Gold-bug academic extraordinaire Antal Fekete is worried about the world economy. He’s so worried in fact he’s posted an open letter to former Federal reserve chairman Paul Volcker on his website calling for imminent intervention:
Permanent gold backwardation (negative gold basis) is staring us in the face. The gold basis is trying to tell you something. It heralds the greatest monetary crisis of all times. It warns about the possible collapse of the international monetary and payments system.
According to Fekete, the situation in the gold markets is now so way-out-of-the-norm due to the negative gold basis that is appearing in the forward curve, it could make the debt crisis of 2008 look like a dress rehearsal.
As he writes:
[2008] gave the world a foretaste. This crisis is a gold crisis. It is a crisis indicating the threat of a shortage of the ultimate extinguisher of debt, without which our runaway debt tower is doomed. When it topples, it will bury the world economy under the rubble, as the Twin Towers buried the people working inside in 2001.
Yes, that is slightly scary. But does his theory stand up?
Well, Fekete bases his argument on the redeemability of Treasury bonds. He argues that even though the gold clause may have been abandoned over 75 years ago, investors still had the ability to “redeem” their Treasury investments via access to an open and liquid paper gold market. Essentially because a dollar-for-gold exchange market existed, it didn’t really matter if Treasuries were outright redeemable for gold or not. You could swap your dollars for gold if you wanted to.
But the appearance of backwardation in the gold market, - where physical gold prices and front-end futures prices are higher than those further down the forward curve - implies scarcity of the yellow metal on the physical side, at least for exchange into dollars. You can alternatively view it as the market becoming increasingly illiquid because no one is eager to sell. In that case, the theory goes, if your dollars can’t buy gold, what good are they?
As Fekete explains:
But once permanent backwardation makes gold unavailable, debt becomes irredeemable in the eyes of the bondholders. Paying U.S. bonds at maturity in F.R. notes does not establish redeemability. The latter is just evidence of debt secured by the former as collateral revealing that bonds are not really redeemable at all. An interest-bearing bond is replaced by a non-interest-bearing bond, that is, by an inferior instrument. All you do is shuffle various forms of irredeemable debt. When the world wakes up to this prestidigitation, the international monetary system will not be able to survive the shock-waves. The chaos that will engulf the world is appalling.
Fekete’s solution to the problem is pretty simple: bring back the gold standard as this will help ease investor jitters over dollar-gold redeemability. As he explains:
The world’s monetary gold should be remobilized. This can be accomplished by opening the U.S. Mint to the free and unlimited coinage of gold. There should be no attempt to fix, cap, or otherwise control the dollar price of gold. The gold coins of the United States ought to be made available to bondholders in order to provide for an orderly retirement of debt, if that is what the bondholders want. When they become convinced that this avenue is open to them through the unlimited availability of gold coins of the realm, the scrambling for liquidity will peter out and stability return.
The only problem is, there isn’t really enough gold in the world to suffice for that sort of arrangement.
Related links:
The gold backwardation theory - FT Alphaville
REMOBILIZE GOLD TO SAVE THE WORLD ECONOMY! - Antal Fekete
Move over, Amero; presenting the “united future world currency” - FT Alphaville
