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4 SPEAKING
FREELY Gold 101: The basics of
basis By Antal E Fekete
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
The inaugural
session of the Gold Standard University was
successfully completed at the Martineum Academy in
Szombathely, Hungary, last month. By unanimous
request, the original program "Gold and Interest"
was extended to include
"Basis" as well.
Basis
is the difference between the nearest futures
price and the spot price. The gold basis is one of
the most sensitive economic indicators, having a
seismographic predictive power. In particular, if
taken in conjunction with other indicators such as
the silver basis, volume, open interest, and the
lease rates for the monetary metals, it is capable
of predicting the beginning of the disintegration
of the world's payments system.
No other
scientific method of early warning can come close.
Moreover, basis could also be used as the guiding
star of bimetallic arbitrage between the gold and
silver markets. If you have a program to
accumulate monetary metals, then the basis will
tell you which account you should increase at any
particular moment to maximize the efficiency of
accumulation. You always buy the metal with the
wider basis. By the same token, you always sell
the one with the narrower basis.
It is
nothing short of amazing that all the websites
that concern themselves with the analysis of gold
and silver, with the remarkable exception of
Silveraxis.com, ignore the basis in spite of my
repeated prodding to start tracking and reporting
it. I now have proof that this is not due to lack
of demand. Accordingly, I have made the
announcement that at the next session of Gold
Standard University, scheduled at the Martineum
for August 15-31, 2007, we will present a
blue-ribbon panel discussion with the title Last
Contango: First Sign of Disintegration of the
World's Payments System. The following essay is a
primer for prospective participants.
The Janus-face of
marketability Gold, interest, and basis are
strongly inter-related. At the inaugural session
we have covered the concept of marketability. Gold
and silver have become money through an evolution
as the most marketable goods. In more details,
gold is most marketable in the large. This can
also be expressed by saying that gold is more
salable than any other commodity.
Silver
is most marketable in the small. This can also be
expressed by saying that silver, along with gold,
is more hoardable than any other commodity.
The Janus-face of marketability can be
observed if we contemplate that gold is the
preferred agent when one has to transfer value
over space. The preferred agent in transferring
value over time is silver followed by gold. We may
clearly recognize the dual nature of money
throughout history.
In the ancient world,
money was cattle and salt. Cattle was most
marketable in the large, while salt was most
marketable in the small. Later, two other
commodities, far more similar to one another, took
over these functions, but the dual nature of money
has been maintained to this day, in spite of the
silver and gold demonetization farce. This is no
accident. Duality has to do with the paramount
fact that space and time are absolute categories
of human thought.
A new theory of
interest Hoardability leads directly to the
concept of interest, which arises out of the
desideratum to optimize conversion of income into
wealth and wealth into income. In choosing the
conversion problem as our point of departure to
develop a new theory of interest we have
deliberately discarded the old-line theory based
on the exchange of present for future goods that
assumes, wrongly, that without exception a present
good is valued more highly than an equivalent
quantity and quality of future good. A more
careful analysis shows that this is true only if
the delivery of the various factors to the site of
production or consumption is dovetailed. Early
delivery may result in a loss.
The
solution to our optimization problem answers two
of the greatest of human needs: providing for
one's old age, and planning for the education of
one's offspring. If the conversion of income into
wealth is done through hoarding, and the reverse
conversion through dis-hoarding, a process also
known as direct conversion, then optimum is
achieved by choosing the most hoardable commodity
as an agent of conversion. However, direct
conversion can be further improved upon, by
passing to indirect conversion, through the agency
of exchange. Typically, a younger man will give up
part of his income in exchange for part of the
wealth of an older, as the former is anxious to go
into business for himself for which the latter
puts up the capital. Then interest appears as the
value of improvement in efficiency through the
exchange over direct conversion. In particular,
direct conversion means zero interest. By
contrast, interest becomes positive if social
arrangements admit indirect conversion.
The nexus between gold and interest is
established by the fact that if indirect
conversion is hampered by secular or canonical
proscriptions (eg usury laws), the economizing
individual is not helpless. He can still achieve
his goals by falling back on direct conversion
through hoarding or dis-hoarding gold. He will do
that even in the absence of proscription. In case
interest is suppressed by the banks or the
government, he will hoard gold in protest, and
dis-hoard it as the rate of interest is
subsequently allowed to rise. Thus gold is the
agent to validate one's time preference.
This aspect of gold is almost always
ignored by authors, including Ludwig von Mises, to
whom gold hoarding is a deus ex machina. He
failed to see that time preference would hardly
amount to more than a pious wish if gold hoarding
did not give it teeth. Moreover, this is true
whether on a gold standard or off. When on, gold
hoarding means withdrawal of bank reserves whereby
the individual forces the banks to adjust their
lending rate to the rate of marginal time
preference. The main excellence of the gold
standard is that it makes the adjustment
crisis-free. When off, hoarding makes the gold
price soar, leading to a monetary crisis. The
upshot is the same: higher interest rates. The
difference is that adjustment is made in a
crisis-prone environment. Moreover, it generates a
swinging interest rate structure that is most
damaging to savers and producers.
Gold
hoarding provides an escape for the individual
from the harsh consequences of the predatory
monetary and credit policies of the banks and the
government as they plunge society into debt
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