Liberty Maven

“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whether it is quoted in dollars, yens, euros, or Swiss francs… To put it differently, all offers to sell gold are being withdrawn.” – Dr. Antal Fekete

by Jake, the Champion of the Constitution
Originally published December 14, 2008 at http://www.nolanchart.com/article5640.html

In this article we will take a look at some alternate but constructive views of Fekete’s recent articles on gold backwardation, covered in earlier articles in this series. I want to note it appears to be a perfect storm shaping up, although it not yet outside the grasp of short-term government manipulation, especially if there is the hint of a panic, or “gold fever” developing. The price of gold and silver are both up over the past week as both metals are in (temporary for now) backwardation, but the price does not have a high degree of relevance. All eyes are on the gold basis will probably drive the price which you can learn about by reading the below mini-series. (Photo) (2)

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)“

Part IV: “The Significance of Gold Backwardation Explained (4/5)”

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

Now some news. Three-month Treasuries slipped negative for the first time ever on December 9 per Bloomberg. The UBS banker “analyst” cheerleading the masses towards buying Treasuries sounds like he is smoking crack. “Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there.” Let’s see, no interest and I will actually lose money by buying? No thanks! Even gold’s naysayers realize holding paper cash is smarter.

A wild rumor of the IMF* dumping 3,000 metric tons of gold around December 10 was unleashed at the gold world on December 8. This is probably just a hoax similar to many prior IMF scares, though the size of it is shocking; the last hoax** was 400 tons, but the IMF only claims to have 3,217 total tons. However:

1. The IMF (for all intents and purposes a US puppet) does not have the required Congressional permission to sell (although the recently discovered bailout principle spells out this could happen quickly),
2. The IMF probably does not have that much gold, or perhaps any gold per the research and correspondence with the stalwart yet “fringe” GATA (Gold Anti-Trust Action Committee),
3. The IMF itself has criticized its own fallacious accounting practices, and
4. There is huge difference between the IMF selling on the open market, or completing an international transaction with China, which would be dollar-bearish and gold-bullish, respectively. [FYI, China is ALWAYS rumored to be searching for... you guessed it! 3,000 tons of gold!  See this 2005 article from the nation's mouthpiece, the People's Daily and this November 2008 article from HK's The Standard.]

* [Under the IMF's Articles of Agreement Schedule C, item 1 (p49/85), linking of a member's currency (its "par value" or face value) to gold is prohibited. This means that the IMF is in direct violation of the Constitution of the United States of America (which actually also forbids the existence of the doomed Federal Reserve Note) by stating in Article 1, Section 10 that our country can not "make any Thing but gold and silver Coin a Tender in Payment of Debts." Today's Keynesian economists and investors should read these documents.  The IMF Articles of Agreement is a relic of a bygone age (1970s) plagued by its refusal to acknowledge gold as money.  For instance, note iron reporting rules required of members in Section 5(a), p19-20, are morbidly focused on monitoring and controlling gold. (Why? Gold is Money.) The Constitution is a shining if neglected example of how the governments' role in a free market economy (last seen in the early 1900s) is confined to an honest monetary system and setting up anti-fraud laws.]

** [An example of a hoax and blatant attempt "The International Monetary Fund will probably sell 5-10 million ounces of gold to fund a program of debt relief, but will not disrupt the markets with its sales." ex-Goldman Sachs, ex-Citigroup, ex-Secretary of Treasury, now close Obama advisor Robert E. Rubin, on March 17, 1999. No gold was sold, although the market price of gold sure suffered!  Rubin is Director and Senior Counselor of Citigroup, where he was the "architect" of Citigroup's strategy of taking on more risk in debt markets, which by the end of 2008 led the firm to the brink of collapse and an eventual government rescue. From November to December 2007, he served temporarily as Chairman of Citigroup. From 1999 to present, he earned $115 million in pay at Citigroup.  Obama: "Change" We Can Believe In.]

(Sources for the above: IMF Articles of Agreement (1978) and Gold Wars by ex-Rothschild Swiss banker Ferdinand Lips (2001), pages 135 and 178)

Ex-Chase Manhattan banker and owner of goldmoney.com, James Turk issued a helpful letter today, stating what the Reader should already realize from this series. “Backwardations are no big deal in most commodities, but they are indeed a very big deal for gold.”

