Back To The Future

“Freedom is just another word for nothing left to lose”.
- Kris Kristofferson, "Me and Bobby McGee.”

From lemetropolecafe.com:
Times might change soon. ...the Comex is alerting various futures firms about the potential of a squeeze on the December contract and is advising the 840 December shorts to exit their positions. That is the remaining open position.

There have been 12,636 notices of delivery. The shorts have until December 31 to make delivery. Normally, they deliver early to take in cash and earn the interest. They must be delaying. As I understand the situation, that represents about 40% of the available gold at the Comex, and of course, someone could enter the scene late, buy Feb gold, and then spread into December, which would stun the shorts.

...this sort of alert is highly unusual and that the concern is real, not only for gold, but other commodities too like copper and palladium, as there is a good deal of talk of taking deliveries there too. But gold is the one in which the advice to cover went out.

This is an extremely productive development and could spur the price of gold up quickly as word spreads.

On a related note…
Silver…...watching the COMEX silver warehouse inventory. It has been dropping between 500,000 and 750,000 per day for the last few days. Yesterday 701,900 ozs were removed of which 693,808 ozs were from the dealers’ registered inventory. The total inventory now stands at 126,826,996 ozs and the dealer registered inventory is 77,756,068 ozs while the eligible inventory is 49,070,928 ozs. Just last week the registered category was above 80 Mozs. Delivery notices currently stand at 29.5 Mozs for December which, if taken off the exchange, will take a big hole out of 77Mozs!
http://www.lemetropolecafe.com/james_joyce_table.cfm?pid=7459

BACKWARDATION THATSHOOK THE WORLD
By Antal E. Fekete
In spite of all the propaganda aimed at discrediting me and my theory of gold backwardation, what we are hearing is the shrill sound of the fire-alarm indicating that the house of the international monetary system is on fire. For many a year I have been warning all those who cared to listen that such a fire-alarm was coming sooner or later, and the consequences of ignoring it would be disastrous. Well, it is sounding loud and clear now, and guess what. Fire-fighters brazenly ignore it. Yet you can ignore it at your own peril.

What does it all mean? Not only does it mean that the market is willing to pay all your carrying charges involved in holding physical gold, but it is also willing to pay you (allegedly) risk-free profits for the privilege of relieving you from carrying the burden! “Let me take over your yoke just for a few days; I shall pay you handsomely for the honor” – so the clearing members of Comex plead.

It is as if the bank was paying all your utility bills without charging it to your account. Nay, the bank is actually offering you a bonus for you allowing it to do you the favor. Suppose, for the sake of argument, that all the banks in the world offered all their account holders to take over responsibility for paying their utility bills. Would it not evoke some searching questions about the hidden agenda of the banks? Wouldn’t people become extremely suspicious of the preposterous offer? Yet here we go, the futures market in gold, the world’s residual source of cash gold, is making the same preposterous offer, and nobody is asking questions. Timeo Danaos et dona ferentes (I fear my enemies most when they bring me gifts, Virgil, Aeneid, II. 49.)

I warn the world again that the futures market would not go to backwardation in gold if the house of paper money were not on fire. There is just no prima facie reason for a shortage in physical gold. A very large part of all the gold produced throughout history still exists in monetary form, sitting in vaults doing nothing. (Under the gold standard it used to be doing heavy-duty work in financing production and world trade.) Unlike all other commodities with the exception of silver, for gold the stocks-to-flows ratio is a high multiple (by contrast, the stocks-to-flows ratio of copper is a small fraction). And, on the top of privately held gold, there is central bank gold amounting to one quarter of all the gold ever produced since the dawn of history. Why are central banks unwilling to take advantage of risk-free profits by releasing gold? Could it be that, in possession of inside information, they have reason to be afraid that the regime of irredeemable currency may soon collapse and, with their gold gone, they don’t want to be left holding the bag? Could it be that the Babeldom of the debt tower is already crumbling, but the fact is being covered up?

The debt tower is toppling. Central banks work overtime printing money to plug the holes in the leaky foundation, but their traction that they could once take for granted is gone. The money they print goes into either gold hoarding or into government bonds. The monetary system has short-circuited and is in the process of burning out. Practically no money is going into the production of goods and services. The bloated economy is contracting fast. Great Depression II is upon us. The monetary system is past the point of repair. This is the story that the backwardation of gold is trying to tell those of us who have ears for hearing and brains for comprehending.

It can be seen that the $80 rise in the spot price from $740 to $820 during the week that just ended has not been able to compel holders of spot gold to exchange their holdings for a promise to deliver gold a mere 18 days later, the bait of ‘risk-free’ profit notwithstanding, in spite of the unprecedented discount on gold futures. To tell the truth, the promised profits are not risk free. The risk is that the gold will never be returned and those who have listened to the siren song will be left holding the bag.

