The Gold Standard 39 Mar 14

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The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 1


The Gold Standard
The journal of The Gold Standard Institute

Editor Philip Barton
Regular contributors Rudy Fritsch
Keith Weiner
Sebastian Younan
Occasional contributors Thomas Bachheimer
Ronald Stoeferle
Publius
John Butler
Charles Vollum

The Gold Standard Institute

The purpose of the Institute is to promote an
unadulterated Gold Standard

www.goldstandardinstitute.net

President Philip Barton
President – Europe Thomas Bachheimer
President – USA Keith Weiner
President – Australia Sebastian Younan
Editor-in-Chief Rudy Fritsch


Membership Levels

Annual Member US$100 per year
Lifetime Member US$3,500
Gold Member US$15,000
Gold Knight US$350,000
Annual Corporate Member US$2,000
Contents
Editorial ........................................................................... 1
News ................................................................................. 2
Bitcoin... Monetary Nirvana? ........................................ 2
The irresistible siren of irredeemable currency .......... 4
A small step for the insurance industry – but a giant
leap towards remonetising gold ................................... 5
Gold Arbitrage and Backwardation Part III (Gold as
a Commodity) ................................................................. 6
Editorial
Knowledge of rhubarb came to the west from China
and Tibet via the writings of Marco Polo. It was
originally prescribed for its laxative properties, but
after the passage of many centuries entered English
kitchens to emerge as delicious rhubarb crumble.
The word ‘rhubarb’ then acquired a secondary
meaning as a melee or free-for-all. This developed
from its use in the theatre, supposedly in
Shakespearean times. Repetitive mutterings of
“rhubarb, rhubarb, rhubarb” by a crowd of actors
and actresses produced the overall effect of an angry
commotion. Those chanting this nonsense were,
and still are, called rhubarbers.
Recently an earnest fellow attendee at a gold
conference breathlessly informed me over lunch that
there was very little gold in Asia – he actually said
‘no gold in Asia’, but I will put that down to the
wine. Having become more and more involved with
gold over a period of forty years, I am well aware of
the conspiracists, fantasists and just plain dull that
scuff up the margins of the discussion.
This fellow has come to represent in my mind every
daft idea about gold that I have ever come across,
and there have been many. To make such a
statement shows zero knowledge of Asia, Asians or
gold. Such people do not seek to add to the
discussion in any meaningful way; they just want to
be heard – rhubarb, rhubarb, rhubarb.
Rhubarbers bedevil the gold community in the 21st
century. They are notable for not making any real
contribution to the discussion of how best to get
gold circulating again and/or how to remove the
malign influence of government from the economy.
Like the sad trolls, they have nothing constructive to
offer.
Beware the gold rhubarbers. They are vexatious to
the spirit and do their best to keep alive the laxative
powers of their namesake vegetable, but worse than
this for the unwary is that they can be a subtractive
influence on the gold discussion as they muffle the
dialogue.
Philip Barton
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 2

News
Please ensure that your bookmark for The Gold
Standard Institute international is
www.goldstandardinstitute.net as .com and .org will
soon be routing directly to the US website.
≈≈≈
Gold Standard Institute US : GSI US names
Executive Director.
≈≈≈
Reuters: Perth Mint – gold sales rise, silver sales fall.
≈≈≈
Bloomberg: Indian jewellers plan shutdown.
≈≈≈
24hgold: Arizona legislature passes gold and silver
legal tender bill.
≈≈≈
Washington Times: Brown’s (you dream it, we build
it) gold guitar.
≈≈≈
The Statesman: India still largest consumer of gold
… maybe, as Arab News says China overtakes India
with record gold demand.
≈≈≈
Hindustan Times: Gold smuggling in India to
accelerate.
≈≈≈
Mineweb: ‘Unofficial’ mining booming in South
Africa (and everywhere else).
≈≈≈
CNBC: California couple find pot of mint condition
gold.
≈≈≈
CBS News: Half of coin find may go in government
taxes

