Professor of Money and Banking

San Francisco School of Economics

A year ago I conducted a Seminar on the gold basis and backwardation in Canberra, Australia.

I suggested to my audience that the gold basis (premium in the nearby futures on spot gold,

with negative basis meaning backwardation) as a “pristine indicator that, unlike the gold

price, cannot be manipulated or falsified by the banks or by the government. Thus it is a true

measure of the perennial vanishing of spot gold from the market, never to return, at least not

as long as the present fiat money system endures.”

That was then. Today we are one year older and that much more experienced. We now

know that the banks and the government have in the meantime found a way or two to

manipulate the gold basis as well. Next month I have another Seminar coming up in Canberra.

I shall address the problem of gold basis, giving a full account of what we know about the

efforts of the powers that be in trying to falsify this most important indicator, the guiding star

of refugees who have entrusted their fate to a golden dinghy on a stormy sea. To the

government, the gold basis is like the naughty child who blurts out unpleasant truths. He must

be gagged and silenced at all hazards. Fool’s gold basis is even more important than fool’s

gold in terms of the number of people victimized.

A prime suspect is the gold basis calculated using COMEX futures prices, or the forward gold

price of the London Bullion Market Association (LBMA). Further suspects are: certain gold

Exchange Traded Funds (ETF’s) such as GLD and their weekly updated bar lists; certain

central banks such as the Bag Lady of Threadneedle Street (nickname of the Bank of

England) that has rushed to the rescue of her agents, the bullion banks, trying to bail them out

by offering substandard (22 carat) gold in settlement of contracts at the verge of being

defaulted. Substandard gold stinks, as I shall explain below.

There seems to be circumstantial evidence that this month the gold exchanges are

unable to honor their expiring contracts for which delivery notices have been issued in

September. It has occurred in spite of a robust, even increasing, contango. Furthermore,

circumstantial evidence exists that counterparties to these expiring contracts for future

delivery — bullion banks, to be precise, the name of J.P.Morgan and Deutsche Bank being

prominently mentioned — have offered bribe money up to 125 percent of the quoted spot

price to holders of long contracts if they would take settlement in paper, on condition that the

2

embarrassing affair will be kept secret. If true, these maneuvers are motivated by the desire to

conceal the real gold basis, and to deny that gold is in or approaching backwardation. If the

truth were widely known, then there would be a run on the bullion banks. The “let’s get

physical” movement would trigger a chain-reaction culminating in all offers to sell physical

gold being permanently withdrawn around the globe. “Gold would not be for sale at any

price”, whether quoted in US or in Zimbabwe dollars — or, for that matter, in any

irredeemable currency — the only kind of money people are allowed to have nowadays. The

curtain would fall on the “Last Contango in Washington”. The day of permanent gold

backwardation would dawn. The chapter on a reactionary episode of history, irredeemable

currency, allowing the Treasury and its central bank to create unlimited liabilities out of

nothing which they have neither the means nor the intention to honor, but could use them for

check-kiting purposes to mesmerize gullible people around the world, would be closed and

become but a bad memory.

We must guard ourselves against falling victim to the rumor-mills, while keeping our eyes

peeled for the very real possibility that the growing shortage of physical gold can no longer be

papered over with paper gold (pun intended). Another story is about GLD, a leading gold

ETF, which publishes its bar-list every Friday at the close of business, reporting the serial

number of every bar in inventory. The list is customarily well over a thousand pages long.

But, lo and behold, on Friday, October 2, and on Friday, October 9, the bar-list shrank to a

mere couple hundred pages, with no explanation offered. Could it be that the management of

GLD has taken a bribe, and replaced physical gold in inventory by paper gold, in order to save

the face and skin of the bullion banks that have gone naked short and subsequently got

cornered?

If so, it won’t get very far. The leadership of the US House of Representatives may

well be able to put in deep freeze the motion of Dr. Ron Paul, seconded by over 250 other

congressmen on both sides of the aisle, to audit the Federal Reserve, but it has no power to

stop the auditing of the ETF’s or bullion banks as required by contract law. According to

some reports independent auditors, at the insistence of parties holding expired forward

purchase contracts to deliver gold, are descending on ETF’s and check their vault’s contents

against their books. The noose is tightening around the neck of fraudulent banksters caught in

the short squeeze.

Reports are circulating that similar audits of certain Asian depositories have already produced

“good” delivery bars (400 oz or 12.5 kg gold bricks) that have been gutted and stuffed with

tungsten — a metal whose specific weight approximates that of gold, so that the famous test

of Archimedes (fl. 287-212 B.C.) based on the Law of Buoyancy, designed to expose

fraudulent goldsmiths, would be inapplicable. Isn’t it strange that criminal law punishes the

fraudulent stuffing of gold bars, but allows the stuffing of gold assets in the balance sheet with

paper gold? After all, the specific value of tungsten is much higher than that of paper!

According to a well-known anecdote, King Hiero II of Syracuse ordered his goldsmith

to make him a new crown in the shape of a laurel wreath out of solid gold. When the finished

crown was delivered to him, the king had reasons to suspect that he had been short-changed

by the goldsmith who presumably diluted the gold with base metals. He called upon

Archimedes to make the determination but without damaging the crown. After some hard

thinking Archimedes solved the problem. He could determine the volume of the crown by

3

submerging it in water, and from the volume and weight he could calculate the crown’s

density. Comparing it to that of gold, the fraud would be exposed if the density of the crown

were lower. It is evident that, if the goldsmith had had a metal at his disposal of the same

density, but cheaper than gold, then Archimedes’ test would have been inconclusive. It is this

property of gold that makes it second to none among the metals, along with other similar fine

properties, explaining why it is a most desirable form of wealth.

