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[bob ford <bobford79 AT yahoo.com>]

Leslie, since you truly seem interested in this subject, I am posting an 
artcle that is the main buzz on commodity and precious metals, commodity 
trader's forums, etc. for the past two days.  This is scaring the h*ll out of 
a lot of players and traders , big and small in this semi-secretive world .  
The author is a highly credentialed, mathematician and economics analyst, not 
just some man with a blog.  Take the informations , as you choose......bobford

p.s. this is about a fifteen-minute read and a bit esoteric, but well worth 
your time and effort is you are gerenerally interested in the new coming 
economic paradigm


------------------------------------------------------------------------


 
 "Paper money eventually returns to its
intrinsic value --- zero." - Voltaire 
 

December 05, 2008

Red Alert: Gold Backwardation!!!
by Antal E. Fekete
 
 
 
December 2, 2008, was a landmark in the saga of the collapsing international 
monetary system, yet it did not deserve to be reported in the press: gold 
went to backwardation for the first time ever in history. The facts are as 
follows: on December 2nd, at the Comex in New York, December gold futures 
(last delivery: December 31) were quoted at 1.98% discount to spot, while 
February gold futures (last delivery: February 27, 2009) were quoted at 0.14% 
discount to spot. (All percentages annualized.) The condition got worse on 
December 3rd, when the corresponding figures were 2% and 0.29%. This means 
that the gold basis has turned negative, and the condition of backwardation 
persisted for at least 48 hours. I am writing this in the wee hours of 
December 4th, when trading of gold futures has not yet started in New York.

According to the December 3rd Comex delivery report, there are 11,759 notices 
to take delivery. This represents 1.1759 million ounces of gold, while the 
Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total 
amount will have to be delivered by December 31st. Since not all the gold in 
the warehouses is available for delivery, Comex supply of gold falls far 
short of the demand at present rates. Futures markets in gold are breaking 
down. Paper gold is progressively being discredited.

Already there was a slight backwardation in gold at the expiry of a previous 
active contract month, but it never spilled over to the next active contract 
month, as it does now: backwardation in the December contract is spilling 
over to the February contract which at last reading was 0.36%. Silver is also 
in backwardation, with the discount on silver futures being about twice that 
on gold futures.

As those who attended my seminar on the gold basis in Canberra last month 
know, the gold basis is a pristine, incorruptible measure of trust, or the 
lack of it in case it turns negative, in paper money. Of course, it is too 
early to say whether gold has gone to permanent backwardation, or whether the 
condition will rectify itself (it probably will). Be that as it may, it does 
not matter. The fact that it has happened is the coup de grâce for the regime 
of irredeemable currency. It will bleed to death, maybe rather slowly, even 
if no other hits, blows, or shocks are dealt to the system. Very few people 
realize what is going on and, of course, official sources and the news media 
won't be helpful to them to explain the significance of all this. I am trying 
to be helpful to the discriminating reader.

Gold going to permanent backwardation means that gold is no longer for sale 
at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. 
The situation is exactly the same as it has been for years: gold is not for 
sale at any price quoted in Zimbabwe currency, however high the quote is. To 
put it differently, all offers to sell gold are being withdrawn, whether it 
concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed 
this event that has cast its long shadow forward for many a year, the last 
contango in Washington -- contango being the name for the condition opposite 
to backwardation (namely, that of a positive basis), and Washington being the 
city where the Paper-mill of the Potomac, the Federal Reserve Board, is 
located. This is a tongue-in-cheek way of saying that the jig in Washington 
is up. The music has stopped on the players of 'musical chairs'. Those who 
have no gold in hand are out of luck. They won't get it
 now through the regular channels. If they want it, they will have to go to 
the black market.

I founded Gold Standard University Live (GSUL) two years ago and dedicated it 
to research of monetary issues that are pointedly ignored by universities, 
government think-tanks, and the financial press, centered around the question 
of long-term viability of the regime of irredeemable currency. Historical 
experiments with that type of currency were many but all of them, without 
exception, have ended in ignominious failure accompanied with great economic 
pain, unless the experiment was called off in good time and the authorities 
returned to monetary rectitude, that is, to a metallic monetary standard. It 
is also worth pointing out that the present experiment is unique in that all 
countries of the world indulge in it. Not one country is on a metallic 
monetary standard, under which the Treasury and the Central Bank are subject 
to the same contract law as ordinary citizens. They cannot issue irredeemable 
promises to pay and keep them in monetary circulation
 through a conspiracy known as check-kiting. Not one country will be spared 
from the fire and brimstone that once rained on the cities of Sodom and 
Gomorrah as a punishment of God for immoral behavior.