Events of last week show the heroic resistance of the bulls: they have so far refused to listen to the sweet siren song of the clearing members. They unearthed the golden hatchet and have not let themselves be led astray from the warpath. On Thursday, December 11, 12,588 contracts in the December futures month (an increase of 139 contracts from the previous day) stood in line waiting for delivery. This is equivalent to 43% of registered gold in the warehouses! As is known, the clearing members have till December 31 to deliver; otherwise they have to declare “liquidation only”, effectively closing the gold window. If that happens, it would be a historical first, likely to cause a much bigger stir than the appearance of backwardation on December 2, which caused a yawn. The world would be shaken out of its lethargy. This backwardation would break the grip of the regime of irredeemable currency on the world.

The clearing members have used the carrot to no avail. Will they now use the stick, increasing margins on long positions to exceed the value of the underlying contract? We don’t know, but obviously they are hesitant to make a rash decision. Such a move could easily backfire. It would betray their desperation, which could provoke even more notices demanding delivery of physical gold.
http://www.lemetropolecafe.com/dospassos.cfm?pid=7462

More on Gold Backwardation
By: James Turk
If gold does trade in backwardation against US dollar for a protracted period (again, barring a very short-term and ephemeral event like the first two instances noted above in which a temporary demand for physical gold disrupts normal market activity), it will mean that a collapse of the dollar has begun. Think about it. How could gold go into backwardation for any prolonged period? If it does, it would mean that no one is willing to take the risk of selling their hoard and instead hold US dollars. It would mean that no one is willing to accept the risks that come with holding dollars while waiting until they can be used at a future date to exchange back into gold.

Those risks are:
1) the dollar can be created out of thin air by governments, and
2) holding dollars has counterparty risk.

The trillions of dollars of newly created bail-out money highlight the first risk, and the sad state of the banking industry today makes clear the second.

Physical gold has neither of these risks. So because of the greater risk of holding dollars, dollar interest rates are higher than gold's interest rates. In short, the higher interest rate currency is always in backwardation when the forwards are measured against a currency with lower interest rates.

In recent years, the politically correct thing to do is to call gold's interest rate a “lease rate”, which is unfortunate. If people recognized that gold has an interest rate because it is money, they would more quickly grasp the significance of a gold backwardation if it were to occur. The contango is gold's interest rate.

In summary, the market for physical gold is tight. The extraordinarily high premiums now being charged on coins and small bars is the most visible aspect of this incredible tightness.

This tightness in the physical market for gold could be a passing phenomenon, but then again, maybe not. It may be any indication that the gold market is profoundly changing, which will cause the price of gold to soar because the gold cartel is unable or unwilling to use any of its remaining inventory to cap the gold price at current levels, or because US dollar is becoming suspect. Then again, it is not unreasonable to conclude that both factors may be at work here. After all, the collapse in the US Dollar Index this month strongly suggests that the dollar’s 4-month bear market rally ended in November.

In any case, we’ll know for sure that the gold price is ready to soar if GoFo goes negative and remains negative. If that happens, take note of the old saying that a bird in the hand is worth two in the bush. Own physical metal and not paper.
http://news.goldseek.com/JamesTurk/1229298105.php

Seven-fold increase in gold needed to avert debt depression
Dear Friend of GATA and Gold:

While it is almost a year old, a study of the enduring importance of gold in the world economic system by R. Peter W. Millar, founder of Valu-Trac Investment Research Ltd. in Scotland (www.valu-trac.com), seems ever more compelling, and Millar graciously has agreed to let it be shared with you.

Millar stresses the periodic upward revaluation of gold as the mechanism for defeating a deflationary debt depression at the end of an economic cycle. Millar writes:

"The first cycle unfolded as follows:

"-- Phase 1: Stability under a gold standard until 1914.

"-- Phase 2: Inflation until 1921, which resulted in a buildup of debt.

"-- Phase 3: Disinflation, which brought stability and allowed asset inflation until 1929, but encouraged a further buildup of debt.

"-- Phase 4: Instability after 1929 caused by deflation of assets from overpriced levels and exacerbated by excessive debt levels, leading to depression of economic activity.

"-- Phase 5: Monetary reform enabled by a revaluation of gold to overcome deflationary debt depression.

"In the second half of the 20th century we saw a repeat of the first three phases of the same cycle:

"-- Phase 1: Stability from 1944 to 1968 under a gold standard.

"-- Phase 2: Inflation from 1968 to 1981, which caused and justified another buildup of debt.

"-- Phase 3: Disinflation from 1981 until the end of the 20th century, and maybe to the present.

"However, it appears that Phase 4 (instability and ultimately deflation due to excessive debt) may have started. If so, Phase 5 (revaluation of the gold price to raise the monetary value of the world monetary base and hence reduce the burden of debt) becomes likely or inevitable. The extent of that revaluation would need to be major according to our calculations, probably by a factor of at least seven times, possibly up to 20 times the current price of gold."

The price of gold when Millar wrote his study, in May 2006, was about where it is tonight.

Millar's study is titled "The Relevance and Importance of Gold in the World Monetary System" and you can find it in PDF format here:

http://www.gata.org/files/PeterMillarGoldNoteMay06.pdf

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.