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American Bases In
Germany
And The Gold Basis
Antal E. Fekete
27 January 2013
Germany is neither independent nor sovereign, prevailing pretences
notwithstanding. It has American troops on her soil for reasons unexplained
and unexplainable after all Soviet occupying troops were withdrawn almost 25
years ago. Equally significant is the fact that the lion’s share of the
German gold reserve is in American custody. If the Bundesbank asked for the
repatriation of a token part of that gold over a long period of time, we may
take it for granted that it was done on American instructions.
But why would the Americans ask the Bundesbank to request the return of a
part of German gold from the ‘safety’ of the basement of the Federal Reserve
Bank of New York in lower Manhattan? Surely not because the vaults are
bulging with American gold and they have to make room for more.
It’s all grand theater. There is a hidden agenda that has to be camouflaged.
The best way of doing it is to put up a show. The public is fascinated by
images of shuffling central bank gold.
One reason, perhaps the chief reason for this exercise is that the managers
of the global fiat money system are preparing for the coming showdown, the
final curtain on what some years ago I dubbed The Last Contango in
Washington. In other words, policymakers are preparing for (or trying
to fend off) permanent backwardation in the world’s gold futures markets
that is threatening to rip apart the present shabby make-belief payments
system of the world.
Contango is the normal condition of the gold Futures markets when the spot
price of gold is at a discount relative to the price of futures contracts.
It demonstrates that plenty of gold is available to satisfy present demand.
People are confident that promises to deliver gold will be honored. The
condition opposite to contango is called backwardation that obtains when the
futures price loses its premium relative to the spot price and goes to a
discount. In the gold market this condition is highly anomalous because, on
the face of it, it allows traders to earn risk free profits. They sell spot
gold at a premium, and buy it back at a discount for future delivery.
However, risk free profits are ephemeral since the very action of traders
will instantaneously eliminate them. What this suggests is that permanent
backwardation in gold could never happen by the very nature of the case.
Yet unknown to the general public a very great danger is looming, the like
of which has not threatened the world since the collapse of the Western half
of the Roman Empire more than fifteen hundred years ago. This danger, should
it materialize, would mark the end of our civilization and the beginning of
a new Dark Age. I am talking about a threat of the sudden and complete
collapse of world trade. It would be heralded by permanent gold
backwardation, something that allegedly could never happen. Hard on its
heels would follow the collapse of the dollar payments system. Barter, of
course, would take place between neighboring countries, but world trade as
we know it would disappear altogether.
The metric whereby the turning of contango into backwardation can be
measured is called the gold basis. It is the premium on the price of
gold for future delivery as per the nearby contract relative to the spot
price. Thus negative gold basis is tantamount to backwardation. We have
scarcely a forty-year history for the gold basis to go by, because there was
no organized futures trading for gold before America defaulted on her
international gold obligations on August 15, 1971.
Futures trading started out with a robust gold basis. Contango was at its
peak. The gold basis cannot be higher than the full carrying charge (also
known as the opportunity cost of holding gold, the major component of which
is interest). But soon enough the gold basis started eroding, and erosion
has continued to this day. This was an ominous process that was ignored by
all politicians, economists and financial journalists.
The vanishing of the gold basis is all the more curious since it has been
taking place against the background of a steady advance in the gold price.
Textbook economics teaches that an advance in price always and everywhere
calls out new supplies. However, textbook economics is helpless when it
comes to gold. For gold the exact opposite is true: an advance in price
makes supply contract; and a very large advance may make supply disappear
altogether. The reason for this paradox is that gold is a monetary metal.
All the bad-mouthing of gold by economists in the pay of governments won’t
change that fact. By now the decay has gone so far that the gold basis is
practically zero, with occasional dips into negative territory.
Academia ostensibly avoids researching the gold basis, pretending that it
has as much bearing on the world economy as the basis for frozen pork
bellies. The public is kept in total ignorance. Yet you can ignore the gold
basis only at your own peril. It is the only indicator available showing the
progressive deterioration of the fiat money system. As is well known, there
has never been a successful experiment with fiat currency in all history.
Nor was it for lack of trying. Every such experiment was either abandoned as
enlightened governments decided to return the currency to a metallic basis,
or it ended in utter fiasco causing tremendous economic pain to people as
the fiat currency was rapidly losing all its purchasing power.
The relentless contraction of the gold basis means that gold available for
future delivery is fast disappearing. Gold is constantly moving into strong
hands that hold on to it and will not relinquish it even in the face of
steeply rising prices. Eventually the gold supply dries up and sporadic
backwardation gives way to permanent backwardation. Gold mines refuse to
take paper money for their product. If you want to have gold, you will have
to have recourse to barter.
