves being made by Central Bankers around the world, some in concert and some in secret. We have unseen flows of capital from dark pools of liquidity into short positions and then back again. We have individual households making their spending plans for this year's Christmas gifts. We have oil barons and gold titans discussing their world-control options. We have a multitude of opinions moving at the speed of light over the internet, changing and shaping the thoughts of millions of people in every country of the world.

So if someone tells you they know for sure exactly what is coming next and when, you can know one thing for sure... that person doesn't know!

The inflation/deflation debate is almost comical at this point. Most of the disagreements I read these days boil down to misunderstood definitions. Many people I see arguing are actually in perfect agreement if they would only properly define the terms.

The point I am getting at is that the only way to view such a complex landscape is from very far away. That is, if you really want to see what is happening. And one way to view it in this way is through Chaos Theory, which was mentioned in this post.

For those of you who don't know much about Chaos Theory, the name can be somewhat misleading. It is a theory that deals with complex systems that, on first glance, appear completely chaotic or random. But the reality is that these complex systems are actually deterministic. That is to say that seemingly chaotic gyrations in the future are actually amplifications of the initial condition of the system, and do not require the interference of random elements to explain.

Through the observation of chaotic behavior, patterns start to appear. As the billions of individual influences on our economic landscape act, and then react, then react again (called "iterations"), a pattern will emerge which is "self-similar". What this means is that the pattern at the smallest scale, the individual, will start to resemble the combined pattern of larger and larger groups. This will continue to develop until the fullness of the pattern has revealed itself, and that will be our future. This pattern, called a "fractal", appears everywhere in nature. It can be seen in clouds, snow flakes, crystals, mountain ranges, lightning, river networks, fern leaves, heat burns, coastlines, and the list goes on and on.

The closer you look, or the farther away you get, the pattern is still apparent. Look at the pattern of a spiral galaxy. Almost looks like a hurricane, yeah? This pattern repeats at each scale as you move in closer. It is seen in the individual solar systems, in the weather patterns on the planets, in a river eddy, even down to an atom with spinning electrons. In nature, fractal patterns abound.


Here are some other common fractal patterns:






The Fibonacci Ratio is an observation that came out of this natural phenomenon, and it is used in the Elliot Wave Principle which most of you are probably familiar with. I only mention this to show that everything is connected. But Fibonacci and Elliot are outside of the scope of this post.

Back to the economy...

At the individual level, a pattern can be seen when it comes to a person's wealth. All over the world individuals are coming to terms with the fact that they have lost some wealth. Their response is the pattern. And the pattern is that the remaining wealth is moved. It's movement may seem chaotic in any individual case, but it is generally following the pattern of moving away from paper promises (perceived danger) to real things (perceived safety).

Often, the first move is not ideal. Value moves from one paper promise to a different one until new danger is perceived, then it is moved again. This "migration" continues, and WILL continue until perceived safety becomes real safety.

As this pattern develops in the individual, it also appears slowly in larger groups, like funds. Pension funds, hedge funds, etc... will all begin to migrate value to safety.

Then, soon the pattern will emerge at the national level, then the international level, and finally the galactic level.

It is my belief that Another recognized this fractal pattern as long ago as 1997, and perhaps sooner. Our path in getting from there to here has been circuitous, to say the least. Many "chaotic" detours have muddled the pattern; 9/11, the housing bubble, etc... But the fractal pattern remains intact. Therefore, I believe that we are still on the path that Another laid before us, and I believe we are closer than ever to the end that he predicted.

You see, it doesn't matter so much what happens along the way. It will make perfect sense to us once we are well beyond the end and can look back. Hindsight is always 20/20. And what happens along the way will most definitely appear chaotic to the close observer. But the pattern will ultimately emerge from the chaos and, in the end, the whole system will be shown to have been deterministic from the beginning.

In this case, the beginning is the mid-90's (or perhaps much earlier), and the end is FreeGold, because that is our focus.

So look for the pattern to appear in the larger scales. I have already seen it appear in my own home. And I can already see the signs that it is coming.

Inflation/Deflation? It doesn't really concern me. I have my opinion, and that is massive hyperinflation at some point in the not-so-distant future. But as I have said before, FreeGold DOES NOT REQUIRE hyperinflation.

As Another said...

The winds blow well on this cloudless night. All are asleep with the dreams of what tomorrow may bring. Yes, this is a fine evening to consider gold!

FOFOA