Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
UK Government Loses Control of the Coronavirus Pandemic 2nd Wave Forecast Consequences - 1st Oct 20
The Prospects of the Rocky S&P 500 Stock Market Recovery - 1st Oct 20
Global Stock Markets: Keep Your Eye on This Remarkable "Divergence" - 1st Oct 20
Covid-19 - The Only Thing Systematic Is The Destruction Of America - Part 2 - 1st Oct 20
Fed Isn’t Thinking about Rate Hikes. So Does It Maybe Think about Gold? - 1st Oct 20
Who is Spreading the Virus? UK Coronavirus 2nd Wave Analysis - 30th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part II - 30th Sep 20
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

It's Not A Dollar Crisis- It's A Gold Crisis

Commodities / Gold & Silver Jun 06, 2008 - 12:24 AM GMT

By: Professor_Emeritus

Commodities

Best Financial Markets Analysis ArticleThe title is a bow to Peter Schiff for his admirable article It's Not an Oil Crisis: It's a US Dollar Crisis .

Thirty-five years ago gold, symbol of permanence, was chased out from the Monetary Garden of Eden, replaced by the floating irredeemable dollar as the pillar of the international monetary system. That's right: a floating pillar. The gold demonetization exercise was a farce. It was designed as a fig leaf to cover up the ugly default of the U.S. government on its gold-redeemable sight obligations to foreigners.


The word 'default' itself was put under taboo even though it punctured big holes in the balance sheet of every central bank of the world, as its dollar-denominated assets sank in value in terms of anything but the dollar itself. These banks were not even allowed to say 'ouch' as they were looking at the damage to their balance sheets caused by the default. They just had to swallow the loss, obediently and dutifully join the singing of the Hallelujah Chorus of sycophants in Washington praising the irredeemable dollar and the Nirvana of synthetic credit.

For a time it looked like a clever coup as America has benefited at the expense of the rest of the world. It could now buy all the goods and services it wanted from foreign countries in exchange for "little scraps of paper on which some ink has been sprinkled". More importantly, America could establish military bases and start wars on foreign soil paying for them with dollars created out of thin air. Foreigners had to put up and shut up. What used to be "deficits without tears" before, has now become "deficits with laughter".

Few people realized at the time that America, far from giving itself a gift at the expense of foreigners, has fatally shot itself in the foot. At first the wound from this self-inflicted gunshot did not hurt and was quite invisible. Festering and pain came later. The long time-lag makes the causal relationship between the two events fade. Yet the connection exists creating ever more mischief, misdiagnosis, monetary quackery and, ultimately, the greatest credit collapse in history.

America had to foster an anti-gold psychosis in the world to cover up default. Milton Friedman was the high priest of the new paradigm with his monetarism, preaching the unmatched virtues of the floating dollar. It was supposed to eliminate the American current account deficit. It never did. Instead, it killed the healthy American trade surplus, as American industry was pushed into an endless decline by the self-mutilation of the dollar.

The worst part of the anti-gold psychosis was its effect on the banking system. American banks were deprived of a chance to hedge their assets, all of it held in the form of irredeemable debt (irredeemable in the sense that at maturity it was payable in irredeemable currency) by holding monetary metals, gold and silver, as a reserve. Those foreign banks that did were made the laughing stock of the banking industry. 'Progressive' banks were free to heap debt upon debt in the asset column of the balance sheet without any regard to reserve ratios, in a mad chase of illusory paper profits. If the balance sheet was not big enough, why, they could simply go 'off balance sheet' to add more debt. Foreign banks chimed in: "Me too, me too!" It was truly an incredible sight watching the Union Bank of Switzerland, a solid and liquid bank before 1973, throwing all caution to the winds in its zeal to embrace hare-brained securitization schemes, and to put a lot of bad debt made in USA on its balance sheet.