Turk uses the London Bullion Market Association’s Gold Offered Forward (GOFO) rates here to determine technical backwardation, while Fekete was looking at intraday trading sessions. My thoughts are that it’s ok to disagree, but geez guys, the overall message is the same. Analyst Rob Kirby understands this as well and issued an article “Backwardation: Facts from Fiction” that may be useful to the Reader.

[For the Reader, NYMEX Gold Session Futures chart, Silver Session Futures chart. Gold spot price chart. Silver spot price chart. When the spot price is greater than the futures price, backwardation exists.]

Trader Dan Norcini of jsmineset.com also reviewed Fekete’s note and issued a statement and charts here on December 5. Again gold is unlike wheat or copper, it has a fixed supply of bars mined from the earth for the past 6,000 years plus new supply from the mines at 1-2% of the total and are just traded back-and-forth on the COMEX. People do not save wheat; they eat it. People do not save copper; they use it for electrical conduits and other industrial uses. People DO save gold. Norcini explains why for gold backwardation is unusual:

“If spot gold is trading at $750 and the futures market is trading at $745, that is a $5.00 per ounce risk free profit just sitting there waiting for a type of arbitrage. One could immediately sell his physical gold at the $750 price and immediately buy it at $745 in the futures market with the intent of taking delivery to meet his contractual obligations and pocket $5.00 ounce for however many ounces one wished. Buy 5 million ounces of gold at $745 and sell that same amount of gold for $750 and you have gotten yourself a cool $25 million profit less the delivery expenses, etc. Not bad. That is why such a thing does not occur very often nor does it last for long. Too many would jump on the chance for a no-risk trade of such nature. Why then are they not doing so? Antal has answered that question they are not willing to part with their gold for paper profits! That is what makes this development so noteworthy.”

If you prefer talking heads, here is a Business News Network video where the analyst concluded that the reason behind the “desire of protection of wealth.” [Note: This YouTube user "GoldtotheMoon" has an incredible amount of goldbug videos, many helpful.]

Now for more on the alleged market manipulation of both gold and silver. For gold, the authority is the Gold Anti-Trust Action Committee (GATA). You can visit their site here. On silver, use the silverseek.com link below; the chief source I follow is Theodore Butler.  Although I take exception to details (so picky!), I have bought into both overall theories since August, which was when global physical coin markets starting going haywire.  No other explanation made any sense then or now.  Since then, of course, the cover on government intervention in the economy has blown off for all to see, to put it mildly.  As I wrote in “A Money Matrix Addendum: Citigroup and GATA Call for an End to the Suppression of the Gold Market“:

Fiat currency is a scheme perpetrated by central banks and the tacit (or is it helpless?) permission from their governments. Fiat currency is almost completely worthless and has no intrinsic value. Ultimately electronic and paper fiat money will be worthless. All of the world’s fiat money is actually a form of debt, and it results in never-ending currency debasement, of which one way is expanding the money supply, aka “printing more money,” aka inflation. To make their scheme work, they intervene in the precious metal markets to manipulate the prices of silver and especially gold. By keeping the prices of real honest money suppressed, they try to make their fiat currency look stronger.

I want to highlight an enlightening article that supports the above theory from Gene Arensberg of www.resourceinvestor.com. In his article “‘On the Fly’ Gold and Silver COT Information” on December 10, Arensberg has done a masterful job of demonstrating the control of the gold and silver markets. [COT stands for "Commitments of Traders" which report open interest and trading positions for the futures and options markets in the US. The reports as issued by the US Commodity Futures Trading Commission (CFTC), a government agency. The CFTC's mission is "to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets." As you will shortly see, they are doing a horrible job, similar to the SEC missing the Madoff collapse.  Here is why the CFTC motto is: "NOTHING TO SEE HERE! Please disperse!"

