December 2008


As 2008 bows and leaves the global economic stage amid the smoking debris and rubble from collapsing firms and financial corporations and as we move out there into the big unknown we call The Future, it might be in order to take along a comforting and refreshing view with us.
It springs from the latest Aden Sisters commentary at Kitco titled “The End of a Bad Year”, where the following snippet comes from.

KEEP CASH AND GOLD

In the meantime, keep your gold and cash, which are best regardless of what happens. In this year of extreme market drops and volatility, for example, gold has held up best and it’s been the best investment. It’s also one of the most important guideposts to be watching. If gold can now stay above $857, it’ll be very bullish, strongly suggesting it’s headed higher and the above, more positive scenario will likely unfold.

Cash is important for dozens of reasons, and it’ll enable you to take advantage of the many bargains now available and during 2009 in order to add or buy new positions, especially in precious metals, stocks, currencies and most gold shares. Whatever you do, don’t sell now. We think we could soon be in for some long overdue good news.

by Mary Anne & Pamela Aden

As a tourist site, Federal Reserve is worth its weight in gold
Amid these troubled economic times, a trip to the central bank is an eye-opening glimpse into the world of currency. Plus, don’t you want to see the big vault?

By John Horn
Los Angeles Times
December 24, 2008

The stock market was in the middle of another spectacular gyration — up more than 500 points one day after dropping more than 400 — and President Bush had come to try to calm Wall Street, urging world leaders not to over-regulate free markets. The economic crisis was palpable throughout Manhattan’s downtown financial district, yet the atmosphere inside the Federal Reserve Bank of New York was eerily serene, almost like a church.

It was fitting, for money is worshiped at the Fed, as the central bank is known, and an outing to the nation’s central bank feels like a trip to capitalism’s cathedral. Where the bodies of saints would otherwise lie, the bank’s catacombs are stuffed with about $180 billion in gold bars — more yellow metal than is stowed in Ft. Knox, and almost a quarter of the world’s supply.

As New York tourist destinations go, the Liberty Street historic landmark attracts a fraction of the visitors to the city’s more famous spots. But the bank plays a much more vital part in our daily lives: The Fed implements monetary policy and, in the New York building’s open market trading floor, handles billions of U.S. government debt. It’s all a part of how the government is trying to rescue the economy, primarily by dropping interest rates.

The bank’s free, 30-minute tour won’t leave you fully grasping the nuances of reserve requirements and the difference between real and nominal gross domestic product. Yet you will leave knowing a lot more about money than when you walked in, and some of it will be more enjoyable than your college economics class.

The first thing you come across while waiting for the guided tour is what looks like an unguarded gold bar, slowly spinning with the invitation, “Help yourself!”

But the bar turns out to be a hologram, your hand passing through it like fog. Though the guided tour is largely humorless and strict (you’re instructed not to take pictures or notes during the visit to the massive subterranean gold vault), the displays in the lobby — a stunning foyer adorned with some of designer Samuel Yellin’s 200 tons of ornate wrought ironwork — are surprisingly fun, even as they’re informative.

Used bank notes are no longer burned (it’s not green to send up green in smoke) but shredded, and there’s $48 million in minced $100 bills in one display, part of the $105 million in paper currency cut up daily.

Not far away, an exhibit about counterfeiting presents some really good fakes; only with an oversized magnifying glass that slides over both the real and the ersatz bills (along with some what-to-look-for pointers in the exhibit) can you spot the impostor $5, $10 and $20 bills.

The American Numismatic Society has lent the bank hundreds of rare coins and currency to illustrate the history of money, grouped by era and region. The highlights include a shekel from 109 BC, similar to the 30 pieces of silver paid to Judas for Jesus’ arrest, and the most valuable coin ever sold, a 1933 Double Eagle that fetched nearly $8 million in a recent auction.

New York’s Fed is one of a dozen Reserve Banks that make up the country’s central bank, and the rest of the lobby tour outlines their history and role. Once a clearinghouse for checks and a walk-up sales location for Treasury bills, the Reserve Banks, among other current responsibilities, supervise and regulate state-chartered banks and foreign bank branches.

The bank’s top historical exhibits are interactive. The best is called “Match Wits With Ben” (as in Franklin), a computer game in which your knowledge of monetary policy is measured against a clock. There are only seven questions, but you will likely miss about half of them unless you dream of stock tables in your sleep. Sample: What organization did the United States create in 1865 to suppress counterfeiters? Answer: the Secret Service.

After the Sept. 11 terrorist attacks (the World Trade Center site is just a few blocks to the west), the Fed tour eliminated a stop in the bank’s trading floors, making the trip down to the gold vault the centerpiece of its guided visit.

Two-dozen MBA students were in my group traveling five stories below street level to see the vault, and they nearly swooned when they saw all the gold bars (each worth about $320,000) neatly stacked to the ceiling.