Permanent backwardation means that confidence in fiat paper currency and
government promises to pay has evaporated. After all, considering their
origin, irredeemable bank notes are nothing but dishonored promises to pay
gold. Once confidence is shattered, all the king’s horses and all the king’s
men cannot put Humpty Dumpty together again. Permanent backwardation is like
a black hole. There is no way out of it. Not even a light ray can escape
from its clutches. That’s how black holes earn their name. ‘Permanent
backwardation’ is not as suggestive as the name ‘black hole’, but it can
gobble up the world economy nevertheless.
The gold basis is akin to the efficiency of bribe money. At first the bribe
is taken with no questions asked. But as it becomes a regular feature of
gold trading, effectiveness is lost. In the end the bribe is refused when it
is realized that the objective is to cheat the holder out of his possession
of gold. A trading system built on bribe is a house of cards. It is
dishonest. It depends on deception and false-carding.
This brings me back to the German gold reserve. As sporadic backwardation in
gold becomes ever more frequent, the gentlemen in charge of running the
world’s fiat money system get alarmed. The only way to pacify the market is
to release more and more central bank gold. Physical gold. The beast
must be fed. Paper gold will not do (although, of course, these gentlemen
will keep trying to flood the market with it).
Releasing American gold to the futures market directly from the Fed is out
of the question. It would confirm the suspicion, already rampant, that the
dollar is a colossus of clay feet standing in knee-deep water. So let the
client states of America do the releasing. The Germans have a reputation of
favoring hard currency. They are reluctant to join the currencies’ ‘race to
the bottom’. Germany is the natural choice to feed the gold futures markets
in an effort to protect the dollar against the last assault that is shaping
up.
For a long time America has been twisting the arm of other countries,
including the U.K. and Switzerland, making them sell hundreds of tons of
central bank gold, while America was not selling one ounce. “Do as I say,
not as I do!” During all this time Germany was not selling either. The
appearance was maintained that this decision was made in Germany. It wasn’t;
rather, it has the mark “made in U.S.A.” German gold is the last defense of
the dollar. By now practically all central banks ignore the siren song from
America. From sellers they have become buyers of gold. According to the
American master plan Germany is the last fort of the crumbling global fiat
money system. Germany will not defect: that is the purpose of keeping
American troops on German soil. Germany will dutifully do the job of feeding
the futures market with gold in an effort to fend off permanent
backwardation. The repatriation of a part of the German gold reserve is a
trial balloon. If markets get scared and panic selling occurs before the
Bundesbank starts selling, so much the better. But if false-carding fails
and the world-wide march of gold into private hoards continues unabated,
then let the Bundesbank, not the Fed, bleed gold. America’s gold must be
spared at all hazards.
On such tricks and deception is the international monetary system grounded.
* * *
What, then, is the solution? How can sudden death in world trade be averted?
Fortunately, there are still upright politicians around. Godfrey Bloom of
the European Parliament, MP for Yorkshire and North Lincolnshire ridings in
the U.K. suggests that Germany should repatriate ALL of its gold and
reinstate a golden deutsche mark.
The underlying cause of the world financial crisis is runaway debt. Gold is
the only ultimate extinguisher of debt. Since its expulsion from the
international monetary system total debt in the world can only grow, never
contract. To stop the cancerous growth of debt gold must be reinstated in
its former position as the guardian of the quality of debt.
If, defying American wishes, Germany took the initiative in creating a gold
mark and opening the German Mint to gold where all comers could convert
their gold ingots into gold coin, the course of world history would be
changed. It would be Germany’s finest hour. Civilization will have
been saved and the onset of a new Dark Age averted. The gold mark could
circulate side-by-side with the irredeemable euro and dollar. Let the people
decide whether they want to get paid in crisis-prone fiat currencies or,
perhaps, they prefer the time-honored stability of the gold coin. It is
hardly in doubt what the choice of the people would be.
The German initiative will set off a chain reaction of similar virtuous acts
by the major central banks of the world, in order to prevent the fatal
depreciation of their currencies against the gold mark. The latter will be
well on its way to become the most coveted currency in the world for
international trade. The financial system will be saved from the ordeal of
competitive currency devaluations and from the corrosive effect of
ever-expanding government deficits. Governments will be forced to face
reality and live responsibly within their means like everyone else. Farmers
will no longer be paid for not farming, and able-bodied workers for not
working. Youth unemployment, in particular, will be a thing of the past.
There is a precedent. In 1948 Germany defied the occupying force when it
created the Deutsche Mark without bothering to ask for permission in
Washington.
But is the gold standard not deflation-prone? In the 1930’s the
international gold standard collapsed because of this very fact, did it not?
As the father of the Deutsche Mark, Wilhelm Röpke (1899-1966) said: it
is not the gold standard that failed, but those in whose care it was
entrusted.
27 January 2013
Dr Antal E. Fekete
www.professorfekete.com
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