On gold, Gene Arensberg writes:

"As of December 2, as gold closed at $783.39, the CFTC reported that 3 U.S. banks had a net short positioning for gold on the COMEX, division of NYMEX, of 63,818 contracts. The CFTC also reported that as of the same date all traders classed by the CFTC as commercial held a collective net short positioning of 95,288 contracts. That means that justthree U.S. banks accounted for 66.97% of all the commercial net short positioning on the COMEX for gold futures. Here's what the three U.S. banks' positioning looks like on a graph:" (chart courtesy Arensberg)

Arensberg then concludes with the revelation that the current short position totals over twice the contents of the COMEX warehouses. Do they really have this gold and why is the "market" concentrated in the hands of so few banks? [Here we learned short positions are the "deliverers" or sellers of gold, while the longs are the "receivers" or buyers.]  My comment is to look at the dip into the “long” side by these banks in roughly June 2008. See how the price fell?  Nothing to see here!  Disperse, disperse!

Let’s look at silver: Arensberg continues:

“For silver, it’s even more startling. On December 2, as silver closed at $9.57, exactly 2 U.S. banks held a net short positioning of 24,555 contracts. The CFTC reports that as of the same date all traders classed as commercial held a net short positioning of 24,894 contracts. So, the 2 U.S. banks, with one particular Fed member bank probably holding almost all of it, held a sickening 98.64% of all the collective commercial net short positioning on the COMEX, division of NYMEX in New York.”  (chart courtesy Arensberg)

Arensberg comments that these two banks’ (cough JP Morgan Chase cough those-damn-corporate-raiders-from-the-Great-Depression cough cough) “net short positioning is equal to about 153% of the amount of deliverable silver in ALL the COMEX members’ accounts.” Sure looks like total control to me! The above is a big reason why the gold and silver markets are so tight now. Who in the right mind would enter the market to play with these giants? Again, where is their silver? So the silvers futures market is not a real “market.” More like a banker’s paradise!

Arensberg also has a section on the coin market in terms of the premium paid. Historically speaking, the premiums have been within a few percentage points of the spot value. Not anymore, gold is about 6%, and the silver premium is pretty amazing, roughly 50% over spot!  Try using  the law of supply and demand to explain that!

Let me finish with a respectable opinion to the contrary from Mish Shedlock’s blog. Try “No Fever Like Gold Fever: Response“, “Nonsense About Gold Backwardation, Ameros,Yuan Devaluations, etc.“, “Double Standard in Gold Hedging?“. I already laced into these articles in the comments field in Part 4, but decide for yourself. Feel free to leave any comments or questions below.

GO GATA!

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

www.CampaignForLiberty.com

www.YALiberty.org

- Disturbed, “The Night” from their Indestructible album.  Gold will finally surface despite governments’ and FED cartel’s efforts to throttle it.  Then these Fabian socialist statists will seek to master it (and us) once more.

“Gold was, and still is, the ultimate symbol of wealth, power, beauty, and prestige.. History shows that whenever the acceptance and the use of gold were high, there was prosperity, cultural advancement and political stability.  But, more importantly, gold is not only essential for prosperity and culture but for personal and political freedom.” – Ferdinand Lips (2001)

“Gold is the standard of all great civilizations.” – The American Federationist (1896)

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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 (12/10/2008)

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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 (1/5)
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! (2/5)
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 or Will Rogers

On Gold and Market Manipulation (3/5)
Published: December 8, 2008
“Gold is Money, and Nothing Else.” – JP Morgan before Congress’s Pujo Commission, 1913

The Significance of Gold Backwardation Explained (4/5)
Published: December 11, 2008
“The [gold] bulls are on the warpath.” – Dr. Antal Fekete, December 10, 2008

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Gold and Silver Investigation Source List

Fellow Nolan Chart columnist Republicae really has a wealth of experience on honest money and government control far exceeding my own, and is one of my favorite authors here at the Chart.  Here are a few articles to take a look at:

“The Hyper-Inflationary Trigger“

“Fiat Money – Inflationary / Deflationary”

“When Our Money Was Our Property”

“A Fabian Socialist Dream Come True”

“Statism: The Bankrupt Ideology“

“The Death Knell Rings For The Federal Reserve”

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-type 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.

Fellow Nolan Chart columnist Brutus in his column, Death to Caesar has a couple interesting articles as well.  “The Case for a 100% Gold Standard” “Taxation is Theft, War is Murder”

I also these articles from the Chart’s Gene DeNardo “MV=PT A Classic Equation and Monetary Policy“  “Corporations and the Free Market” “Fiat Monetary System Harms Environment“