Want to Be Successful? Own Gold!


People get scared when they hear me talk about gold. “Why Gold?” They ask. “Isn’t gold only for the depression-ready end-of-the-world-as-we-know it pessimists?”

Not if you value it as the most valuable and un-destroyable currency in the world.

Once upon a time, gold was the currency of the wealthy and powerful. Only kings and rich noblemen (and woman) traded in its coinage. The middle-class used primarily silver, and the poor used copper and other base metals.

But as time passed, society began treating gold-equivilents as gold. But when every government around the world “de-linked” their paper currencies from the precious metal, people none the wiser. They continued to treat Dollars – once gold-equivalents – as, well, gold.

I always say that the default holding of any investor should be gold, as it always has been. The investor has to be thoroughly convinced of a business’s potential upside and limited downside to part with it.

I just finished a great article from Gold Basis Trader, Antal Fekete. He wrote a rather lengthy article on te subject here are my take-away notes. Emphasis in bold.

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“The Last Contango in Washington”

The complete article and its follow up can be found here and here.

Contango: In technical jargon of futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market – a contango market – due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

Here is the deal they offer you: Give us your cash gold in exchange for gold futures that we’ll let you have at a deep discount so that you can pocket risk-free profits. The offer is increasingly declined. There was a time when a drop in the basis would pull in gold from the moon, figuratively speaking. No more. Arbitrageurs no longer believe that gold futures are fully exchangeable for cash gold.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the trend has been that the basis as a percentage of the rate of interest has been vanishing and now has dropped from 100% to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The last contango has first occurred in Zimbabwe, where gold is not available at any price quoted in Zimbabwe dollars. [Editor: Zimbabwe has recently suffered from hyper-inflation by printing many quadrillions (comes after trillions) of notes].

Gold backwardation is virtually inevitable, and when it comes, it will be irreversible. Why? Because it signifies a crisis of the first magnitude: the general disappearance of gold from trade for reasons of lack of confidence. No one will give up gold, because one is no longer confident that he can get it back on the same terms.

Implications

The only thing that might turn this runaway train around is a steep rise in US interest rates. However, that would ruin what is left of the U.S. economy. It would cause the bond market to collapse, sending the dollar down the drain.

I do not see the collapse of the bond market happening any time soon. The US Treasury and the Federal Reserve can muddle through this crisis, and possibly beyond, by making bond speculation risk-free in order to maintain demand for Treasury paper.

Bonds, notes, bills, and other obligations of any government are irredeemable. They are redeemable in nothing but more of the same. Treasury Bonds are redeemable in Federal Reserve credit, which is irredeemable and “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

The debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

Scenario

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt – or any debt, for that matter – will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

Once the $1,000 level is breached, there may be some “profit taking,” to be sure. But because of the zero basis, those who take profits will look rather foolish. Last contango = last profit taking.

Be prepared for a great wave of defaults on paper gold obligations. Certainly, the lessees of central bank gold will default. Comex will close its gold pit for good, and outstanding contracts will be settled on a cash basis.

I’d be surprised if any gold ETF shareholders get a fraction of their gold back from the warehouses – after a lengthy wrangle. Too many claims have been issued on the same lump of gold.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

Apart from wartime, the gold standard has been the most crisis-free monetary system in history. Of course, all monetary system have a habit of breaking down during wars.

The international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971.

The Last Contango in Washington will be different from all previous crises. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will destroy our freedoms, unless we take protective action.

~~~

At Sentiment of Success feel that there is still a faint element of pessimism that surrounds gold. That’s why we go with silver. Whatever happens to gold, silver will rise much further and at the same time always maintain its value as a monetary currency.

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