Ninety percent of the gold belongs to foreign countries, stored in the Fed’s little cells for safekeeping. The bricks are so heavy (about 28 pounds each) that vault workers wear $500 magnesium boots to avoid smashed metatarsals, and the concrete floor is dented from bars that once toppled over.

As soon as the tour is over, guests are given a free little bag of shredded bills. It’s a funny souvenir of one of the bank’s functions, but a more sobering — though unintentional — reminder of the status of the economy.

Interviewed Monday this week on the “Trading Day” program of Business News Network in Canada, former Federal Reserve Governor Lyle Gramley hinted that a big upward revaluation of gold may figure heavily in the Fed’s attempt to rescue the U.S. economy.

The program’s guest host, Niall Ferguson, an author and history professor at Harvard, asked Gramley, now senior adviser at Stanford Group in Houston, about the seemingly grotesque expansion of the Fed’s balance sheet in recent months.

Ferguson asked: “I‘ve heard it said that the Fed has turned into a government-owned hedge fund, leveraged at 50 to 1. Do you feel nervous about what this might actually do to the Fed’s reputation?

Gramley replied: “I think you have to reckon with the fact that one of the Fed’s assets is gold certificates, which are priced, as I remember, at $42 an ounce, and if we were to price them at market prices, the Fed’s leverage would look a lot less than it is now.”

While valuing the U.S. government’s claimed gold reserves at today’s Comex closing price of around $822 per ounce instead of the government antique bookkeeping entry of $42.22 per ounce would indeed vastly expand the government’s monetary assets, it might not be enough to offset the liabilities and guarantees the government lately has taken on. But the job might be done by revaluing the gold to $5,000 or $10,000 per ounce, as the British economist Peter Millar speculated two years ago might be necessary to prevent debt deflation:

http://www.gata.org/node/4843

You can watch BNN‘s interview with Gramley HERE

(They can’t, but we can..)

Silver Stock Report
by Jason Hommel, December 10th, 2008
***

What if the Government went back on a Gold Standard?

Do do that, they would need to use their gold to pay off all their debt.

That would give a price of gold if the U.S. Government backed the dollar with gold.

We only need to know two numbers, and do a simple problem of division.

First number: The national debt.
http://www.treasurydirect.gov/NP/BPDLogin?application=np

The government tells us this is:
$10,656,119,227,403

That’s 10.6 trillion dollars.

Second number: The U.S. Gold stock.
http://www.fms.treas.gov/gold/current.html

The government tells us this is:
261,498,899 ounces of gold

That’s 261 million ounces of gold.

So $10,656,119,227,403 divided by 261,498,899 = $40,750/oz. of gold.

In theory, if the U.S. government had the restraint to stop issuing any kind of new debt, and if there was a runaway hyperinflation, the government could credibly stop any sort of runaway gold price by offering gold at a price of $40,750/oz.

That’s the price that could cap the gold market if the U.S. government sold all their gold to all their bond holders. At that point, all new taxes would have to be levied in gold, not dollars.

It’s important to realize that any effort by the government to sell gold below that price will ultimately fail, and will eventually cause the gold price to go even higher than that price, as that would only deplete their limited stock of gold at inappropriate price levels.

The main point is that T-Bills, which are perceived as the safest haven around, are not safe. They are only backed up by gold at a rate of $40,750 per oz. With gold trading today at around $800/oz., the U.S. gold backs less than 2% of the value of the issued bonds, or stated another way, $800 is 2% of the price of $40,750. Gold, at today’s prices, is clearly a far superior safe haven.

And silver, which is in short supply, due to relentless industrial demand that has consumed nearly all world silver supplies, is even safer.

Clearly, the government cannot offer gold at $40,750 per oz. today. There would be no buyers. But, over time, the gold price may rise to such levels, and beyond, as a generation of people slowly wake up to the monetary fraud of the last 29 to 95 years, depending on whether you count from 1980 or 1913.

I am not an advocate of a return to a gold standard, where gold backs up paper money. I’m in favor of a return to using silver and gold coins and bars as money, as measured by weight, and traded at their intrinsic value according to the price in an open and free market place.

Sincerely,

Jason Hommel

Antal E. Fekete
Gold Standard University Live

Here is an update on the backwardation in gold that started on December 2 at an annualized discount rate of 1.98% and 0.14% to spot in the December and February contracts. It continued and worsened on December 8, 9, and 10 as shown by the corresponding rates widening to 3.5% and 0.65%. It is nothing short of awesome. This is a premonition of a coming gold fever of unprecedented dimensions that will overwhelm the world as soon as its significance is fully digested by the doubting Thomases. The worsening of backwardation must be viewed in the context of the gold price bouncing back from the lows of last week. It shows that the ‘gold bashing’ on Friday was done in the December contract. It is quite revealing that the spot price bounced back more than the futures price. The bulls are on the warpath. They have unearthed the hatchet. They have stopped eating from the hands of the clearing members.