Bitcoin... Monetary Nirvana?
Since I wrote this article a few weeks ago, Bitcoin has been in
the news big time. Major Bitcoin theft has occurred, and the
price of Bitcoins has fallen drastically... by almost 50%. So
much for Bitcoin being a store of value. Furthermore, even
more importantly, the criminalization of Bitcoin has begun.
The US government considers that holding or using Bitcoins is
an indication of 'criminal intent'.
The future of Bitcoin is more cloudy than ever, and what I
wrote as possibilities just weeks ago are now happening.
History is speeding up.
To start off the new year, I would like to digress a bit
from the usual Gold and Gold Standard articles that
TGSI is famous for, and take a close look at the
latest form of ‘money’ making the rounds... the
notorious Bitcoin.
If you don’t know what Bitcoin is, do a bit of
research on the internet, and you will get plenty... but
the short story is that Bitcoin was created as a
medium of exchange, without a central bank or bank
of issue being involved. Furthermore, Bitcoin
transactions are supposed to be private, that is
anonymous. Most interestingly, Bitcoins have no real
world existence; they exist only in computer
software, as a kind of virtual reality.
The general idea is that Bitcoins are ‘mined’...
interesting term here... by solving an increasingly
difficult mathematical formula –more difficult as
more Bitcoins are ‘mined’ into existence; again
interesting- on a computer. Once created, the new
Bitcoin is put into an electronic ‘wallet’. It is then
possible to trade real goods or Fiat currency for
Bitcoins... and vice versa. Furthermore, as there is no
central issuer of Bitcoins, it is all highly distributed,
thus resistant to being ‘managed’ by authority.
Naturally proponents of Bitcoin, those who benefit
from the growth of Bitcoin, insist rather loudly that
‘for sure, Bitcoin is money’... and not only that, but
‘it is the best money ever, the money of the future’,
etc... Well, the proponents of Fiat shout just as
loudly that paper currency is money... and we all
know that Fiat paper is not money by any means, as
it lacks the most important attributes of real money.
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 3

The question then is does Bitcoin even qualify as
money... never mind it being the money of the
future, or the best money ever.
To find out, let’s look at the attributes that define
money, and see if Bitcoin qualifies. The three
essential attributes of money are;
1) money is a medium of exchange
2) money is a stable store of value
3) money is the numeraire.
Compared to Fiat, Bitcoin does not do too badly as a
medium of exchange. Fiat is only accepted in the
geographic domain of its issuer. Dollars are no good
in Europe etc. Bitcoin is accepted internationally. On
the other hand, very few retailers currently accept
payment in Bitcoin. Unless the acceptance grows
geometrically, Fiat wins... although at the cost of
exchange between countries.
The second condition is a lot tougher; money must
be a stable store of value... now Bitcoins have gone
from a ‘value’ of $3.00 to around $1,000, in just a
few years. This is about as far from being a ‘stable
store of value’; as you can get! Indeed, such gains are
a perfect example of a speculative boom... like Dutch
tulip bulbs, or junior mining companies, or Nortel
stocks.
Of course, Fiat fails here as well; for example, the US
Dollar, the ‘main’ Fiat, has lost over 95% of its value
in a few decades... neither fiat nor Bitcoin qualify in
the most important measure of money; the capacity
to store value and preserve value through time. Real
money, that is Gold, has shown the ability to hold
value not just for centuries, but for eons. Neither
Fiat nor Bitcoin has this crucial capacity... both fail
as money.
Finally, we come to the third attributes; that of being
the numeraire. Now this is really interesting, and we
can see why both Bitcoin and Fiat fail as money, by
looking closely at the question of the ‘numeraire’.
Numeraire refers to the use of money to not only
store value, but to in a sense measure, or compare
value. In Austrian economics, it is considered
impossible to actually measure value; after all, value
resides only in human consciousness... and how can
anything in consciousness actually be measured?
Nevertheless, through the principle of Mengerian
market action, that is interaction between bid and
offer, market prices can be established... if only
momentarily... and this market price is expressed in
terms of the numeraire, the most marketable good,
that is money.
So how do we establish the value of Fiat...? Through
the concept of ‘purchasing power’... that is, the value
of Fiat is determined by what it can be traded for... a
so called ‘basket of goods’. But his clearly implies
that Fiat has no value of its own, rather value flows
from the value of the goods and services it may be
traded for. Causality flows from the goods ‘bought’
to the Fiat number. After all, what difference is there
between a one Dollar bill and a hundred Dollar bill,
except the number printed on it?
Gold, on the other hand, is not measured by what it
trades for; rather, uniquely, it is measured by another
physical standard; by its weight, or mass. A gram of
Gold is a gram of gold, and an ounce of Gold is an
ounce of Gold... no matter what number is engraved
on its surface, ‘face value’ or otherwise. Causality is
the opposite to that of Fiat; Gold is measured by
weight, an intrinsic quality... not by purchasing
power. Now, have you any idea of the value of an
ounce of Dollars? No such thing. Fiat is only
‘measured’ by an ephemeral quantity... the number
printed on it, the ‘face value’.
Bitcoin is farther away from being the numeraire; not
only is it simply a number, much as Fiat... but its
value is measured in Fiat! Even if Bitcoin becomes
internationally accepted as a medium of exchange,
and even if it manages to replace the Dollar as the
accepted ‘numeraire’, it can never have an intrinsic
measure like Gold has. Gold is unique in being
measured by a true, unchanging physical quantity.
Gold is unique in storing value for thousands of
years. Nothing else in reach of humanity has this
unique combination of qualities.
In conclusion, while Bitcoin has some advantages
over Fiat, namely anonymity and decentralization, it
fails in its claim to being money. Its advantages are
also questionable; the intent is to limit the ‘mining’
of Bitcoins to 26,000,000 units; that is, the ‘mining’
algorithm gets harder and harder to solve, then
impossible after the 26 million Bitcoins are mined.
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 4

