Liberty Maven

“The [gold] bulls are on the warpath.” – Dr. Antal Fekete, December 10, 2008

by Jake, the Champion of the Constitution

Originally published December 11, 2008 at http://www.nolanchart.com/article5631.html

“And we are in no mood for prisoners.” – Jake, the Champion of the Constitution

I’ve written what is amounting to a short series on what is, in my opinion, the major economic event of gold going into backwardation and what this will mean.  Due to recent interest, particularly email comments, in this article I would like to further describe this event and in the next part share links to more gold and silver news on this topic with you (as well as some objective criticism of Fekete).  I think it is also important to note that I am no expert.  I fully realize I could be wrong for now, or misjudge how the government forces will intervene.  It is far from clear whether this backwardation will become permanent.  That said, I do believe that the resistance shackling gold and silver will be eventually be overwhelmed; it’s just a question of when.  In the final analysis, Gold is the world’s greatest chance at economic liberty and a world with far less war. (photo2)

Part I: “The End for the Dollar and all Fiat Currencies (1/5)“

Part II: “The Next Bubble to Pop! (2/4)“

Part III: “On Gold and Market Manipulation (3/5)“

Supplement to explain futures market basics and backwardation: “The Money Matrix – What the Heck Are Derivatives? (PART 10/15)“

Part V:  I’m writing it as fast as I can!!

Let’s return to the rice example I used earlier which is traded on commodity futures markets in a similar fashion as gold and silver are today.  Let’s say I absolutely must have 1000 bushels of rice 1 month from today.  At the futures market, I have two options – I can buy a 1-month futures contract and take delivery right before I need it, or I can buy at the immediate market price (or spot price) and store it for a month.

Now, let’s say rice goes into backwardation.  This means that the spot price is more expensive than the 1-month futures price.  So, normally I would buy the futures contract since it is cheaper and the storage cost is borne by the other party.  And if enough people did this, backwardation would quickly disappear.  Now why would I buy at spot price?

I would buy at spot only if I feared that within a month the other party would not have any rice to deliver. Now the strange thing is that for backwardation to continue to exist, all rice traders at the market need to believe the same thing.  Why?

If other traders holds surplus rice, and does not need it for a month, and believes they will get delivery 1 month later, they will release his stock into the market (driving the spot price down and the futures price up) and take delivery in a month’s time, which would give a tidy basis profit (spot price minus the futures price), plus the savings of not storing the rice for a month.

So therefore, backwardation is the sign of a very tight market, and a market that will be tight for sometime into the future – either 1) current supply is very tight, 2) future supply is projected to be very tight, or 3) there is a severe distrust in counterparties – that the short positions can deliver the goods on time per the contract, or vice versa that the long positions will not have the cash.

That said, backwardation in seasonable, weather-dependent perishable commodities like rice or corn is certainly not unheard of.  It even sometime occurs with industrial commodities like lead or copper.  Sometimes it can even be the natural state of the market.

However, gold futures are completely unlike these other commodity markets. Gold is mostly traded solely as a “store of value”; the jewelry or electronics or dentistry demand pales in comparison to the quantities of the yellow metal traded as a store of value (even an “anti-dollar” if you wish).  In other words, gold is not a consumable market.

And here is the final piece to the above from South African Daan Joubert, quoted at lemetropolecafe.com.  Gold backwardation can only mean that either “a) There are enough people so concerned about non-delivery that they will pay a large premium to get their hands on gold right now” or “b) There are no large holders of gold who have sufficient faith in the futures exchange to exploit the [backwardation].”

Dr. Fekete has issued two recent updates, “Has the Curtain Fallen on the Last Contango in Washington” and “There’s No Fever Like Gold Fever.”  I consider both must-reads, especially the conclusion to the “Gold Fever” article.  I will freely admit to you that for some of the reasons Fekete mentions in the “Gold Fever” article I considered not writing this series under my own name (perhaps I may later regret it) but there is something about sharing the truth as I see it that forbids me what ultimately amounts to cowardice.  Anyways, here is the intro to “Gold Fever”:

“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.“

Keynesian economist John Keynes once pessimistically noted, “In the long run, we are all dead.”

I say, YES, the day when gold or silver breaks the COMEX IS death.

Death to the Keynesians for all the havoc they have wrought.

Long live the Austrians!  GO GATA!

Jake, the Champion of the Constitution                      [Reach the Author Here!]

www.CampaignForLiberty.com

www.YALiberty.org

- Collective Soul, “Counting the Days“

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

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Nolan Chart Facebook Group Page Created

Summary of Articles for Jake, the Champion of the Constitution (12/03/2008)

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The Money Matrix Series

America, Were Michael Phelps’ Eight Olympic Gold Medals Worth Winning?
Published: August 24, 2008
Michael Phelps and other American athletes are bringing back loads of Gold, Silver, and Bronze Medals from the Beijing Olympics. A young libertarian economist asks if it was worth it.

