Antal E. Fekete is writing There Is No Fever Like Gold Fever.

Before I reply I want to thank Antal for not taking my post Nonsense About Gold Backwardation, Ameros,Yuan Devaluations, etc. as a personal attack. It certainly was not meant to be.

In email responses, some questioned why I would be disparaging gold.

I am not disparaging gold, and as proof I offer I Like Gold Here and I might point out that Sitka Pacific Absolute Return strategy has about a 20% allocation to gold and/or gold miners that we have held for most of the year, and hold right now. This can change at any time of course, and without warning, I just do not expect it to change anytime soon.

Finally, I point out that I believe gold is money and have stated such many times in many places, annoying many who believe otherwise. A good case was presented by “Trotsky” on my blog on June 26, 2007 in Misconceptions about Gold.

By the way, “Trotsky” has his own blog, Acting Man writing under a new pseudonym “Pater Tenebrarum”. Inquiring minds may wish to take a look. Pater definitely write with an Austrian economic point of view that most believers of gold will find welcome.

With that out of the way let’s consider a few snips from There Is No Fever Like Gold Fever.

Mish needs to educate himself on the fundamental difference between a monetary and a non-monetary commodity, before he can grasp the idea that lasting backwardation in gold is tantamount to the realization that ‘gold is no longer for sale at any price’.

“Gold is no longer for sale at any price” is the exact sentence that I dispute. Gold is still for sale. It is still being delivered although there are indeed shortages of some retail forms of gold (small quantities and coins) as opposed to full sized bars.

On November 24th I had the following conversation with James Turk at GoldMoney.

Mish: James what size bars of gold and silver do you buy?
Turk: Bars that meet the standards of the LBMA. Gold bars weigh approximately 400oz per bar, and silver 1000 per bar.

Mish: Any problems with deliveries?
Turk: Not yet, we buy in the spot market for cash. We have had difficulty though in finding bonded silver bars in London (i.e., bars in bonded warehouses which enables our customers to buy silver without UK’s onerous 17.5% value added tax – by buying bonded bars, the tax is levied only if they take delivery of the bars). Consequently, we raised our fees in London to discourage buying there so that customers buy silver in Zurich instead, where we have had no problem finding bars.

I do not believe there is going to be a failure to deliver December gold, or any other month anytime soon. And even if it were to happen it hardly means hyperinflation.

Commodity prices certainly are not confirming any hyperinflation theories.

$CRB Commodity Prices

click on chart for sharper image

If hyperinflation was around the corner, there would be at least a hint of it somewhere. There is no hint of it in commodity prices, housing prices, the stock market, or anywhere else.

Treasury Yields Negative

There is a mad scramble for the rush of treasuries with negative yields (backwardation) as noted in Huge Demand For Treasuries As Banks Refuse To Lend. Hoarding money is simply the opposite of what one would expect to see in inflation and hyperinflation.

I am sticking what what I said in the above link “This money supply increase will matter at some point, but in light of credit destruction and falling asset prices, the point at which it does matter may be much further out that most think.

“Pater Tenebrarum” had this to say in an email exchange.

Anything that trades on a futures exchange can go into backwardation, but it’s still a rare event with gold. When it happens, it’s usually bullish.

This is how one must think of a gold backwardation: It is partly a side-effect of interest rates of competing currencies falling to near zero, or being expected to do so. This lowers the opportunity cost of holding gold.

The gold forward rate usually expresses this opportunity cost (which is why forward selling was so popular during the bear market). Of course, it should not really go into backwardation. Instead, the forward curve should merely flatten.

After all, interest rates are not likely to go negative, and storage costs must also be baked into the curve.

So a backwardation does indicate that current demand is strong, and in all likelihood it also indicates that gold lenders are not eager to lend out much gold.

Fekete is only right about one thing: in Zimbabwe, you can not buy gold with Zimbabwe dollars anymore, regardless of how much money you offer. This is basically when an inflationary conflagration reaches its point of no return.

U.S. Not Zimbabwe

Interestingly interest rates did indeed go negative but I doubt that lasts.

And I must point out that the U.S. is not Zimbabwe, no matter how many try to equate the two. Which is a second point of contention because the U.S. is clearly in deflation if one takes into account the destruction of credit that is happening at a staggering rate. That destruction of credit and further expectation of more destruction of credit is of course why banks won’t lend.

To see what hyperinflation looks like please check out some extremely funny pictures of Zimbabwe in a post called What the real crisis is like!

Here is one of a set of about 26 images. Click on the link, it’s really funny.

Odds of that happening anytime soon in the U.S. are remote. Destruction of credit and value of physical assets such as housing, commodities, and equity markets is happening at a far faster pace than printing. And what printing is taking place is sitting for the most part in treasuries.

Gold Signaling Deflation Not Inflation

Gold is acting how it should act in deflation: Strengthening in real terms vs. commodities. Gold is money, money is hoarded in deflation, and gold is being hoarded. That does not mean or imply ‘gold is no longer for sale at any price’, at least outside of Zimbabwe.

It is comparisons to Zimbabwe that may be years or decades early along with various conspiracy theories elsewhere about central bank suppression of the price of gold, coupled with rumors spread for the past few months that there will be a failure in the delivery of December gold, etc, that turn people off about the gold story.

Such stories turn people off because they are hype. If governments could manipulate prices, the stock market would not have fallen 50%, Bear Stearns and Lehman would not have gone under, and housing prices would not have collapsed. If the government is acting to suppress the price of gold, then bring on more of it cause it sure is failing.

Articles that launch the idea that “gold is going to the moon next month on a failure to deliver”, or that “gold will not be available at any price” because of backwardation, and comparisons between the U.S. and Zimbabwe simply do more harm than good to the gold story.

We will soon know if there is a failure to deliver in December gold. I actually hope there will be! I just am not calling for it, nor should it be expected, nor is the U.S going to look anything like Zimbabwe anytime soon.

Finally, the price of gold in U.S. dollars most certainly is not headed to infinity in any kind of timeframe worth making investment decisions on, and that is the point I was trying to make.

Mike “Mish” Shedlock
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