What could happen then if a new coordinated reserve currency fails to emerge? The answer is simple: the US dollar will stop being the world trading benchmark. A period will then unfold during which trading nations won't have a clear worldwide unit to value their goods, much less to store value for future trading. Possibly, some regional currencies might be tried on a geographically limited basis, and another alternative might emerge with a currency for which there isn't much policy to go about: gold. The consequences of such transition will be immense; an Hungarian mathematician called Antal Fekete, claims to already be getting signs in that sense, with gold futures entering backwardation late last year. This is a rather technical issue, way beyond the aims of this simple essay, but with or without backwardation, it is important to know what Fekete foresees [pdf!] in case the present system ceases to exist without a clear replacement
Tom says that he does not see things evolving in the same catastrophic manner as I do. For example, he believes that "there will always be willing buyers and sellers of gold in some quantity if the price is right." Buyers - si, sellers - no! That's just the whole point. The lack of credibility of irredeemable currency will be such that no one in his right mind will accept it in exchange for gold, the ultimate liquidator of debt. Previously, people were willing to trade their gold because they could always replenish their supply from Comex warehouses. That means, in other words, that the irredeemable dollar could still be used as a liquidator of debt (i.e., gold still has a competitor). But let them close the Comex gold warehouses. This is a quantum jump; it means that the irredeemable dollar can no longer be used to liquidate debt, e.g., debt incurred by those holding short positions in gold futures. It is essential not to belittle the import of this observation.
Tom thinks that I am an alarmist in believing that the permanent closing of the gold window at the Comex will mean a cessation in gold mining, loss of segregated metal deposits, and institutionalized theft of ETF holdings. ... I have nowhere said that the end of the fiat money system will follow the closing of the gold window at the Comex in a matter of days. Sure, finance ministers and central bankers will try to "muddle through". It is not possible to predict how long the death throes of fiat money will continue. Tom may be right in suggesting that it will take many years, and claims of an imminent monetary and economic collapse will again turn out to be wrong.
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I have nowhere said that the end of the fiat money system will follow the closing of the gold window at the Comex in a matter of days. Sure, finance ministers and central bankers will try to "muddle through". It is not possible to predict how long the death throes of fiat money will continue. Tom may be right in suggesting that it will take many years, and claims of an imminent monetary and economic collapse will again turn out to be wrong.
ECB is accused illegally selling gold to Deutshe Bank so that the latter could deliver on its illegal naked shorts of gold.
gold to Deutshe Bank so that the latter could deliver on its illegal naked shorts of gold.
Seeking Alpha: Did the ECB Save COMEX from Gold Default?
On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price, faced a serious predicament. Some 27,000 + contracts, representing about 15% of the April COMEX gold futures contracts remained open. Technically, short sellers are required to give "notice" of delivery to long buyers. However, in reality, buyers are the ones who control the amount of gold to be delivered. They "demand" delivery of physical gold by holding futures contracts past the expiration date. This time, long buyers were demanding in droves. In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions.
On Tuesday morning, gold derivatives dealers, who had sold short in the face of a fast rising gold price, faced a serious predicament. Some 27,000 + contracts, representing about 15% of the April COMEX gold futures contracts remained open. Technically, short sellers are required to give "notice" of delivery to long buyers. However, in reality, buyers are the ones who control the amount of gold to be delivered. They "demand" delivery of physical gold by holding futures contracts past the expiration date. This time, long buyers were demanding in droves.
In normal times, very few people do this. Only about 1% or less of gold contracts must be delivered. The lack of delivery demand allows the casino-like world of paper gold futures contracts to operate. Very few short sellers actually expect or intend to deliver real gold. They are, mostly, merely playing with paper. It was amazing, therefore, when March 30, 2009 came and passed, and so many people stood for delivery, refusing to part with their long gold futures positions.
taking a short position in a futures contract is not an illegal short
Did the ECB Save COMEX from Gold Default? -- Seeking Alpha
It is quite important to determine whether or not Deutsche Bank was bailed out by the ECB because that will answer a lot of questions about allegations of naked short selling on the COMEX. If the ECB knew that its gold would be used as post ipso facto "cover" for uncovered shorting, staffers at the central bank might be co-conspirators. At any rate, if the German bank did sell short on futures contracts without having enough vaulted gold it sold a naked short. It also means that the ECB has facilitated a major rule violation in a jurisdiction (the USA) with which Europe is supposed to have extensive joint regulatory agreements, any number of which may have been violated by this action of the ECB. At the very least, naked short selling is a blatant violation of CFTC regulations, which require 90% cover of all deliverable metals contracts. If the delivered gold came directly, or indirectly, from the ECB, it means that Deutsche Bank's gold short contracts were "naked" at the time they were entered into.