Unfortunately, this announcement could very well be
the death knell of Bitcoin; already, some central
banks have announced that Bitcoins may become a
‘reservable’ currency.
Wow, sounds like a major step for Bitcoin, does it
not? After all, the ‘big banks’ seem to be accepting
the true value of the Bitcoin, no? What this actually
means is banks recognize that they could trade Fiat
for Bitcoins... and to actually buy up the 26 million
Bitcoins planned would cost a meagre 26 Billion Fiat
Dollars. Twenty six billion Dollars is not even small
change to the Fiat printers; it is about a week’s worth
of printing by the US Fed alone. And, once the
Bitcoins bought up and locked up in the Fed’s
‘wallet’... what useful purpose could they serve?
There would be no Bitcoins left in circulation. If
there are no Bitcoins in circulation, how on Earth
could they be used as a medium of exchange? And,
what could the issuers of Bitcoin possibly do to
defend against such a fate? Change the algorithm and
increase the 26 million to... 52 million? To 104
million? Join the Fiat printing parade? But then, by
the quantity of money theory, Bitcoin would start to
lose value, just as Fiat supposedly loses value
through ‘over-printing’...
We come to the key issue; why search for a ‘new
money’ when we already have the very best money,
Gold? Fear of Gold confiscation? Lack of anonymity
from an intrusive government? Brutal taxation? Fiat
money legal tender laws? All of the above. The
answer is not in a new form of money, but in a new
social structure, one without Fiat, without
Government spying, without drones and swat
teams... without IRS, border guards, TSA thugs... on
and on. A world of liberty not tyranny. Once this is
accomplished, Gold will resume its ancient and vital
role as honest money... and not a moment before.
Rudy J. Fritsch
Editor in Chief

The irresistible siren of irredeemable
currency
It is fair to remark that readers of this journal are not
easily taken in by the seductive sirens of
governmental promises. The reader’s ship, captained
by independent thought and judgement, steer clear
of the crashing rocks and jagged cliffs which have
regretfully claimed all sides of the financial, political
and intellectual spectrum. The irresistible siren of
irredeemable currency seduces and then enslaves
most who encounter it - no matter what their prior
allegiances were. It is the seductive nature of
irredeemable currency which proves the
imperativeness of educative thought and rigorous
investigation when analysing the socio-economic
environment around oneself. Yet currently the sirens
are singing and, at least in Australia, many are
drifting closer and closer to their call. It is the intent
of this brief article to call attention to those tempted
by one aspect of the seductive melody: the property
market.
The property market in Australia is “hot” – that is
property prices are appreciating at an accelerating
rate relative to the Australian dollar. The recent
increase in prices, seeing many realise a gain in home
equity, has erased the harsh memories of 2007-2010.
Yet the parallels between the Australian property
market and Exter’s Pyramid
1
are remarkable. Larger
homes, being the least marketable, have all but
stalled with the notable exception of the most
prestigious properties. These homes have become
largely unattainable despite their depression like
decline in prices. Average homes, which have
enjoyed tremendous price appreciation over the last
four years, have also begun to slide.
So with all this said, where is the property boom that
the government, banks, mortgage brokers, home
builders et cetera speak of? In the most marketable
good of course. And the most marketable good in
property is whatever is deemed “affordable
property” – Apartments, terraces, townhouses,

