December 2, 2008, was a landmark in the saga of thecollapsing international monetary system, yet it did not get anymention in the press: gold went to backwardation for the first time ever in history.The facts are as follows: on December 2nd, at the Comex in New York,December gold futures (last delivery: December 31) were quoted at 1.98%discount to spot, while February gold futures (last delivery: February27, 2009) were quoted at 0.14% discount to spot. (All percentagesannualized.) The condition got worse on December 3rd, when thecorresponding figures were 2% and 0.29%. This means that the gold basishas turned negative, and the condition of backwardation persisted forat least 48 hours.
According tothe December 3rd Comex delivery report, there are 11,759 notices totake delivery. This represents 1.1759 million ounces of gold, while theComex-approved warehouses hold 2.9 million ounces. Thus 40% of thetotal amount will have to be delivered by December 31st. Since not allthe gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.
Alreadythere was a slight backwardation in gold at the expiry of a previousactive contract month, but it never spilled over to the next activecontract month, as it does now: backwardation in the December contractis spilling over to the February contract which at last reading was0.36%. Silver is also in backwardation, with the discount on silverfutures being about twice that on gold futures.
Thegold basis is a pristine, incorruptible measure of trust, or the lackof it when it turns negative, in paper money. Of course, it is tooearly to say whether gold has gone to permanentbackwardation, or whether the condition will rectify itself (itprobably will). Be that as it may, it does not matter. The fact that ithas happened is the coup de grâce for the regime ofirredeemable currency. It will bleed to death, maybe rather slowly,even if no other hits, blows, or shocks are dealt to the system. Veryfew people realize what is going on and, of course, official sourcesand the news media won’t be helpful to them to explain the significanceof all this. I am trying to be helpful to the discriminating reader.
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. Thesituation is exactly the same as it has been for years: gold is not forsale at any price quoted in Zimbabwe currency, however high the quoteis. To put it differently, all offers to sell gold are being withdrawn,whether it concerns newly mined gold, scrap gold, bullion gold orcoined gold. I dubbed this event that has cast its long shadow forwardfor many a year, the last contango in Washington ? contangobeing the name for the condition opposite to backwardation (namely,that of a positive basis), and Washington being the city where thePaper-mill of the Potomac, the Federal Reserve Board, is located. Thisis a tongue-in-cheek way of saying that the jig in Washington is up.The music has stopped on the players of ‘musical chairs’. Those whohave no gold in hand are out of luck. They won’t get it now through theregular channels. If they want it, they will have to go to the blackmarket.
Gold and silver basis serves as an earlywarning system and it is signaling the beginning of the end. The end isapproaching with the inevitability of the climax in a Greek tragedy, asthe heroes and heroines are drawn to their own destruction. The presentreactionary experiment with paper money is entering its death-throes.
The situation with gold
backwardation is, for the money system, like the confrontation of the Titanic(representing the international monetary system) with the iceberg(representing gold and its vanishing basis) as the latter is emergingfrom the fog too late to avoid collision. The vanishing gold basis andits corollary, the seizing up of the paper money system threatens theworld with a Great Depression eclipsing that of the 1930’s.
Onceentrenched, backwardation in gold means that the cancer of the dollarhas reached its terminal stages. The progressively evaporating trust inthe value of the irredeemable dollar can no longer be stopped.
Negativebasis (backwardation) means that people controlling the supply ofmonetary gold cannot be persuaded to part with it, regardless of thebait. These people are no speculators. They are neither Scrooges norShylocks. They are highly capable businessmen with a conservative frameof mind. They are determined to preserve their capital come hell orhigh water, for saner times, so they can re-deploy it under a sanergovernment and a saner monetary system. Their instrument is theownership of monetary gold. They blithely ignore the siren songpromising risk-free profits. Indeed, they could sell their physicalgold in the spot market and buy it back at a discount in the futuresmarket for delivery in 30 days. In any other commodity, traderscontrolling supply would jump at the opportunity. The lure of risk-freeprofits would be irresistible. Not so in the case of gold. Ownersrefuse to be coaxed out of their gold holdings, however large the baitmay be. Why?
Well, they don’tbelieve that the physical gold will be there and available for deliveryin 30 days’ time. They don’t want to be stuck with paper gold, which isuseless for their purposes of capital preservation.
December2 is a landmark, because before that date the monetary system couldhave been saved by opening the U.S. Mint to gold. Now, given the factof 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.
Fewpeople realize that the shutting down of the gold trade, which is whatis happening, means the shutting down of world trade. This is afinancial earthquake measuring ten on the Greenspan scale, withepicenter at the Comex in New York, where the Twin Towers of the WorldTrade Center once stood. It is no exaggeration to say that this eventwill trigger a tsunami wiping out the prosperity of the world.