The author is under a misconception as to the role of futures markets. Selling "naked short" contracts is what COMEX and all the other futures markets is for. The regulation he has fixed upon relates to forward physical/OTC contracts.
While I can only guess why DB were so massively short of the market, picking up the gold from a Central Bank (probably leased), to fulfil the contract, is routine, although the size of the transaction is not. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Putting it simple: as more trillions flow more likely will it be for gold to replace paper as long term wealth store medium.
Continuing on this tack, at some point the wholesale gold market will break and the paper gold (futures) value goes down to zero. If that happens it is game over - governments lose the ability to perform monetary policy and parking wealth in gold will be the greatest investment of all, thus killing trade and industrial activity.
Vencit omnia veritas.
Fekete ends with
I think Tom's greatest mistake is to interpret the move into backwardation, or gold to enter the `fever phase', as "gold's regaining fully-recognized monetary status". Unfortunately, just the opposite is the case. Whether officially recognized or not, gold's monetary status was never in doubt. Gold has always been the monetary commodity par excellence, due to the fact that it has constant marginal utility (or, if you will, the fact that the marginal utility of no other commodity declines at a rate slower than that of gold). What we are witnessing is a transition that deprives gold of its monetary qualities. Gold in hiding cannot and will not act as money. More to the point, absent gold, nothing else can or will. The disappearance of money, that can be trusted, fatally undermines the legal system, the sanctity of contracts, habeas corpus, any and all provisions of law and order that we take for granted. Under these conditions nobody can operate a gold mine, nobody can run a gold refinery, nobody can guarantee segregated gold deposits, and nobody can prevent the institutionalized theft of ETF holdings. Welcome to the Madoff economy! (See References below: Paul Krugman's column in The New York Times). Jail one Madoff, two others will jump into his shoes.
What we are witnessing is a transition that deprives gold of its monetary qualities. Gold in hiding cannot and will not act as money. More to the point, absent gold, nothing else can or will. The disappearance of money, that can be trusted, fatally undermines the legal system, the sanctity of contracts, habeas corpus, any and all provisions of law and order that we take for granted. Under these conditions nobody can operate a gold mine, nobody can run a gold refinery, nobody can guarantee segregated gold deposits, and nobody can prevent the institutionalized theft of ETF holdings. Welcome to the Madoff economy! (See References below: Paul Krugman's column in The New York Times). Jail one Madoff, two others will jump into his shoes.
Gold has always been the monetary commodity par excellence, due to the fact that it has constant marginal utility (or, if you will, the fact that the marginal utility of no other commodity declines at a rate slower than that of gold)
absent gold, nothing else can or will [act as money]
It may stay nice to look at for a million years, but you can't live on it, keep yourself warm with it, or use it to send emails - all of which I would call forms of utility.
The problem is that that a thousand economists probably have ten thousand definitions of money between them - certainly over time.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Probably semantics again but what utility has gold?
Among other uses, gold is the material par excellance for coating connectors where low noise performance is required. I designed a connector that terminated 27 pair shielded audio cables into a connector socket with gold plated contacts. I used 80 micro inches RMS gold plating on the printed circuit board that terminated the cable. It terminated the cable for less than $1.00/shielded pair, including both connectors. That was in 1978. That would be over $10/ pair today. There are many commercial uses for gold beyond jewelry. These uses suffer from the consequences of gold also being seen as a de facto store of monetary value when gold prices surge.
Of course the drawbacks to gold as the standard of monetary value include its perverse inability to increase its quantity by a few percent per year. Another (barely) conceivable drawback is that, given that it is a naturally occurring element, it is always possible that some new discovery could vastly increase the quantity of available gold. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
I'd also point out that there is no reason to allow "gold to go into hiding." Governments have tanks and infantry divisions. Rich individuals have a pile of gold. I'm sure they can be persuaded to store said gold in the national bank for the duration of the emergency.
My interpretation of this is: gold is a non-ferrous metal, a gold coin lasts forever.
I think this passage means exactly that, I don't agree with him on that ... you know energy at least should do the same, if not better job.
Mind here that Fekete is not your regular economist and his way of thinking is hard to grasp even to regular economists.
And thinking about what Chris wrote, there's one simple reason why gold is (has been?) the ultimate currency: it is effectively impossible to falsify. It was the heaviest metal known to man for millennia I believe; even today heavier metals are more expensive, you can try a fake gold coin, but it will be costlier.
Gold has the double the density of silver for instance, which in its turn is easily falsifiable with lead... Vencit omnia veritas.