1
Exter’s Pyramid is an inverted pyramid (named after US
economist John Exter) which in effect ranks assets classes based
upon their marketability. The more marketable a good, the lower on
the pyramid. At the bottom, naturally is the most marketable good,
being gold.
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 5

houses – all of which are many kilometres from the
cities.
As potential home buyers are pushed out of what
was once attainable to them, they find themselves
crowding into the affordable property market.
Residential apartments are booming in Australia with
record auction clearance rates across the capital
cities. The social toll of these appreciating prices is
that those who could previously only afford these
property types now find themselves facing the
prospect of all property being unaffordable. In
desperation many find themselves purchasing
property, any property, irrespective of whether it’s
affordable to them or not. The sirens song, sung by
the media and powers that be, is that property prices
are going to appreciate indefinitely.
The price mechanism is at the heart of all free or
semi free societies. Those viewing the appreciating
prices via a relatively economically liberal outlook
may recall the expression “low prices lead to high
prices and high prices lead to low prices” suggesting
that the free market will rectify any abnormality. This
is true yet it’s based upon a fallacious assumption:
that we have a free market.
Government interference in the money market is
apparent for all to see. Yet what isn’t necessarily
obvious is the “cause and effect” as Bastiat would
say. The Chinese capital flows into the Australian
property market is certainly providing a very solid
bid driving prices ever higher. These capital flows are
a result of several factors, all of which are a result of
government intervention (Chinese and even US).
Yet when the siren stops singing, when the Chinese
capital flows into Australia slow and the bid is
removed, how will the property market fair? It is
uncertain at this time, yet what is certain is that the
party never ends well. A soft landing will be as soft
as the rocks of Cape Pelorum.
Sebastian Younan
President the Gold Standard Institute Australia
A small step for the insurance
industry – but a giant leap towards
remonetising gold
For years now I have been working with Vienna
Life, a Liechtenstein-based subsidiary of the Austrian
insurance concern Vienna Insurance Group, „in all
things gold”. On top of providing conventional
insurance and investment products, this company
has shown a special interest in safeguarding the
purchasing power of their customers. This focus led
to the establishment of a physical gold fund based in
Liechtenstein.
Step 1 – The physical gold fund
Already in 2007 we designed a physical gold fund
which has been marketed from 2008 onward. This
fund gave Europeans three major advantages:
I) Access to physical gold without the hassle of
storage;
II) Storage at a private Liechtenstein bank
removed from the large, interconnected
„too-big-to-fail“ banks so assets seizures are
precluded;
III) The principality of Liechtenstein is a
sovereign and independent nation and does
NOT belong to the European Union.
Therefore, the underlying gold lies outside
the EU, but still in the heart of Europe.
Step 2 – Packaging into a life insurance policy
During the last few years, demand for physically-
covered so-called alternative life insurance products
has risen dramatically. The EU has not supported
these developments for obvious reasons. They tried
to keep the most popular savings product – life
insurance – from exiting the „paper“ fiat money
system and which would help savers avoid the
stealthy expropriation via inflation. That is the
reason why until recently it was well-nigh impossible
to purchase life insurance outside the paper world
with its gradual erosion of one’s purchasing power.
After the successful establishment of the fund, the
Vienna Life legal team found a way to wrap the
physical gold fund into a life insurance policy. In
2012 Vienna Life began to market these gold-
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 6

covered life insurance policies. Shortly after, it
became possible to pry customers out of existing
contracts and convert them into gold policy holders.
Unfortunately, 2013 was a „black“ year for gold,
which depressed demand for gold policies. The
distributing company Veniogold, co-founded by me
for the purpose of selling policies, has been dormant
to await a gold price rebound. January 2014 brought
the hoped-for trend change, so now we can continue
our marketing efforts via this new channel.
Step 3 – Marketing via hartgeld.com
For two years now I have been an editor with
www.hartgeld.com, the biggest alternative German-
language finance website. The name stands for its
contents: it covers „hard” money, the gold standard,
gold, silver, politics, democracy, expropriation via
inflation, etc. The site boasts more than 120,000
visitors per day! By end-November we passed the
200 million viewer mark – now we stand at 210m.
The site acts as a news agency. We receive up to
1,000 emails per day. Editors sift through the
incoming material, decide which news and
information are to be published on the site and add
their own comments. The main body of readers are
people who have seen through the fiat money
system. Hartgeld.com gives them valuable
information and a platform to vent their frustrations.
This website is an ideal channel for marketing a
product such as our gold-covered life insurance
policy. In mid-March 2014 we will start advertising
the policy. Since hartgeld.com has a well-informed
and interested audience, we hope to generate
massive demand for our product.
Should this new variant of Europe’s most popular
savings product achieve sizeable sales, it will be a joy
to proponents of the gold standard since it would be
an enormously important first step towards
remonetising gold. Therefore, the Gold Standard
Institute lends its scientific support and also brands
the veniogold.de website with its logo. For further
information please contact me at:
[email protected]
Thomas Bachheimer
President the Gold Standard Institute Europe
Gold Arbitrage and Backwardation
Part III (Gold as a Commodity)
In Part I, we discussed the concept of arbitrage. We
showed why defining it as a risk-free investment that
earns more than the risk-free rate of interest is
invalid. There is no such thing as a risk-free
investment, and in any case economics must be
focused on the acting man rather than theoretical
constructs. We validated that arbitrage arises because
the market is constantly offering incentives to the
acting man in the form of spreads. Arbitrage is the
act of straddling a spread. Arbitrage will tend to
compress a spread. The spread will narrow, though
not to zero because no one has any incentive to
make it zero.
In Part II, we looked at the question of whether gold
is a currency. The answer cannot be provided by the
symbol naming committee at Bloomberg. Gold is
indisputably money, and it may be used in the
occasional transaction today. The reason for
considering it as a currency was to look at contango
and backwardation simply as states of gold having an
interest rate that is lower or higher, respectively, than
the dollar. However, as we concluded in Part II,
there is no proper interest rate in gold. The gold
lease rate is closer to being a discount rate than an
interest rate.
In this final Part III, we look at the fact that gold is a
tangible commodity. While the question of whether
gold is a currency is important, and it’s good to think
about philosophical concepts such as arbitrage, let’s
not forget that gold is a material good. It can be held
in the hand, it can be bought and sold, and it can be
warehoused.
Warehousing is an important innovation. Did you
ever wonder how people coordinate their actions
over many months between wheat harvests? How is
it possible that farmers, bakers, financiers, and
consumers could somehow work out a mechanism
in the free market to store grain at the time of the
harvest and release it throughout the year? The fact
that this occurred is amazing. Wheat is not only
available out of season, but its price does not gyrate
radically (at least no more than every other price
these days, as the failing dollar goes off the rails). It
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 7

does not crash when the grain is harvested and it
does not skyrocket as the grain stocks are consumed
later in the year.
Obviously, a warehouse suitable for storing grain is
necessary. However, without another innovation the
warehouse won’t be able to solve the problem. It is
necessary but not sufficient. The innovation of the
futures market is also necessary.
2

Today, we think of futures market as a venue to
speculate on the price of something, such as wheat.
If we expect the price to rise, we go long a futures
contract. To bet on a falling price, we could go short.
Speculators indeed play an important role in the
market. They drive prices up, when they expect
goods to be scarce, which prevents
overconsumption and running out. They also drive
prices down, when they expect a glut, which
encourages consumption before stockpiles overflow.
The futures market evolved to fulfill the needs of
two other actors. The producer of a good—the
farmer in the case of wheat—wants to lock in a price
at which he can make a profit. If, in March when he
is making his decision of what crop to plant, the
price of wheat is $6 per bushel, he can sell wheat
futures and lock in a price of around $6 immediately.
This removes the risk of an adverse price move. It
may also help him obtain financing to produce the
wheat.
On the other side of the trade, there is a bakery that
wants to secure access to wheat and to hedge the risk
that the price could rise. The bakery can buy wheat
futures.
The speculator is not able to deliver, or take delivery
of, any goods. By contrast, the producer and
consumer intend to exchange wheat and cash. The
farmer intends to deliver wheat when he harvests it.
The bakery intends to take delivery when he needs it
to bake bread.
One other actor is necessary to make this market
work. The warehouseman arbitrages the spread
between wheat in the cash market and wheat in the
futures market. Suppose that cash wheat is selling for