We were also treated to another incredible sight: the Bank for International Settlements (BIS), the only sane central bank left after the gold-demonetization farce, committing hara-kiri . Since its establishment the BIS carriedits books in Swiss gold francs.The implication was clear: the BIS wanted to stay above the hurly-burly of competitive currency devaluations which humiliated even the lofty Swiss franc in 1936. The BIS continued to carry its books in Swiss gold francs, never mind the vicious anti-gold agitation that started in 1973. Ultimately it threw away all good banking sense and caved in. On March 10, 2003, BIS abandoned the Swiss gold franc and embraced the SDR (Special Drawing Rights) as its unit of account. The SDR has the dubious distinction among fiat currencies that it does not even have an obligor . It is an out-and-out make-believe currency. It does not arise as an obligation. It arises as a free gift, manna from heaven, brought by Santa Claus alias IMF. (This Santa has just announced that, in a move of belt-tightening, he was selling gold to cover the cost of mending his bag). In want of a definition of an accounting unit no bank is subject to any meaningful accounting rules any more. The last central bank with the ability to step into the breach, offering sound credit in case of a world-wide credit collapse, has disappeared from the scene.

Because of the anti-gold psychosis the dollar went into a downward spiral, never to come out of it. The question arises whether gold is just an embellishment, a barbarous relic, a superstitious talisman, or whether gold is a real mooring without which the banking systems cannot safely manage risks in the long run.

To answer this question we must understand the first principles of hedging. Gold and silver, as monetary metals, are the two most important hedges banks can have to offset risks to the asset column of their balance sheets. You cannot hedge these risks through owning more debt -- the liability of someone else. A hedge that is subject to exactly the same risks would not diminish but magnify risks. It is a "Texas hedge". (The reference is to the rancher who, when it was pointed out to him that his long contracts on live cattle can in no way hedge his herd on the ranch, proudly answered: "me hedge is a Texas hedge".)

For a true hedge, you need and ultimate asset that is not the liability of anyone. Such an asset is furnished by the monetary metals. It is foolish to suggest that gold and silver have lost their value as hedges since their prices fluctuate. The fluctuation of their price does not prove that the value of gold and silver fluctuates. On the contrary, it is the value of the dollar that does fluctuate in which gold and silver prices are quoted.

Because of this fluctuation it is inherently treacherous to trade gold and silver on the variation of price. Proper hedging replaces price risk with basis risk which is less erratic and more predictable. The basis is the difference between the nearest futures price and the cash price of the monetary metal, gold or silver. There is a long-term trend for the basis to fall, and ultimately to go negative. Traditionally the basis has been positive. The condition that holds when the futures price exceeds the cash price is called contango . Permanent contango is a characteristic of the monetary metals indicating large above-ground stores relative to the annual output of the mines. But fiat currencies keep losing value through monetary debasement. It makes the basis of gold and silver fall, and contango disappear. The opposite condition, obtaining when the futures price goes to a discount against the cash price, is called backwardation . It is equivalent to a negative basis. It is an indication of the fact that the monetary metals are going into hiding.

The international monetary system is inevitably drifting towards the black hole of backwardation, and will ultimately succumb to its pull. Governments and central banks tell you that they are combating inflation. They do in the forlorn hope that they can escape the pull of the backwardation of monetary metals. But they cannot, because that pull is the global manifestation of countless individuals' seeking shelter against deliberate monetary debasement in the ownership of monetary metals.

The point is that the only way to measure the more or less slow deterioration in the collective value of irredeemable currencies is the gold and silver basis. It is precisely the change in the basis that provides clues for hedging against the risk of monetary debasement. The outstanding fact is that the basis can be traded with greatly reduced risk, as compared with trading the price.

It should be clear that some banks in the world are doing just that. They are trading the gold and silver basis (as opposed to trading the gold and silver price) continuously. This means that they are buying hedged metal when the basis is high, and selling it when the basis is low. This enables them to earn a steady income on their gold and silver reserves in gold and silver. The proof that they indeed engage in this activity is furnished by the inordinate size of the short interest in the gold and silver futures market. It is altogether erroneous to attribute this short interest to the activities Jurassic Park creatures, and to that of the bogeyman of 'naked' silver commercials. The inordinate size of short interest in gold and silver is just the visible side of the hedges of bullion banks and others, the invisible side of which is their metallic reserves.

