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Why don’t we look at this from a different aspect and try to understand who is saying why and when about what is actually happening and whose truth does one believe in. There are certain indicators that do not lie and gold is one of them.

The price of an item is driven by the supply and demand factors. When supply is low and demand is high, the price skyrockets. Alternately, when supply is a plentiful and demand is weak, the price bottoms out. This is an economic certainty. Gold however is different. It retains its intrinsic value regardless of whether the supply and demand is evident or otherwise. The only other commodity having such inherent characteristics is oil. That is why oil is also known as “black gold”. Herein lies the dilemma.

When Citicorp, the largest banking institution in the entire history of the world, is in dire straits and requiring a government bailout, one can say that the global economic shit has hit the fan, big time. Credit crunch. What the Hell is a credit crunch? Well, insofar as I know, it is the deprivation of credit and without credit (owing to whatever factors) there is no trade. A company that cannot do trading is a dormant company. A nation that cannot do trading becomes a banana republic. Hyperinflation sets in as the value of its currency becomes insignificant. Prices for everything (goods and services) shoot up and the overall value of a nation decreases. Savings and pension funds are devalued and all banking institutions take a massive wallop. Share prices will be non-indicative of its true value and will render a nation’s economy worthless.

So what has this to do with gold? Gold is traded in US Dollars (so is black gold). When the value of greenbacks depreciates against all currencies, gold would hereafter be traded at a lesser value than what it is actually worth. The price of gold (and black gold) will (one would think) henceforth rise to offset this devalued dollar. Well, this has not happened. The prices of gold and black gold have actually dropped, rather drastically too. Okay, one anomaly does not indicate a global economic meltdown.

Let us now look at the futures prices for gold. Gold futures for January and February 2009 are, mildly said, bleak. When a commodity’s spot price is higher than the following delivery month’s futures price, it means that the value of that particular commodity is dropping. No big deal as the value of gold has always automatically corrected itself. When the following month’s futures price is also higher than the next following month’s futures prices, the economists call it “backwardation”. In the entire history of the world, gold has never experienced a backwardation, until December 2008. In fact, gold futures have never experienced a fall in price (and worth) for more than one single trading day and certainly never ever trickled across the following delivery month. Now we are looking at a minimum of three months’ drop in prices (since the 1st of December). This means that the gold basis has turned negative. Anomaly number two. Same with black gold – anomaly number three.

What is exactly the gold basis? The gold basis is an incorruptible measure of trust in paper money. During the “Gold-Standard” Great Depression years of Roosevelt, the US Dollar was backed by physical gold. Not anymore since 1971 when it was allowed to float in the international trading markets. All currencies are now operated on a system called the “fiat money” which can be defined as “money that is intrinsically irredeemable and is primarily utilized only as a medium of exchange”, hence the gold basis as an indicative backing system for a currency’s actual worth.

When the gold basis turns negative, the confidence and trust accorded the value of currencies drop. Paradoxically, one US Dollar now is not worth one US Dollar of before. When this happens, hyperinflation sets in. A loaf of bread costing US 1 Dollar might cost US 10 Dollars now. Where does the additional US 9 Dollars come from? Credit, what credit? Remember that there is a credit crunch?

And then there are the paper gold traders and bullion banks. Gold can also be traded in paper form whereby the issuers guarantee the buyers ala traders ala investors, the value of gold on a piece of paper or in a “gold account”. In Malaysia, certain major banks offer such services. The government guarantees bank depositors their Ringgit but not investors. Likewise, the banks guarantee the value of the investment, not the worth. If ever the international bullion banks go bankrupt (either fraudulently or through the depreciation of the US Dollar against the value of gold), the investment will turn sour. This is quite possible if the price of gold continues to drop. In a backwardation scenario, spot gold traders will not continue to trade as gold producers stop production and go into hibernation. Futures gold traders holding these contracts will be wiped out as there can be no deliveries of this commodity and their contracts give them no right to physical gold anyway. Since there will be no legal trading of gold, all legal protection of the ownership of and trade in gold will be suspended indefinitely.

This is altogether only hypothetical but in reality quite feasible. How will it affect Malaysia? The Ringgit is also an irredeemable “fiat” currency and not backed by any physical form of gold, and irredeemable currency can last only as long as it is visibly capable of supporting the futures market(s) in gold. Without a futures market trading gold, “wherefore art thou, my Malaysian Ringgit?”

Yes, the southeastern nations of Asia (except Vietnam and Indonesia) are not directly affected by the depressing economic downturn as being experienced now in America and Europe. Part of the reasons why is due to our de-leveraged banking institutions and the high amount of foreign currencies currently being held by the respective governments here. Inadvertently though, the effects of the larger American and European markets will trickle down here and Malaysia will not be immune to it. This is because the Malaysian economy together with all the southeastern nations’ economies added together are not large enough to sustain this corner of the earth irrespective of the massive American and European markets. No matter what the government does here to try to stimulate the local economy, the greater effects from America and Europe will eclipse all attempts to divert this global economic tsunami away from our shores.

You can bet your last “irredeemable” ringgit on it. Better still; bet your last ringgit on the Indian economy because India is the only country left in the entire world enjoying a positive economic growth rate.

- Hakim Joe

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