Physical Gold Shortage Worst In Over A Decade: GOFO Most Negative Since 2001

Courtesy of The Hedge:

The last time there was an systemic physical gold shortage was in July 2013. It is then that, for the first time in 5 years, the 1-month Gold forward offered rate, or GOFO, went negative. We said:

Today, something happened that has not happened since the Lehman collapse: the 1 Month Gold Forward Offered (GOFO) rate turned negative, from 0.015% to -0.065%, for the first time in nearly 5 years, or technically since just after the Lehman bankruptcy precipitated AIG bailout in November 2011. And if one looks at the 3 Month GOFO, which also turned shockingly negative overnight from 0.05% to -0.03%, one has to go back all the way to the 1999 Washington Agreement on gold, to find the last time that particular GOFO rate was negative.

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Fast forward to today, when as noted over the past week there has been a massive shortage of precious metals – most notably silver which as of this moment is indefinitely unavailable at the US Mint – as a result of the tumble in the paper price, and following 8 days of sliding and negative 1 month GOFO rates, today the physical metal shortage surged, as can be seen by not only the first negative 6 month GOFO rate since last summer’s much publicized gold shortage when China was gobbling up every piece of shiny yellow rock available for sale, but a 1 month GOFO of -0.1850%: the most negative it has been since 2001! Continue reading

Quantitative Easing – The Final End Game

Courtesy of Sandeep Jaitly @ Fekete Research.com:

What we are currently witnessing with the various ‘quantitative easing’ procedures across the world is the culmination of a process that began many decades ago in the 1920s shortly after the establishment of the Federal Reserve System.

The Federal Reserve System was set up in 1914 to run in a similar fashion to the London gold bill market. The charter informs us that the purpose of the System is to:

“…furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes…”

At its founding, the assets of the system were limited to commercial paper, i.e. self- liquidating gold bills and gold, to the strict exclusion of government securities – i.e. government bonds redeemable in gold (via the fiat ‘dollar’ name intermediary.) This was thrown to the wind during World War I. The ‘Liberty Bond’ series was initiated in April 1917 with a $5bn issue, followed by a $3bn issue in October. In 1918, April and September saw $3bn and $6bn issues respectively. The first four ‘Liberty Bond’ issue amounted to $17bn (approximately 25,000 tonnes gold.) When the repayment of these bonds within the given schedules looked more unlikely, they started appearing on the System’s balance sheet and were thus ‘accommodated.’

Bills being discounted from the Member banks started to dry up in the early 1920s reducing the Reserve banks’ revenue, as the ‘Liberty Bonds’ were rolling off. So in the first half of 1922, they purchased government securities from the open market. This didn’t have the intended effect – as soon as government securities were purchased, any commercial bank paid off their loans to the Reserve banks further – increasing the Reserve banks’ income. But, the commercial banks were in a theoretically more advantageous situation for lending on.

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The US is the New Falling Roman Empire (Exclusive Interview with Antal E Fekete)

Courtesy of Guillermo Barba @ Inteligencia Financiera Global:

The Inteligencia Financiera Global blog (Global Financial Intelligence Blog) is pleased to present this exclusive interview with Prof. Antal E. Fekete, founder of the New Austrian School of Economics, monetary scientist, proponent of the gold standard and a critic of the monetary system based on irredeemable currency (fiat money).

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Thanks for accepting this interview.

– Prof. Fekete, why did you decide to found the “New” Austrian School of Economics (NASOE)? Did you find something wrong within the “old school”? What about Carl Menger and Mises?

– What I have found was that post-Mises Austrian economists, but already Ludwig von Mises himself, had substantially deviated from Carl Menger’s teachings for the worse. Thus in my view a rather large portion of the post-Mises Austrian economists’ research is in error. I took it upon myself to criticize the deviation from Menger and correct it. The list includes their dismissal of Adam Smith’s Gold Bills Doctrine, the theory of interest as distinct from the theory of discount, to name but a few. The New Austrian School of Economics (NASOE) was launched under the slogan: “Back to Menger!”

– We know you don’t support both the Keynesian and Monetarist theories. What’s wrong with them? What’s their biggest mistake, if any?

– The biggest mistake of Keynesianism and Friedman-style monetarism is that they favor the destabilization of the interest rate structure that was stable before, but had started gyrating and, more recently, plunging into the black hole of zero interest. All this was in consequence of Keynes’ and Friedman’ success in undermining and ultimately overthrowing the gold standard.

– If these two theories are wrong, why do you think they have become the mainstream all around the world? Were they imposed by somebody?

– They became mainstream for reasons of their demagoguery. They are designed to appeal to one’s sense of justice: antidote against misery amongst plenty. They take advantage of the appallingly low level of education based, as it is, on envy. It is characterized by an almost complete neglect of the aprioristic branches of science: logic, mathematics and economics. And I say this as a professional mathematician. Keynes ensnared F.D. Roosevelt; Friedman ensnared Nixon. These two presidents were happy to trample upon the United States Constitution at their bidding. As a consequence the gold standard was destroyed and irredeemable currency was foisted upon American citizens in 1933 and, on every inhabitant of the Earth in 1971. At the same time the gold of the people was looted by the government. Continue reading

Analysis of the Yield Curve

Courtesy of Sandeep Jaitly @ FeketeResearch.com:

One of the greatest conflicts that prevented the establishment of a credible theory of interest was that between the time preference & productivity schools. Fekete, looking back to Menger, synthesised the two schools to produce the only coherent & complete theory of interest.