2
What follows is material I shared with my private subscribers in
Feb 2012.
$5 during the harvest season, but January future
wheat is selling for $6. The warehouseman can
simultaneously buy spot and sell January, pocketing $1.
He stores the wheat until delivery in January.
The warehouseman has no exposure to the wheat
price.
This is a really important idea. He is a specialist in
knowing when to store wheat, not in speculating on
the price. If the warehouseman were forced to take
price exposure, there would either not be
warehousing, or the cost of warehousing would have
to rise dramatically to cover the price swings.
If the warehouseman has no exposure to price, what
does he have exposure to? On what does he make
his money? He has exposure to the spread between
the cash or spot market, and the futures market—
called the basis. In our example, this was $1.
If the price of wheat in the futures market is greater
than the price in the spot market, this is called
contango. In a contango market, if the warehouseman
has space for more wheat, he will add wheat to his
warehouse. Putting wheat into the warehouse for
delivery under contract later is called carrying it.
This works in the other direction, too. If the price in
the spot market is higher than in the futures—called
backwardation—then the warehouseman will sell
wheat in the spot market and buy back the futures he
shorted. Selling wheat and buying back the futures
contract is called decarrying.
If there is contango and the basis is rising, then we
can be sure that more wheat is going into
warehouses. If there is backwardation and the basis
is falling, then we know that wheat is leaving the
warehouses. This can continue until there is no more
wheat in the warehouses.
It is worth mentioning what one must have in order
to take these arbitrages. To carry wheat, one must
have money. With current credit conditions, this is
not much of a constraint. One must also have extra
warehouse capacity. To decarry it, one must have
wheat. This makes for a lopsided set of risks to the
basis.
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 8

The basis isn’t going to rise much above the cost of
credit plus storage costs, because in normal
circumstances warehousemen have access to credit
and warehouse space (in some commodities, space
can be a problem such as crude or natural gas).
Consider the other direction. Suppose you drove a
truck up to a grain elevator town two days before the
harvest. Workers have the equipment partially
disassembled and they’re cleaning it, getting ready
for the trucks that will soon be coming off the farm
fields. You hop out and go over to a group of
elevator operators chatting on the edge of the
parking lot. You ask them how much to fill up your
truck with wheat, right now?
They begin to laugh, so you take out a wad of $100
bills. They stop laughing and stare at you and
eventually one of them says $20 a bushel. He
reminds you that if you can sign a contract to take
delivery in a month, the price is $7.
Clearly, just days before the harvest, no one has any
extra wheat. If you pay that $20, he will make a
phone call and a truck halfway to some bakery in
another county will turn around. That bakery will
end up getting paid more money to be idle for a
week than it would have made by selling bread.
This is a case of extreme backwardation (exaggerated
to make a clear point). Think of backwardation as
being synonymous with shortage. This is a pretty
strong statement, so let’s look at the proof.
If there was no shortage of wheat, then why isn’t
someone decarrying it? The markets do not normally
offer you a risk-free profit that grows day by day. If,
for example, IBM shares traded in NY for $99 and
for $101 in London, then someone would buy in NY
and sell in London and keep doing it until the prices
were brought together. Arbitrage acts to compress
the very spread from which it derives its profit.
In our example, no one is taking the wheat decarry
arbitrage because no one has any wheat left over.
While, as we saw above, there is a limit to how high
the basis can go, there is no limit to how low. The
scarcer the good, the lower the basis could fall.
One other thing is worth noting before we proceed.
With the advent of the futures market, the price of a
good that’s produced seasonally but consumed all
year need not fluctuate much due the time of year.
Price fluctuation would harm producers or
consumers.
What can fluctuate harmlessly is the basis spread.
What does this have to do with gold? Virtually every
ounce of gold ever mined in thousands of years of
human history is still held in human possession. The
stocks to flows ratio—inventories divided by annual
production—is measured in decades for gold, but
months for wheat and other regular commodities.
This means that there is no such thing as a glut in
gold, and no such thing as scarcity. Gold is not
produced seasonally, and it is not consumed. There
should not be a futures market in gold. It exists as a
perverse byproduct of the regime of irredeemable
paper money. It would not exist in a free market,
which would have a robust global market for gold
lending.
Right before the harvest, the wheat market can go
into backwardation because no one has any wheat to
decarry. It is truly scarce. In gold, backwardation
should not be possible. There is always enough gold
in existence, to decarry and eliminate any
backwardation.
And yet, there has been an intermittent gold
backwardation since December of 2008. It has
become typical for each futures contract to go into
backwardation as it headed into expiration, and I
have coined the term temporary backwardation.
3