Gold Standard University Live is the only organization that advocates paying attention to features such as silver and gold contango, backwardation, basis, and short squeeze. The vocabulary of analysts and other observers of the passing scene doesn't even include these market terms. They follow statistics of production and off-take, the commitments of traders in the futures market, and are trying to divine coming moves in the gold and silver price through supply and demand equilibrium analysis. Theirs is a wrong-headed approach. Supply and demand equilibrium analysis is inapplicable to the monetary metals, both the supply of and the demand for which tend to be unlimited. That's just what makes gold and silver a monetary metal. Nevertheless, the threat of a short squeeze or, if the worse comes to the worst, that of a corner, is very real.

Corner in precious metals also goes by the other name hyperinflation . Reams and reams of supply/demand statistics and all the COT reports in the world will not predict when it will hit. Only the basis will. It provides an early-warning system indicating, with the precision of a seismograph, the escalating shortages in silver and gold. And only Gold Standard University Live is willing, "without fear or favor", to publish the results of research which tell you how to read basis signals.

In summary, the present crisis is far from over. Far from being an oil crisis, it is not even a dollar crisis. It is a gold crisis . It is preying on American and other banks, punishing them for their failure to hedge paper assets with gold. The U.S. government is trying to bail out large multinational banks by stuffing them with more paper assets to bursting. In a recent move the Federal Reserve has made history when it swapped U.S. Treasury bonds for the so-called asset-backed securities held by brain-dead banks for which the market refuses to put in a bid. The trick won't work. And it is doubtful that the only meaningful bail-out that would work, namely, opening the U.S. Mint to gold and silver as advocated by presidential candidate Dr. Ron Paul, is in the cards. To be sure, opening the Mint to the monetary metals should work. It would make U.S. Treasury gold available to American banks, to save them from insolvency. What they need is not augmentation of capital in the form of more paper credits. What they need is metallic hedges to prop up the value of paper assets. Opening the Mint would mobilize the world's metallic reserves, presently in hiding, and put them back into the public domain to assume their traditional role as the foundation of the world's credit system.

References:

Peter Schiff, It's Not an Oil Crisis, It's a Gold Crisis , May 23, 2008, www.marketoracle.co.uk
A. E. Fekete, What the Gold and Silver Analysts Overlook , May 1, 2004, www.professorfekete.com
A. E. Fekete, The Last Contango in Washington , June, 2006, www.professorfekete.com
June 5, 2008.

GOLD STANDARD UNIVERSITY LIVE

Session Four is to take place in Szombathely, Hungary (at Martineum Academy where the first two sessions were held). The subject of the 13-lecture course is The Bond Market and the Market Process Determining the Rate of Interest (Monetary Economics 201). It will be followed by a panel discussion on the topic: The Silver Basis and the Present Banking Crisis: Phony Bond Insurance Schemes and the Lack of Hedging Irredeemable Dollar Debt with Monetary Metals.

The date is: July 3-6. For more information please see www.professorfekete.com/gsul.asp or contact GSUL@t-online.hu . Registration can be made by e-mail upon payment of the pre-registration fee. The remainder of the registration fee is due 3 weeks prior to the session. Space is limited; first come, first served.

Preliminary announcement : Gold Standard University Live is planning to have its Session Five in Canberra, Australia, in November, 2008. This Session will include a Primer on the gold and silver basis, prerequisite for a Workshop on the basis offered at Session Six (planned to take place in the Spring, 2009).

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics

"GOLD STANDARD UNIVERSITY" - Antal E. Fekete aefekete@iisam.com

For further information please check www.professorfekete.com or inquire at GSUL@t-online.hu .

We are pleased to announce that a new website www.professorfekete.com is now available. It contains e-books, archives, news about GSUL, and material of current interest

Copyright © 2008 Professor Antal E. Fekete
Professor Antal E. Fekete was born and educated in Hungary. He immigrated to Canada in 1956. In addition to teaching in Canada, he worked in the Washington DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform till 1990. He taught as visiting professor of economics at the Francisco Marroquin University in Guatemala City in 1996. Since 2001 he has been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University on this website.

Antal E. Fekete / Professor_Emeritus Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules