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Trading Lessons

Gold Basis Screwed

Commodities / Gold and Silver 2010 Jul 27, 2010 - 03:14 AM GMT

By: Professor_Emeritus

Commodities Who needs a thermometer to know that the heat-wave is on?

Fofoa has just published another thoughtful paper with the title: Red Alert: Gold Backwardation!!! http://fofoa.blogspot.com. It raises the question nobody has apparently raised before: "Is the dollar bidding for gold, or maybe gold is bidding for dollars?" And it gives an amazing answer: the gold basis has been screwed and it has been giving bogus signals for more than a year. We have likely had backwardation all this time but it has been stonewalled. There is no real gold market any more. Goldman Sucks is playing with itself. Most trades are bogus, sales as well as purchases. Leases ditto. What Goldman Sucks couldn't get away in a falling market, it can in a rising one.


There are other metrics beside the gold basis that the market has developed in the meantime. One such is GOFO = $ LIBOR - GLR (the gold lease rate). On the face of it, GOFO cannot ever go negative. If it did, it would mean that the risk in borrowing gold is greater than the risk in lending dollars, even though the latter has infinite counterparty risk. But there is no counterparty risk in borrowing gold! That's a telltale for you. Nasty negative GLR, nasty negative GOFO, shut up, both of you!

Fofoa says that the dollar needs voluntary bids from private physical gold holders to survive. But the pool of real bids is bone dry and cracking. Dollar liquidity is just a cheap facade. As the gold price rises slowly, nervous Nellys, suckers, and other weak hands will relinquish bits and pieces of the yellow precious which will keep the merry-go-round in motion. Gold-bidding for dollars can be kept alive on a life support system. Indefinitely? Pretty well. But Fofoa says that Goldman Sucks has shot itself in the foot.

I can add little to these speculations, but I would like to note another telltale: the fine Goldman Sucks has agreed to pay Uncle Sam. On July 19 The New York Times carried a story entitled: Goldman Employee Denies Fraud. Just days after Goldman agreed to pay $550 million to settle securities fraud claims, a midlevel employee of the bank, Fabrice Tourre, has filed a 13-page denial and sought dismissal of the case. Smell the stink? Goldman agrees to pay more than half a billion while a vice president, central to the case, challenges the charges. To add another little twist, according to the NYT article, Goldman Sucks released a batch of old e-mail messages of Fabrice Tourre, who calls himself "Fabulous Fab" for his skills in selling "Frankenstein bonds" (= bonds going bad fast) "to widows and orphans" on the tarmac of Brussels airport, designed to damage Mr. Tourre's case in the continuing S.E.C. investigations. Who is fooling whom here? Is it possible that the fine they levy and pay is just another case of check-kiting? But why would they do such a thing? Why, a bogus fine could deflect suspicion away from a much bigger charade in misleading the public, namely, to cover up gold backwardation!

Meanwhile all we can do is to sharpen our tools in sleuthing to uncover the contango. I started a Seminar in Australia in 2008 on backwardation and the secular vanishing of the gold basis. By all standards, it was a huge success. We continued in 2009 and were making plans to reassemble in Sidney, Australia this year in November. I am sorry to give notice that the 2010 The Third Annual Seminar on gold backwardation and the last contango is cancelled, due to the greed of the professional organizers of the event. Rest assured, however, that the research is going on, and if we get a decent invitation, we shall make up for the cancelled event, with further revelations!

In the meantime, here is a hint to whet your appetite. Fofoa should refine his indicator GOFO as follows. GOFO = LIBOR - GLBR, where GLBR = gold lease bid rate, i.e., the rate which bidders are willing to pay for leased gold to the bullion bank. It should be somewhat greater than GOFO as it has been defined up to now. (Why?) It is true that GLBR is not publicly quoted, but a little bit of sleuthing should be able to produce a proxy. Then GOFO will tell you how profitable the gold carry trade is, or is getting. Negative GOFO tells you that it is making a loss and net shorts in gold are under water or will soon be.

But there is another indicator equally important for successful sleuthing. (Goldman Sucks, are you listening?) I shall call it COGOFO. Here it is: COGOFO = LIBBR - GLOR. Here LIBBR = London interbank bid rate; it is the rate at which a bank in the London market is willing to borrow from another. Furthermore, GLOR = gold lease offered rate; the rate at which bullion banks are willing to lease out gold. Again, LIBBR is not in the public domain, so due diligence is required to come up with a reasonable proxy.

Here are some quiz questions: (1) What is the relation between LIBOR and LIBBR (2) and between GLOR and GLBR (3) and between GOFO and COGOFO? (4) Can COGOFO go negative, and if so, what does it mean? (5) How can you make inferences about movements at large between cash gold and paper gold from the variation of GOFO and COGOFO? (6) If you plot GOFO and COGOFO, what does a crossover of the two mean?

As my faithful students will notice, the distinctions I am recommending to Fofoa are those of Carl Menger, the 19th century founder of the Austrian School of Economics. The New Austrian School of Economics that will start its first ten-day course on August 9 in Budapest will provide its audience with full background on Menger's theories, and how to apply them in the present situation where markets are rigged and governments are lying. Send in your answers to: aefekete@hotmail.com, and participate in the draw that will take place at the 3rdAustralian Seminar on Backwardation and the Secular Vanishing of the Gold Basis! Prizes will include gold nuggets.

IMPORTANT ANNOUNCEMENT

Thanks to a recent donation, scholarships covering tuition and college accommodation at the ten-day course (see below) have become available for students. First come, first served.

Calendar of Events

August 9-20, 2010, in Budapest, Hungary. The New Austrian School of Economics, the first 20-lecture course offered, entitled: Disorder and Coordination in Economics -- Has the world reached the ultimate economic and monetary disorder? For more information, see the website www.professorfekete.com or contact szepesvari17@gmail.com

Preliminary announcement: a session in Hong Kong in late October is on the drawing board, followed by more events in New Zealand in November. Stay tuned.

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics

"GOLD STANDARD UNIVERSITY" - Antal E. Fekete aefekete@iisam.com

For further information please check www.professorfekete.com or inquire at GSUL@t-online.hu .

We are pleased to announce that a new website www.professorfekete.com is now available. It contains e-books, archives, news about GSUL, and material of current interest

Copyright © 2010 Professor Antal E. Fekete
Professor Antal E. Fekete was born and educated in Hungary. He immigrated to Canada in 1956. In addition to teaching in Canada, he worked in the Washington DC office of Congressman W. E. Dannemeyer for five years on monetary and fiscal reform till 1990. He taught as visiting professor of economics at the Francisco Marroquin University in Guatemala City in 1996. Since 2001 he has been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996 Professor Fekete won the first prize in the International Currency Essay contest sponsored by Bank Lips Ltd. of Switzerland. He also runs the Gold Standard University on this website.

DISCLAIMER AND CONFLICTS - THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY. THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING THAT IT REPRESENTS, UNDER ANY CIRCUMSTANCES, A RECOMMENDATION TO BUY OR SELL ANY SECURITY. THE CONTENT OF THIS LETTER IS DERIVED FROM INFORMATION AND SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT, IN ANY SECURITIES MENTIONED, WHICH MAY BE CHANGED AT ANY TIME FOR ANY REASON.

Antal E. Fekete / Professor_Emeritus Archive

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