The Money Matrix – Prelude (PART 1/15)
Published: August 1, 2008
Prelude and Source List to a Series on Global Monetary Policy of Control and Explaining Big Government’s Finances

The Money Matrix – What is a Dollar Bill Worth? (PART 2/15)
Published: August 2, 2008
“Living so free is a tragedy when you can’t see what you need to see!” – Powerman 5000 ‘Free’

The Money Matrix – What Makes Money Money? (PART 3/15)
Published: August 3, 2008
A quick history of money per Rothbard followed by the properties of money per Ron Paul

The Money Matrix – If You Don’t Know Who the Sucker Is, Then It’s You! (PART 4/15)
Published: August 7, 2008
The Money Matrix series rolls on by asking ‘What are the Types of Money?’ and ‘What is the “Best” Currency and Why?’

The Money Matrix Explores Seigniorage – Do not give in to evil, but proceed ever more boldly against it. (PART 5/15)
Published: August 24, 2008
The Money Matrix explores Seigniorage as Legalized Silent Plunder with an introduction into medieval and modern banking.

The Money Matrix – How the FED Works (PART 6/15)
Published: November 17, 2008
A step-by-step explanation of how the Federal Reserve, America’s Central Bank, can manipulate monetary policy.

The Money Matrix – What the Heck Are Derivatives? (PART 10/15)
Published: December 9, 2008
This article seeks to define financial derivatives and why they are so important. Future and spot market basics are also examined so the Reader understands how the price of gold and silver is determined.

A Money Matrix Addendum: Citigroup and GATA Call for an End to the Suppression of the Gold Market
Published: September 22, 2008
The Suppression of the Gold Market Goes Mainstream, Thanks to Citigroup. And a few interesting back-of-envelope calculations about where the price of gold could go.

Save Ron Paul’s Voice – A Money Matrix Addendum
Published: September 28, 2008
Learn how by reading. Article is intended as a poke-in-the-eye for members of the Ron Paul Revolution who complain about the bailouts and the financial, banking, and housing crises and do not realize that they may in fact be hypocrites.

MY PROPHECY – The Federal Reserve Will End! A Money Matrix Addendum
Published: October 29, 2008
Many of the Prophecies of Ferdinand Lips from 2005 are becoming true. “Right now [the FED] is creating the biggest housing bubble in history. This may lead to economic collapse. I expect that a revolution will one day take place against the Fed. It must be abolished. After all, its founders were not that intelligent but rather stupid men. Or they were devils. It is a tragedy. Not only that: It is the biggest tragedy in world history, even worse than wars. Yes, worse than wars. It made most people poor. It damaged America. It caused wars and then helped to finance them.”

The End for the Dollar and all Fiat Currencies – A Money Matrix Addendum
Published: December 6, 2008
Gold is now in backwardation. I submit to you, Reader, the US Dollar is now officially a DEAD MAN WALKING.

The Next Bubble to Pop!
Published: December 7, 2008
“These days, I am more concerned with the return OF my capital, not the return ON my capital.” – attributed to Mark Twain

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Gold and Silver Investigation Source List

A Quick History of Gold

GO GATA! The premise of the Gold Anti-Trust Action Committee that the world gold market is artificially suppressed by central banks in order to make their currencies look stronger.

www.GoldMoney.com – GoldMoney is an international gold and silver warehouse with insured vaults in London and Zurich.  Ability to hold and pay interest on four major fiat currencies, issue payments in goldgrams, etc. Think of them as an alternative way to diversify where and how  your physical metal is stored, but I urge you to be wary and thoroughly investigate this and ANY method where someone else holds your metal for you before investing.  The best is always physical possession  (or pay for storage at a Brinks depository) although you should always be creative with your storage locations

The World Gold Council – A wealth of information on central bank holding, gold derivatives, supply and demand statistics and more.  Free login required.

Rothbard, Murray N. “What has the Government Done with Our Money?” (1990) A 50-page document that describes Austrian economics.  Rothbard has written a host of other great sources as well, like the 1994 work “The Case Against the Fed.”

www.jsmineset.com Expert Jim Sinclair shares his thoughts on gold investing, financial markets, and trading.  For free!

www.DollarCollapse.com This site’s main use is as a newsfeed for dollar, gold, and housing market current events.  They explain their dollar collapse theory here, which I partly agree with.

www.SilverSeek.com I particularly enjoy reading the columns of Theodore Butler and Jason Hommel

www.GoldSeek.com The sister site of SilverSeek.  The Mogambu Guru’s (aka Richard Daughty) column has tunnel vision but hilarious and educational..

www.professorfekete.com A seriously pro-gold scholar.

www.lemetropolecafe.com Offers timely gold market advice and a daily “Midas” column.  Try the 2-week free trial.

Paul, Ron. “Pillars of Prosperity.” (2008) A 400+ page compilation of Dr. Paul’s writings. After reading these, one realizes that Dr. Paul did very little recent work in putting together his best-selling “The Revolution” as most of this book was written 20+ years ago.

Millar, Peter. “The Relevance and Importance of Gold in the World Monetary System.” (2006). Self-explanatory title. Understanding Graph 2 on page 3 is key.

Greenspan, Alan. “Gold and Economic Freedom.” (1966) Interesting work from the Maestro prior to his conversion to inflationary Keynesian theory.