In all previous episodes there were some countries around that did not listen 
to the siren song and stayed on the gold standard. They could give a helping 
hand to the deviant ones, thus limiting economic pain. Today there are no 
such countries. If you want to be saved, you must be prepared to save 
yourself.

You cannot understand the process whereby a fiat money system self-destructs 
without understanding the gold and silver basis. The Quantity Theory of Money 
does not provide an explanation, because deflation may well precede 
hyperinflation, as it appears to be the case right now.

For these reasons I placed the study of the gold and silver basis on the top 
of the list of research topics for GSUL. These can serve as an early warning 
system that will signal the beginning of the end. The end is approaching with 
the inevitability of the climax in a Greek tragedy, as the heroes and 
heroines are drawn to their own destruction. The present reactionary 
experiment with paper money is entering its death-throes. GSUL has had five 
sessions and could have established itself as an important, and even the 
only, source of information about this cataclysmic event: the confrontation 
of the Titanic (representing the international monetary system) with the 
iceberg (representing gold and its vanishing basis) as the latter is emerging 
from the fog too late to avoid collision.

Unfortunately, this was not meant to be: GSUL has to terminate its operations 
due to a decision made by Mr. Eric Sprott, of Sprott Asset Management, to 
terminate sponsoring GSUL, saying that "results do not justify the expense."

I sincerely regret that our activities did not live up to the expectations of 
Mr. Sprott, but I am very proud of the fact that our research is still the 
only source of information on the vanishing gold basis and its corollary, the 
seizing up of the paper money system that threatens the world, as it does, 
with a Great Depression eclipsing that of the 1930's.

Let me summarize the salient points of discussion during the last two 
sessions of GSUL for the benefit of those who wanted to attend but couldn't. 
The gold basis is the difference between the futures and the cash price of 
gold. More precisely it is the price of the nearby active futures contract in 
the gold futures market minus the cash price of physical gold in the spot 
market. Historically it has been positive ever since gold futures trading 
started at the Winnipeg Commodity Exchange in 1972 (except for some rare 
hiccups at the triple-witching hour. Such deviations have been called 
'logistical' in nature, having to do with the simultaneous expiry of gold 
futures and the put and call option contracts on them. In all these instances 
the anomaly of a negative basis resolved itself in a matter of a few hours.)

In the commodity futures markets the terminus technicus for a positive basis 
is contango; that for a negative one, backwardation. Contango implies the 
existence of a healthy supply of the commodity in the warehouses available 
for immediate delivery, while backwardation implies shortages and conjures up 
the scraping of the bottom of the barrel. The basis is limited on the upside 
by the carrying charges; but there is no limit on the downside as it can fall 
to any negative value (meaning that the cash price may exceed the futures 
price by any amount, however large).

Contango whereby the futures price of gold is quoted at a premium to the spot 
price is the normal condition for the gold market, and for a very good 
reason, too. The supply of monetary gold in the world is very large 
relatively speaking. Babbling about the 'scarcity of gold' reflects the 
opinion of uninformed or badly informed people. In terms of the ratio of 
stocks to flows the supply of gold is far and away greater than that of any 
commodity. Silver is second only to gold. It is this fact that makes the two 
of them the only monetary metals. The impact on the gold price of a discovery 
of an extremely rich gold field, or the coming on stream of an extremely rich 
gold mine, is minimal -- in view of the large existing stocks. Paradoxically, 
what makes gold valuable is not its scarcity but its relative abundance, 
which evokes that superb confidence in the steadiness of the value of gold 
that will not be decreased by a banner production year, nor can it be
 increased by withdrawing gold coins from circulation. For this reason there 
is no better fly-wheel regulator for the value of currency than gold. The 
same goes, albeit to a lesser degree, for silver.