Gold backwardation is incredible. Like a unicorn, it
should never be seen! All of this gold just sitting
around, and the owners stare at their screens and
don’t take the bait. It’s a risk free profit, according to
the conventional view. And yet gold is becoming
scarcer, at least to the market. All of those gold
owners are choosing to let their gold sit idle, not
earning anything at all, rather than trade away their
bars for futures contracts.

3
What Drives Negative GOFO and Temporary Gold
Backwardation
The Gold Standard The Gold Standard Institute
Issue #39 ● 15 March 2014 9

It’s not possible to understand this phenomenon
with mathematical models. Sure, you can measure
the basis and use it to model all sorts of things, but
to understand the big picture you have to take a step
back. You have to see the forest and that means
backing away from that tree for a minute.
Perhaps one of the biggest news items pertaining to
gold as I write this is the ongoing situation regarding
Germany’s gold. Germany asked for the Federal
Reserve to give back a quantity of their gold over a
period of 7 years. And by the end of 2013, the Fed
had delivered too little, and was falling behind even
that leisurely pace. I won’t speculate on what’s
happening, but I do want to point out what the
Germans are thinking.
They don’t trust the Fed.
They didn’t trust the Fed in the first place, which is
why they pressured the Bundesbank to ask for the
gold to be shipped to Germany. The Fed’s apparent
failure to deliver only deepens their convictions that
they were right not to trust the Fed, and of course
increases the distrust of many observers around the
world too.
Many in the online gold community want to see
Germany get their gold, but are concerned that they
won’t. They have themselves taken possession of
their own gold. They urge everyone to take his own
gold in the form of coins or bars out of the banking
system, and hold it at home or someplace that’s safe
and secure.
This is the process of gold withdrawing from the
market. It is an inexorable trend towards permanent
backwardation.
4
One ignores this at one’s peril. It
cannot be dismissed by the assertion that gold is a
currency. Whether or not gold has a rate of interest,
and whether this rate is above or below LIBOR has
no bearing here.
Gold is a physical commodity. Its owners are
removing it from the tradable markets, squirreling it
away in nooks and crannies where they feel it’s safe.
This is not merely a phenomenon of differing
interest rates. Real metal is being moved in the real

4
When Gold Backwardation Becomes Permanent
world, and everyone would do well to understand
why, and what it means.
Trust is collapsing, and for good reason. The
foundation of the global financial system is the US
Treasury bond. It is backed by nothing more nor less
than the full faith and credit of a government with
exponentially rising debt, and which has neither the
means nor intent to repay. If you don’t trust that the
US government can pay, then you can’t trust a bank
deposit because the bank uses the Treasury as their
asset. If you can’t trust a bank, then you can’t trust a
gold futures contract.
It is in this light that one must view gold
backwardation. In wheat or any other ordinary
commodity, there is sometimes a state of shortage.
When that occurs, anyone with the commodity can
make a risk-free profit by decarrying it. However,
there is no such thing as a shortage of gold. There is
a shortage developing—a shortage of trust.
Decarrying gold does incur a risk. One may be giving
up good metal for bad paper, and never be able to
reverse the swap.
Unfortunately, with the collapse of trust comes the
collapse of coordination of economic activity. The
disappearance of gold from the monetary system will
have momentous consequences. This is why I
founded the Gold Standard Institute USA to
promote the gold standard, and reverse this trend
before it reaches the end.
Dr. Keith Weiner
Dr. Keith Weiner is the president of the Gold Standard Institute USA,
and CEO of Monetary Metals where he write on the basis and related
topics. Keith is a leading authority in the areas of gold, money, and credit
and has made important contributions to the development of trading
techniques founded upon the analysis of bid-ask spreads. Keith is a sought
after speaker and regularly writes on economics. He is an Objectivist, and
has his PhD from the New Austrian School of Economics. He lives with
his wife near Phoenix, Arizona.



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