Sunday, May 5, 2013

Antal Fekete: Gold Backwardation and the Collapse of the Tacoma Bridge

Dr. Antal Fekete

The Daily Bell is pleased to present this exclusive interview with Antal Fekete.
Introduction: Professor Antal E. Fekete is an author, mathematician, monetary scientist and educator. Born in Budapest, Hungary, in 1932, he graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. He immigrated to Canada in 1957 and was appointed Assistant Professor at the Memorial University of Newfoundland in 1958. In 1993, after 35 years of service he retired with the rank of Full Professor. In 1995 he was Resident Fellow at the Foundation for Economic Education in Irvington-on-Hudson, New York and in 1956 he was Visiting Professor at the Francisco Marroquin University in Guatemala. He is the founder and chairman of the board of the New Austrian School of Economics in Hungary. His website is Professor Fekete is a proponent of the gold standard and critic of the current monetary system. His work falls into the school of free-market economic thought led by Carl Menger. He is an advocate of Adam Smith's Real Bills Doctrine.
Daily Bell: Nice to speak with you again. Let's jump right in. Why is the price of gold declining?
Antal Fekete: Columbia University professor Michael Woodford, the world's most closely followed monetary theorist said recently that if we are going to scare the horses, might as well scare them properly. He said it in an allegorical sense: loose talk about ending QE and about exit strategies is amateurish. Telling the world that central bank financing of the public debt is here to stay, and that QE is forever, is professional. The allegory can be extended from fiscal policy to monetary policy as well. The demand for dollars is waning spectacularly due to its unprecedented debasement that, to add insult to injury, is done with great fanfare. The price of paper gold was declining in April because Bernanke now thinks it's time to scare the horses properly. They have strayed too far afield to graze. They should get back to the dollar turf.
Daily Bell: Where is the price of gold headed from here?
Antal Fekete: The price of gold is headed for extinction. I for one don't believe that the price of gold is headed for five digits. Long before that might happen, permanent backwardation* would shut down the gold futures markets. Gold could no longer be purchased at any price. Gold would only be available through barter. World trade is facing an avalanche-like transformation flattening out monetary economy into barter economy. Practically all economists, financial writers and market analysts have missed this possible scenario. They don't see the greatest economic contraction ever staring them in the face. They don't see the coming tsunami of unemployment. Very few see deflation as indicated by the progressive disappearance of cash gold. It never occurred to Bernanke that the new Federal Reserve notes he is printing galore could also go to purchase physical gold, causing the gold basis to shrink. Once the gold basis* goes permanently negative, the total U.S. debt, all $16 trillion of it, will not be worth one ounce of gold. That will pull the rug from underneath the international monetary system. Barter is the ultimate in deflation, and that is what the world economy is getting.
Daily Bell: Is gold a commodity?
Antal Fekete: Gold (and silver) must be distinguished from other metals and other commodities. Gold is a monetary metal due to the fact that its marginal utility declines at a rate lower than that of any commodity. For this reason gold does not obey the Law of Supply and Demand. For example, a higher price of gold need not call out a greater supply; often it causes the supply to shrink further. Also, the threat of a lower or falling price for paper gold, far from "scaring the horses properly," will induce people to dump paper gold and make them flock to cash gold. Keynesian and Friedmanite economics have wiped out the distinction between ordinary commodities and monetary commodities. Today no university offers courses treating the gold basis, the gold cobasis and their interplay, or on the apocalyptic threat of permanent gold backwardation. At the New Austrian School of Economics we do offer those couses.
Daily Bell: How about silver?
Antal Fekete: Silver is not an ordinary commodity either. Like gold, silver is also a monetary metal. Its marginal utility declines at a rate slower than that of any other substance save gold. The silver basis, just like the gold basis, has shown a secular decline from its maximum, the full carrying charge to zero and beyond, proving that the supply of silver available for futures trading is dwindling and disappearing fast. Permanent backwardation of silver is a matter of time, probably not a very long time. It is an intriguing question which event will come first. While there is a strong argument that its greater relative scarcity will trigger permanent backwardation of silver first, it's hard to see how permanent backwardation of gold can lag that of silver, making it probable that the two events might occur simultaneously. Be that as it may, either event will create an unprecedented and uncontrollable turmoil in the financial markets, for which Bernanke is utterly unprepared. Practically nobody realizes that the root cause of all the bubbles, price-shocks, currency crises, as well as the more recent deflation in Japan, Europe and America was the secular decline in the gold basis. The "Big Bang" occurred in 1971, when the U.S. defaulted on its international gold obligations.
Daily Bell: Why do they fix the price of gold in London? Is this how commodities should be priced?
Antal Fekete: Of course, they don't fix the gold price in London. It's more like taking a snapshot and pretend that the landscape was frozen thereby. It is another question that the London gold fix could come handy in trying to manipulate the gold price and to "scare the horses properly".
Daily Bell: Are gold and silver manipulated or is the current shake-out a result of too-high market expectations?

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