Here is the fundamental difference between the monetary metal, gold, and 
other commodities. Backwardation will pull in stocks from the moon as it 
were, if need be. The cure for the backwardation of any commodity is more 
backwardation. For gold, there is no cure. Backwardation in gold is always 
and everywhere a monetary phenomenon: it is a reminder of the incurable 
pathology of paper money. It dramatizes the decay of the regime of 
irredeemable currency. It can only get worse. As confidence in the value of 
fiat money is a fragile thing, it will not get better. It depicts the paper 
dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, "all 
the king's horses and all the king's men could not put Humpty Dumpty together 
again." To paraphrase a proverb, give paper currency a bad name, you might as 
well scrap it.

Once entrenched, backwardation in gold means that the cancer of the dollar 
has reached its terminal stages. The progressively evaporating trust in the 
value of the irredeemable dollar can no longer be stopped.

Negative basis (backwardation) means that people controlling the supply of 
monetary gold cannot be persuaded to part with it, regardless of the bait. 
These people are no speculators. They are neither Scrooges nor Shylocks. They 
are highly capable businessmen with a conservative frame of mind. They are 
determined to preserve their capital come hell or high water, for saner 
times, so they can re-deploy it under a saner government and a saner monetary 
system. Their instrument is the ownership of monetary gold. They blithely 
ignore the siren song promising risk-free profits. Indeed, they could sell 
their physical gold in the spot market and buy it back at a discount in the 
futures market for delivery in 30 days. In any other commodity, traders 
controlling supply would jump at the opportunity. The lure of risk-free 
profits would be irresistible. Not so in the case of gold. Owners refuse to 
be coaxed out of their gold holdings, however large the bait may be.
 Why?

Well, they don't believe that the physical gold will be there and available 
for delivery in 30 days' time. They don't want to be stuck with paper gold, 
which is useless for their purposes of capital preservation.

December 2 is a landmark, because before that date the monetary system could 
have been saved by opening the U.S. Mint to gold. Now, given the fact of gold 
backwardation, it is too late. The last chance to avoid disaster has been 
missed. The proverbial last straw has broken the back of the camel.

I have often been told that the U.S. Mint is already open to gold, witness 
the Eagle and Buffalo gold coins. But these issues were neither unlimited, 
nor were they coined free of seigniorage. They were sold at a premium over 
bullion content. They were a red herring, dropped to make people believe that 
gold coins can always be obtained from the U.S. Mint, and from other 
government mints of the world. However, as the experience of the past two or 
three months shows, one mint after another stopped taking orders for gold 
coins and suspended their gold operations. The reason is that the flow of 
gold to the mints has become erratic. It may dry up altogether. This shows 
that the foreboding has been evoked by the looming gold backwardation, way 
ahead of the event. Now the truth is out: you can no longer coax gold out of 
hiding with paper profits.

If the governments of the great trading nations had really wanted to save the 
world from a catastrophic collapse of world trade, then they should have 
opened their mints to gold. Now gold backwardation has caught up with us and 
shut down the free flow of gold in the system. This will have catastrophic 
consequences. Few people realize that the shutting down of the gold trade, 
which is what is happening, means the shutting down of world trade. This is a 
financial earthquake measuring ten on the Greenspan scale, with epicenter at 
the Comex in New York, where the Twin Towers of the World Trade Center once 
stood. It is no exaggeration to say that this event will trigger a tsunami 
wiping out the prosperity of the world.

References:
By the same author:

The Rise and Fall of the Gold Basis, June 23, 2006
Monetary and Non-Monetary Commodities, June 25, 2006
The Last Contango in Washington, June 30, 2006
Gold, Interest, Basis, March,7, 2007
Gold Vanishing into private Hoards, May 31, 2007
Opening the Mint to Gold and Silver, February 5, 2008

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

Note: the author is coming out with a follow-up piece:
Has the Curtain Fallen on the Last Contango in Washington?
Stay tuned.

Calendar of events

Szombathely, Martineum Academy, Hungary, March 28-29, 2009
Encore Session of Gold Standard University Live.

Topics: When Will the Gold Standard Be Released from Quarantine?
The Vaporization of the Derivatives Tower
Labor and the Unfolding Great Depression
Gold and Silver in Backwardation: What Does It All Mean?

San Francisco School of Economics, June-August, 2009
Money and Banking, a ten-week course based on the work of Professor Fekete.

TheSyllabus of this course is can be seen on the website: 
www.professorfekete.com

 

  


Antal E. Fekete
Professor, Intermountain Institute of Science and Applied Mathematics, 
Missoula, MT 59806, U.S.A.
 
 




--- On Sat, 12/6/08, Leslie <cayadopi AT yahoo.com> wrote:

> From: Leslie <cayadopi AT yahoo.com>
> Subject: Re: [Homestead] US -China: Free Farm Trade Agreement
> To: bobford79 AT yahoo.com
> Date: Saturday, December 6, 2008, 10:38 AM
> Gold backwardation this week, thanks for the heads up, I
> missed that this week, while working on other things.   
>  
> I see that as a buying opportunity in the making... as we
> move towards the 9 year cycle low.
>  
> Gold, trades in 9 year cycles, as measured from low to
> low.  Gold has one more leg down to complete the current
> cycle (the low should come in approximately next summer). 
> If you can get any gold/silver, I sure would.  
>  
> As you might know, there are long delays to obtain
> physical metal at the spot prices.   Big boys have
> switched over to taking physical delivery right from the
> COMEX.  The physical delivery for the Dec 2008 contract
> (NY) was significant on 11/30. 
> http://www.financialsense.com/Market/kirby/2008/1201.html
>  
> It makes no sense to have dropped into backwardation in
> that context... but it does in terms of Fed manipulation. 
> They need "investors" to buy treasuries to finance
> our corrupt government, not gold.  The fed has a long
> history of punishing banks who are long gold also.
>  
> Anyway, rumor has it that the COMEX couldn't meet Dec
> physical demand and the UK has loaned them the physical
> gold....  If that is true, and the source of that
> statement seems to know these things, rising prices down
> the road are a given....once the cat gets out of the bag and
> defaults become known.... boom up we go.
>  
> Physical demand for gold/silver is very high worldwide -
> hence the commercials on TV for those sell your jewelry
> commercials (the smart ones are buying everything in
> sight).  The futures markets in gold are out of sync with
> reality.  Reality at some point will come home to
> roost...  One silver producer actually is loading up
> airplanes and flying silver to India!!!  and carrying some
> thru on suitcases....
>  
> I believe part of the fall in gold/silver is related to the
> unwinding of carry-trades, part is Fed manipulation.
>  
> Commodities also fall during depressions/recessions....
> gold/silver in the past has led the way out.  I'd add
> oil to that list now, since we live in a petro-currency
> world instead of gold/silver currency world.  I'd guess
> a number of those who bought gold 1k - probably think that
> it is the 1980s repeating and they'll never get $1k
> again, at least for another 20 or so decades.  
>  
>  
> I just posted another thread on US >100Trillion
> national debt.  There is the tip of the iceberg in that
> thread about the Fed's manipulation of oil prices (and
> why).  The current backwardations are temporary, and Fed
> manipulated IMO.  
>  
>  
>  
> Since I can't participate in much of that, I just see
> current low prices caused by falling commodities as a
> buying opportunity to stock up on supplies.... shovels,
> garden hoes, hammers, nails, toilet paper, anything....that
> can help me survive.
>  
> When the Fed can no longer manipulate the oil prices
> down,,,, or it becomes time to deploy the inflation phase
> again to attract foreign money in treasuries, the various
> backwardations will correct.  
>  
> Commodities,,,, they move in cycles also.  3 year cycle in
> commodities - statistically was predicted to burst in August
> 2008..... it popped right on schedule in July 2008.  If it
> had not popped then, statistically things would have gotten
> really really ugly.  I'll have to go re-read some stuff
> to find out when the next low is projected. I was working on
> that last night, but didn't finish up on commodities.
>  
> Yes, gold & silver are money.  And truly the only way
> to keep up with hyper-inflation.  I figure that down the
> road for the masses, barter will become key.... and very
> illegal.  There's some pretty scary stuff about
> homeland security that I will post to the whole board.... as
> it ties in with the FDA and that coop stuff.............. 
> and potentially attacks people who are hoarding food
> personally....
>  
>  
>  
> Stock market is statistically set up to drop like 1929-1932
> crash, where we are now roughly at the Dec 1930 time frame.
>  
> http://stockcharts.com/charts/historical/djia19201940.html
>  
> This has only happened once in history, so the stats are
> iffy.......... but they are what they are --  for now.  
>  
>  
> There is a big difference between then and now.
>  
> For