Looking back to Menger’s observation of the existence of a bid/offer spread as opposed to a monolithic price, Fekete combined the productivity and time preference schools via marginal analysis with marginal time preference and marginal productivity of capital. Ludwig von Mises admitted only time preference – and not marginal time preference at that – as the basis for the formation of interest. This was an oversight and not in keeping with the Menger’s established form of marginal analysis.

Space – via marginal productivity of capital – and time – via marginal time preference – were united in Fekete’s theory of interest. Marginal time preference is expressed via the marginal bond holder. The marginal bondholder is the first to refuse to exchange gold coins for bonds in view of the (bid) rate of interest falling below their time preference. The time preference of the marginal bondholder is defined as marginal time preference. In a similar fashion, marginal productivity of capital is expressed via the marginal entrepreneur. The marginal entrepreneur is the first to refuse to exchange bonds for capital goods in view of the offered rate of interest being above their (potential) productivity.

Marginal analysis coupled with Menger’s original observations, can be extended further to determine the theoretical shape of the yield curve under an unadulterated gold standard: discussion of which occupies the faculty of The New Austrian School & Fekete Research. Would it be flat? Would it have an upward bias? Continue reading

Coordination of the Natural Social Interaction

Courtesy of Sandeep Jaitly @ Fekete research.com:

The aim of this paper is to show that the monetary/financial system that develops is a representation of some form of productive social interaction. The monetary system is the consequence, not the cause, of productive social interaction.

Money is defined as that substance which is the ultimate extinguisher of any debt. As a consequence the substance(s) used as money must have perceived value in and of itself. Menger described the iterative procedure by which a substance was promoted to money by the people themselves in ‘The Origin of Money (1892.)’

There is no record of the date at which humanity first gave value to gold and silver because the Sanskrit literature that first referred to them cannot itself be accurately dated. However, we can be sure about the mechanism that resulted in their promotion to the monetary metals courtesy of Menger.

The substance which is promoted to money will necessarily have very high inventory to primary production ratio (also known as stocks to flow ratio.) This arises from the fact that incremental additions to one’s personal holdings of this substance do not affect one’s personal terms of acceptance of this substance. This substance must exist, just as the largest number amongst a set of numbers must exist.

If one arranges all commodities on earth by the stocks to flow ratio, two metallic commodities stick out markedly: gold and silver. The extent by which these two metals differ from the next substance in terms of stock to flow is astounding and testimony to the exceptionally long period of time over which humanity has valued these two metals. There can be no other explanation.

With the monetary substance chosen, the evolution of the financial and payment system – merely a mirror of the natural ‘social interaction’ that arises from the fact of our own existence – can begin.

Economic activity is a base synonym for ‘social interaction:’ the farmer sending wheat to the miller who sends flour to the baker who makes bread for consumption. The crude extractor sending oil to the refiner who sends on refined petroleum distillate to the retail pumps. These are all examples of social interaction. Interaction that is not related per se to the medium used for money. Interaction that occurs by the very nature of our existence. Interaction that must recur for the maintenance of our existence.

A defined amount of the monetary substance is the unit of account of multiple aspects of this social interaction. An extended social procedure stretched over countless millennia itself gave birth to the monetary media, so it is quite clear to see that neither the monetary substance itself, nor the amount in existence, would influence that social interaction.

Social interaction occurs in different ‘forms’ and ‘frequencies.’ For example, the sale of bread by the baker is pretty much guaranteed whereas the sale of the new jet engine to the aircraft company is not. This is an example of differing forms of social interaction.

The construction of an airport takes a different period of time (usually) to the construction of a residential home. This would be an example of differing frequencies of social interaction. Continue reading

Positivism and The Quantity Theory of Money

I believe that within this world we are forced into boxes and categories, believing we should act and behave within certain parameters and fit into models created on previous action. I posit that this is not the case, that we are human beings with souls and we can act in an infinite number of ways on a finite timeline, not in a finite number of ways on an infinite timeline. Positivism has no place in a free thinking and flowing world but one entrenched in a blockaded and statist world.

Courtesy of  Sandeep Jaitly @ FeketeResearch.com:

What is positivism and how does the quantity theory of money fit in with it? The doctrine of positivism is a form of arch-empiricism that tries to crystallise the supposed process of ‘scientific thought’. An adherent of positivism believes that there are general ‘laws’ of cause and effect in the natural/social sciences and the only way to uncover these ‘laws’ is via the tool of research. An adherent of positivism believes that objective analysis – whatever is meant by this – is the only form of analysis; indeed there exists a zero possibility of the observer influencing the observed. Nature is orderly and regular; scientific knowledge is cumulative in character and all objective phenomena are eventually knowable – all characterize the approach of positivism.

Whilst it may seem to be a sound basis for a doctrine, positivism is utterly flawed and mischaracterizes the process of natural/social scientific thought. Simple examples shall be described to show why the approach of positivism is flawed. Take Newton’s ‘law’ of gravity. Newton’s observations of the movement of the visible planetary bodies seemed to fit with a certain type of mathematical relationship related to the masses of the bodies, and their distances apart. In slightly further detail, the relationship involves the inverse square of the distances apart. In the context that Newton was working, this ‘law’ was more than adequate. Indeed, centuries later, the ‘law’ was sufficient to send rockets into (near) outer space and back. However the nature of the establishment of this ‘law’ should not be mischaracterised – as a positivist approach did indeed cause with the observations of Einstein at the turn of the twentieth century. Newton’s ‘law’ is invalid over super-massive distances. When Einstein changed the context further beyond Newton, Newton’s observations did not quite fit the bill and scientific squabbling ensued. To the benefit of the physicists however, this supposed dichotomy was resolved – Einstein is appropriate in a broader context than Newton. Continue reading