Anatole Fekete on Gold Backwardation

Dress Rehearsal For The Last Contango. I've excerpted three paragraphs below, but you really should read the whole thing, it is a brief four pages.

Still, we have to explain the relevance of this to the present credit crisis. It is no secret that the bonds, notes, bills, and other obligations of the United States government, or any other government for that matter, are irredeemable.
That is, they are redeemable in nothing but more of the same. For example, the bonds of the U.S. Treasury are redeemable in Federal Reserve credit, which is itself irredeemable and is ‘backed by’ the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand, where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell-game? How can such a crude check-kiting scheme mesmerize the entire population of our globe? Come to think of it, the sight of this Ponzi scheme would shudder the Founding Fathers of our great Republic.

This is not an easy question to answer. But going through all the alternative explanations one-by-one, we come to the conclusion that the debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price. But if you break that final link, when gold is no longer for sale at any price quoted in U.S. dollars, then the rug will have been pulled from underneath this house of cards, and the international monetary system will collapse like the twin towers of the World Trade Center. And this is the situation that we are now confronted with.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are ‘on the house’. This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

Contango is when the futures price of a commodity is greater than the spot (current) price, backwardization is when the futures price is lower than the spot price.

As Professor Fekete explains in the beginning of the article, gold has monetary status and therefore the gold futures always experience contango. Over time, however, this premium has been eroding and he believes it could turn negative, such that future gold would be more expensive than current gold. Backwardation has occurred in recent history—a couple of times that lasted for a couple of days—but it has only been traded in a futures market for about 40 years.

Fekete is arguing that gold will be in permanent backwardation, meaning gold is not for sale at any price, or rather the spot price has rocketed. This leads him to conclude that the entire financial system will have collapsed or will collapse in short order. No sellers at any price implies that gold holders do not want to buy anything, an outcome I highly doubt, however, though its possible for financial markets to breakdown.