In 1933 F.D. Roosevelt did not stop at the mere confiscation of the constitutionally mandated

gold coins of the realm. He sent them to the refinery in order to melt them down. He wanted

to expunge the evidence from history that this great republic once had the largest pool of

circulating gold coins anywhere, ever. Roosevelt betrayed his oath that he would uphold the

U.S. Constitution and went ahead to rob the citizenry by calling in the gold replacing it with

Federal Reserve notes, the value of which he promptly cried down by 56 percent, under the

disguise of monetary reform. The melted gold was given the shape of gold bars and was

stored in Fort Knox, West Point, and other depositories.

Careful as though Roosevelt was to cover his trail in getting away with the loot, he has

made one major blunder. He failed to make the looted gold fungible. The coins were not made

of pure gold: they were an alloy 22 carat in fineness. The reason was to make them stand up

to wear and tear better in circulation. All countries striking coins for general circulation

employed an alloy. Roosevelt thought that he could save the cost of refining the melted gold

to the international standard of 995 fine (24 carat) so the gold bars in Fort Knox are only 22

carat fine. In consequence these gold bars are not fungible. They are easily identifiable as

contraband, the proceeds of the Great Gold Heist of 1933. The shear quantity of this looted

gold makes it impossible to refine it at this late hour. The U.S. gold stinks, and will keep on

stinking.

The memory of the Crime of 1933 comes back to haunt the government that

committed it. For 75 years nobody suspected that one day these gold bars may be needed to

pacify the market. Everybody thought that they could rest in peace in the depositories till

doomsday. But then, as the proverb says, ill-gotten goods seldom prosper. The Great

Financial Crisis of 2007 struck and the dollar got into hot water. The U.S. Treasury ran out of

fungible gold and had to dip into its hoard of looted gold. It is too late now; the bad odor

cannot be expurgated from the U.S. gold hoard. Should this gold ever show up at an audit, or

as bribe money, it will immediately be recognized. Everybody will see that it originated from

the Great Gold Heist of Roosevelt and that the shame of the U.S. government is attached to it.

Worst of all, it will also reveal that the U.S. has fallen upon hard times. The looted gold was

released in desperation, in trying to stem the tide of burgeoning gold backwardation.

The result is that every time 22 carat gold pops up anywhere in the world, for example,

as an offer to pacify angry possessors of expired gold futures contracts, it will be new

evidence of the fact that Uncle Sam is cornered and tries to bribe his way out of the corner

with looted gold. If Uncle Sam is trying to pay the blackmail on behalf of his cohorts the

bullion banks, in offering 22 carat gold in settlement of contracts calling for 24 carat fineness,

then the world will immediately know what’s up, even if the substandard gold is offered

through intermediaries. Everybody will know that Uncle Sam is trying to cover up, or fend

off, backwardation to prevent the gold basis from going permanently negative. The telltale

sign will haunt him and make the gold crisis worse, not better. Most of the possessors of

expired gold futures contracts will refuse to take substandard gold for settlement, but neither

will they keep Uncle Sam’s secret. Apparently there are already two known instances where

the looted gold turned up. Central banks, in coming to the rescue of their agent bullion banks

4

that were caught red-handed in being naked short in gold, offered 22-carat gold to bail out

their agents. This fact in itself makes the quantity of gold available for resolving the gold

crisis smaller. Permanent backwardation in gold, the Nemesis of irredeemable currency,

cannot be postponed much longer.

Rob Kirby, the best sleuth we have to uncover government hanky-panky in the gold market,

has castigated the cover-up of what he considers a severe backwardation in no uncertain

terms. He calls central banks for their complicity in the cover-up a blight on humanity. In his

opinion, the central banks are aiding and abetting the plunder of the sovereign assets of their

countries to bail out their agents or friends in an attempt to “sweep the whole bloody mess

under the carpet”. This assessment is apt. It is no exaggeration to say that the regime of

irredeemable currency is a blight on humanity. The Uncle Sam will never be able to live down

his shameful role in plunging the whole world into the monetary abyss.

Central banks are also guilty of corrupting the young — a crime that was punishable

by death in Athens at the time of Socrates. They have hijacked monetary economics lock,

stock, and barrel. They have commissioned scribes for hire to rewrite it as a eulogy of their

sordid trade, the creation of fiat money. Graduates of our universities are no longer taught that

this regime has a 100 percent mortality rate through the sudden death syndrome, pauperizing

the population in the process. The role of gold in history is falsified and distorted. People are

told that harking back to gold money is a sign of backwardness and reactionary thinking.

Modern money is managed money — as long as they themselves are entrusted with its

management. In this view the U.S. Constitution is a backward document not worth bothering

with, so they don’t bother with proposing a constitutional amendment changing its monetary

clauses to conform it to present practice.

An axiom of Aristotle states that no substance can be present at two different places at the

same time. The reason for gold’s monetary role is rooted in this very axiom. The same paper

promise can be present in the asset column of the balance sheets of any number of individuals.

The same gold coin cannot. This eliminates the possibility of a miraculous proliferation of

money — putting latter-day money changers out of business. But once gold is removed from

the monetary system, the miraculous proliferation of money starts in earnest. Central bankers

will distribute it, if need be, from helicopters hovering overhead. The proof that this is

beneficial to society is