Page 4 of 4 SPEAKING
FREELY Gold 101: The basics of
basis By Antal E Fekete
taking risks, and I show you one
who has invented perpetual motion.
Yet
there is no contradiction here. Paradoxically, it
was mainstream economists themselves who made this
black art possible. They promoted the regime of
irredeemable currency with the result that the
gold price fluctuates. The upshot of it all was
that those intelligent enough to keep their book
in terms of gold
units
rather than units representing irredeemable
promises can indeed earn an income in gold on
gold, even without relinquishing the metal,
thereby incurring the risk of losing it. To
understand this, we only need to refer to the
possibility of harnessing the energy represented
by the flow and ebb of water in the oceans.
Likewise, it is possible to harness the
energy represented by the fluctuating price of
gold and silver. The best way of doing this is to
keep accumulating both monetary metals while
maximizing the efficiency of hoarding. This means
that one always buys the metal the hoarding of
which is more efficient at the given price. But
how to determine the relative efficiency of
warehousing different goods as a function of
price? This is the same dilemma facing the
elevator operator when he buys grain at harvest
time. Should he buy more wheat or more corn?
Should he sell one to make more room for the
other? The price could easily mislead him. The
basis would not. He solves the problem by always
buying the grain with the wider and selling the
one with the narrower basis. In this way he
maximizes the efficiency of his warehousing
operation.
What to silver analysts appears
as naked short-selling is more likely the
activities of bulls in bear's skin. It is the tip
of the iceberg that can be seen. What is not seen,
the bulk of the iceberg, is dynamic hedging of
ever increasing gold and silver hoards, and
covered option writing, where the principal wants
to stay anonymous. The bull in bear's skin is
actually very happy that analysts believe, and
spread the belief, that he is naked. The longer he
can keep his "cover" as being "naked", the better
it is for his operations.
It is futile and
puerile to wait for the naked shorts to cover in a
panic, sending the price through the roof. Cover,
yes, panic, no. Make no mistake, this does not
mean that the price may not go through the roof,
but if it does, then it is also likely to go
through the floor next time around when the
pendulum swings back. It means that volatility is
increasing. The get-rich-quick crowd, those who
are "insanely bullish on silver" waiting for the
miracle of the silver price going to four digits
overnight, will be frustrated. Rewards will go to
the patient and industrious observer taking pains
to study the market, and who has the right
strategy that can handle the ever-increasing
swings in the price both ways. He will not be
dislodged from his long position when the pendulum
swings back. He doesn't subscribe to linear
models. His guiding star is the non-linear model
of the variation of basis.
Gold Standard
University is working out a strategy following
these principles, one applicable to small and big
investors alike. It will be unveiled during the
next session in August. At this point let's just
say that the strategy is essentially bimetallic
arbitrage, but it uses the basis rather than the
bimetallic ratio for clues.
Conservation of matter and
energy But how do we answer the objection
that our proposed scheme contradicts the Principle
of Conservation of Matter and Energy? Simple. We
don't. We might as well admit up front that the
contradiction is real. Chalk it up as an
unintended gift from the managers of the regime of
irredeemable currency. Helicopter Ben has
air-dropped manna to the enemy camp by mistake.
Nor can he help but keep doing it. His navigation
system is all screwed up. The gold standard,
when in force, is an instant reward/penalty system
that rules out income generated without risk. Were
our schools allowed to teach economics properly,
the electorate would know this and it would demand
the immediate scrapping of irredeemable currency
as the most wasteful and iniquitous monetary
system imaginable. It would also demand the
immediate reinstatement of the gold standard as
the only monetary system serving even-handed
economic justice. Under a gold standard, foreign
exchange and interest rates are stable. So is the
price of monetary commodities. There is no profit
in gold, silver, and bond speculation.
Interest-rate derivatives and bond futures are
unknown. Debt is reined in by the ability to
service it. Banks cannot lend long while borrowing
short with impunity. When they lend short, they
are limited by their quick assets. There is no
free lunch. Under the gold standard Helicopter Ben
belongs to fairy tales, not to banking, let alone
central banking.
Under the gold standard
all economic risks are created by nature, none by
man. Risks created by nature are clearly
demarcated by the fact that they are addressed on
the floor of the commodity exchange. By contrast,
risks created by man are addressed in the gambling
casino.
The regime of irredeemable
currency strives for obfuscation and for spreading
the lie, eagerly propagated by mainstream
economists, that the risks involved in gold and
bond as well as in interest and
foreign-exchange-rate futures trading are created
by nature, not by man. They conclude that
speculation has a dampening effect on these prices
and rates. In fact, just the opposite is true. As
in the casino where an increase in the number of
gamblers will heighten the gambling spirit, more
speculation will increase volatility in the gold
and bond markets.
The regime of
irredeemable currency builds on ignorance. As it
defies natural law, it is digging its own grave.
This is the true explanation of the coming
crack-up boom, not the "overissuing" of the
currency. The currency was overissued already 100
years ago. What needs to be explained is the lag.
Antal E Fekete is professor
emeritus, Memorial University of Newfoundland, St
John's. Further information on the Gold Standard
University can be obtained by writing to
GSUL@t-online.hu.
(Copyright 2007 by A E
Fekete. All rights reserved. Used by permission.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
