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The Future of Paper Money Looks Dim

Dec 09, 2008

Prof. Antal E. Fekete of Gold Standard University is pointing out a new indication that the price of gold may begin to go back up, relative to paper dollars. Two articles are worth reading for those who are interested in such things.



He points out that the COMEX warehouse is short of gold for December deliveries. An increased number of people who bought gold futures actually want the real stuff delivered to them in December. The COMEX does not own all the gold in its warehouse. Much of it belongs to others who have a claim on it. But yet December deliveries call for 40% of the total amount in stock.

At the same time, he says at the beginning of the first article (above), "December 2, 2008 was a landmark in the saga of the collapsing international monetary system."

He explains that those who own large amounts of gold will often make money on it by selling it (at least on paper) and then buying an equal amount of it in futures contracts. One can sell for the spot price, but a futures contract carries a little discount. So it is like selling immediate gold for a few dollars more per ounce than it costs to buy it two months in the future. Sell high, buy low--and the gold owner makes some money, while still retaining a supply of gold.

Problem is, it seems that more and more gold owners are reluctant to trade the real gold for a piece of paper, an IOU for future delivery. They are less trusting that the system will actually have the physical gold to deliver to him by February to replace what he could sell today. This is driving up the "gold basis."

As the Professor explains on page 3 of article 1:

"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." 

So the COMEX is seeing its supply of gold running short, because of fewer sellers and an increase in buyers who want actual delivery of the real stuff. This phenomenon does not happen often, but it has occurred twice in a row for the first time in recent history. It is called "Backwardation."

"Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust int he 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. . ."

"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. . ."

"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."

By the way, the same thing is happening with silver. He writes:

"Silver is also in backwardation, with the discount on silver futures being about twice that on gold futures."

It appears that those holding silver are twice as reluctant to trade it for a piece of paper than those holding gold. But with silver, we have seen that delivery has simply been delayed about four months. Will that occur also for gold? More to the point, given the importance of gold in world trade, which far exceeds that of silver, will they be able to delay delivery of gold like they have done with silver?

I do not know the answer to that, but I suspect that it will be much more difficult to follow the silver pattern, because gold is more important than silver in world trade. But if the guacamole hits the fan with gold, it is bound to draw attention to the problem with silver deliveries as well and thus magnify its current problem.

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Category: Financial

Dr. Stephen Jones

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