Mish Shedlock published a disdainful criticism of my theory on the worsening backwardation in gold, calling it “nonsense” (see References below). A friend of his owns a seat on Nymex (a branch of Comex) who had this to say:

I have seen countless commodities go into backwardation for numerous reasons, the most frequent being a radical temporary divergence between immediate and overall demand. I have seen backwardations that have lasted years. The article is based on the assumption that a backwardation will necessarily lead to a breakdown of the delivery mechanism. But for every breakdown of the delivery mechanism there have been thousands of backwardations without a breakdown. Only if and when an actual breakdown occurred would the conclusions that the author drew make sense.

Well, well, one can buy himself a seat on the Nymex for sure, and the price is hefty these days, but Nymex does not deliver the understanding of monetary science along with the seat. Nor does any university anywhere in the world. To fill this obvious gap, I founded Gold Standard University Live. It is defunct today, but not because my theories are “nonsensical”.

It is defunct because Mr. Eric Sprott of Sprott Asset Management withdrew his funding after only three sessions, saying that “results do not justify the expense”. Under these circumstances I do what I can to teach all those who want to learn, and pick the “forbidden fruits” of monetary science that have been blotted out from the curriculum ― and from the gold and silver pits of Nymex.

Mish says that “there is nothing special about backwardation, period. OK, they are rare in gold. So what?” Here is what. There is a difference between “rare” and “non-existent”. Backwardation in gold has been non-existent, and for a very good reason, too, as I have explained in my articles. (I also pointed out that there have been ‘hiccups’, or short-lived instances of backwardation. They were temporary ‘logistical’ bumps, always resolved within a day at most, and they never ever spilled over to the next actively traded delivery month.)

Mish needs to educate himself on the fundamental difference between a monetary and a non-monetary commodity, before he can grasp the idea that lasting backwardation in gold is tantamount to the realization that ‘gold is no longer for sale at any price’.

The bottom line is that there is no fever like gold fever. It is akin to St. Vitus’ dance that swept through the Christian world just before the year 1000 A.D. affecting all the people who expected the end of the world to happen at the turn of the millennium. It was far worse than the mania that swept through the world affecting all the people who expected the 2K disaster to happen a thousand years later. The coming gold fever must be distinguished from tulipomania in February 1637, when one single tulip fetched the equivalent of 20 times the annual income of a skilled worker. Gold fever is as different from a bubble as real gold is from fools’ gold. It is visceral. It has to do with one’s instinct for survival. It has no patience with logical arguments. It is highly contagious, ultimately affecting everybody. A bubble that never pops.

You may ridicule the idea that, during a prolonged backwardation, all offers to sell gold will be withdrawn. But a serious analyst must answer the question why hundreds of millions of people having gold coins under the mattress and in the cookie jar refuse to take the bait of ‘risk-free’ profits offered by backwardation. Such a thing would never ever happen to a non-monetary commodity.

The only successful corners in history were gold corners, a.k.a. hyperinflation. Keynesian and Friedmaite economists in the pay of the government thought that gold futures trading will permanently short-circuit the forces of gold backwardation thus preventing hyper-inflation from ever happening. They were wrong.

In an article The Manipulation of Gold Prices (see References below), Professor Emeritus of Economics and former Dean of the School of Business Administration at the University of Indianapolis, James Conrad argues that Bernanke is different. He understands that he needs a much higher gold price in order to increase the efficiency of his airdrops. There is no better way to distribute new money among prospective spenders than putting it into the pockets of the gold bugs. (Conrad admits that he is one.) This will induce a large spending spree, holding deflationary pressures back.

According to Conrad, Bernanke is well aware that the new money he is feverishly airdropping has not stopped and will probably not stop the bloodbath in the stock market. Further devastation of share prices will render pension funds insolvent. To prevent this, the dollar needs a massive devaluation, on the pattern of Roosevelt’s tinkering with the value of gold. I quote:

Anyone who reads the written works of our Fed Chairman will know that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of the position of most prior chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of F. D. Roosevelt’s gold revaluation/dollar devaluation back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.

It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about one half of the recent increase in Federal Reserve credit is neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of a gold standard. In the nearer term, gold will rise to about $2,000 per ounce as the Fed abandons its hopeless campaign to support Comex short sellers in favor of saving the other, more productive, functions of various banks and insurers.

Revaluation of gold, and a return to a gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology; and lending and economic output will increase all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.

It is to be regretted that more of Professor Conrad’s admirable paper cannot be quoted here because of lack of space. To summarize: Bernanke is prepared to throw the issuers of paper gold at the Comex to the wolves, as they have become useless, even a nuisance, by now. Besides, the wolves must be appeased lest they devour whatever remains of the U.S. banking and insurance system.

My own position is somewhat different from Professor Conrad’s. In my view we are facing a world-wide elemental grass-root movement: the flight into physical gold ― witness the backwardation in gold. It is irresistible, and will ultimately overtake all other market forces. It will overwhelm official resistance.

An intriguing case can be made, as is attempted by Conrad, that Bernanke is intelligent enough to realize all this thinking that he can harness, if not hijack, the grass-root movement for his own purposes. This is a wee-bit more intelligence than I can give credit for to the Chairman, who is a former academic himself. I find the thought surrealistic that Bernanke wants to use gold as the safety-valve through which he can release steam from an overheating deflation one day, and from an overheating inflation the next.

Be that as it may, the Brave New World of irredeemable currency sans the paper gold factory at Comex will be an entirely different world from what we have been used to for the past thirty-six years. I highlight the differences as I see them. This should be helpful in the long run, even if this backwardation is temporary and gold futures trading will return to normal, since permanent backwardation is ultimately unavoidable.

Item 1: Barrick and other gold producers that still have an open hedge book will go bankrupt.

Item 2: Other gold miners will, one after another, stop selling gold altogether, and go into hibernation.

Item 3: Junior gold mines will put off starting production indefinitely. They will consider their gold ore reserves in the ground a safer store of value than paper money in an insolvent bank.

Item 4: The closing of the gold window at the Comex will furnish an excuse for other issuers of paper gold including the bullion banks to declare bankruptcy fraudulently.

Item 5: GLD and other joint depositories of gold will be under enormous pressure to default and let the owners of the ETF shares hold the bag. Let them sue for the gold. They won’t get it: their contracts give them no right to physical gold. They will get small change, in paper. The principals will cut up the gold pie among themselves. No crumbs will trickle down to shareholders.

Item 6: Even allocated and segregated metal account gold is not safe. The temptation on the account providers to default will be irresistible. They are not going to release the gold until expressly ordered by the courts, and will make sure that no gold will be left by then.

Item 7: Central banks forfeit their gold under leases due to backwardation, causing an uproar of citizens whose patrimony was sequestered and dissipated in such an ignominious manner.

Item 8: The only market for gold will be the fragmented black markets in various countries each charging a price whatever the traffic can bear. All legal protection of the ownership of and trade in gold will be suspended. The Dark Age will descend on the trading world, just as it did when the Roman Empire collapsed.

Our present experiment with irredeemable currency can last only as long as it is able to support futures markets in gold. The declining gold basis is the hour glass: when it runs out and the last grain of sand drops, gold fever will bleed the futures markets of cash gold, and the days of the regime of irredeemable currency are numbered.

Previous episodes of experimentation lasted no more than 18 years, or half as long as the present one which has taken 36 years so far, a world record. Of course, none of the earlier episodes were supported by futures markets. Forewarned, forearmed. Get ready and move closer to the doors. When the curtain falls on the last contango in Washington, there will be panic and some people may get trampled to death at the exit.

Dear Mish, lower your gun. The topic of gold backwardation is not for you.

References

Monetary versus Non-monetary Commodities, April 25, 2006

The Last Contango in Washington, June 30, 2006

Red Alert: Gold Backwardation!!! December 4, 2008

Has the Curtain Fallen on the Last Contango in Washington? December 8, 2008

These and other articles of the author can be accessed at the website

http://www.professorfekete.com

The Nonsense about Gold Backwardation, etc., by Mike (Mish) Shedwick, December 7, 2008, http://www.globaleconomicanalysis.blogspot.com

The Manipulation of Gold Prices, by James Conrad, December 4, 2008, http://www.seekingalpha.com

Gold in Backwardation? Not so fast…, by ‘Hard Asset Investor’, December 2, 2008, ibid.

The Battle against Contango, by Brad Zigler, November 20, 2008,

http://www.hardassetsinvestor.com

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.

The Syllabus of this course is can be seen on the website:

http://www.professorfekete.com

December 10, 2008

Economist and monetary historian Antal Fekete warns in commentary posted today at GoldSeek that gold and silver are showing signs of going into backwardation metal to be delivered today being priced higher than metal to be delivered later — because buyers don’t believe that the metal will be available later, don’t believe paper promises of metal anymore. Fekete says this foretells the collapse of the dollar and other fiat currencies. His commentary is headlined “Red Alert: Gold Backwardation” and you can find it at GoldSeek HERE

In a new analysis at Jim Puplava’s Financial Sense Internet site, GATA consultant Rob Kirby of Kirby Analytics in Toronto examines the increasingly obvious fraud of the New York Commodities Exchange’s gold and silver markets and the evidence that much more real metal than usual may be withdrawn from the exchange this month.
Kirby’s analysis is headlined “Shock and Awe at Comex” and you can find it HERE

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