Arbitrage is the act of profitably straddling a spread: buying at the offer (also called the ask) in one market and selling at the bid in another. The process of arbitrage compresses price differences between markets. A carry trade is an example of an arbitrage.
Backwardation is when one can make a profit by decarrying: selling a commodity for cash and simultaneously buying a futures contract. It is typically a signal of a shortage in a commodity.
Basis is the profit or loss earned on a carry trade, quoted as an annualized percentage. It is calculated as Basis = (Future Bid – Spot Ask) / Spot Ask.
Capital Consumption is when investors spend their investments rather than living off the yield of those investments. See this article for a more detailed explanation.
Carry involves buying (at the offer) a commodity and selling (at the bid) a futures contract against it. If done with borrowed cash, one pays interest on the borrowing to buy the commodity, plus one has costs to store and insure it in the meantime (called the cost of carry). For the trade to be profitable, the futures price needs to be higher than the spot price (i.e., contango) by an amount greater than the costs of carry.
Cobasis is the profit or loss earned on a decarry trade, quoted as a percentage per annum. It is calculated as Cobasis = (Spot Bid – Future Ask) / Future Ask.
Contango is when one can make a profit carrying: selling a futures contract and simultaneously buying a commodity. It implies that there is plenty of the commodity available, or at least that there is no scarcity.
Counterfeit Credit occurs when a loan is made, and the lender does not know or approve, and/or the borrower lacks the means or the intent to repay the loan. See Inflation: an Expansion of Counterfeit Credit for a more detailed explanation.
Currency is the most marketable credit instrument. Marketability refers to the bid-ask spread, and most marketable means the spread of this good is narrower than all others. Keith Weiner’s brief article on Forbes describes why this matters. Like money, currency is used as a medium of exchange. But while money is a commodity, currency is a promise to pay. Currency can be redeemable for gold, as in the classical gold standard. Currency can be irredeemable, as in the dollar after 1971. Currency can be backed, as the dollar today, by assets such as bonds. Or it can be unbacked, as bitcoin.
Decarry involves selling (at the bid) a commodity and buying (at the offer) a futures contract against it. For the trade to be profitable, the spot price needs to be higher than the future price (i.e., backwardation).
Duration Mismatch is when a bank borrows using short term loans or bonds, but lends for a longer term. It can cause bank runs and market crashes when depositors demand their money back, as banks must desperately sell any asset they can into a market that is suddenly “no bid”. See Why Duration Mismatch Will Always Fail for a more detailed explanation.
Financial Repression is the use of political measures to gain control over the finances of individuals. The purpose of such measures is to direct funds to the government that would otherwise flow elsewhere. Such measures often include, but are not limited to:
- Manipulation of interest rates (typically lower)
- Direct or indirect government control of banks and financial institutions
- Elimination of the convertibility of bank notes
- Regulation that restricts competition in banking, and raises barriers to entry
The Federal Reserve Banking System is the primary engine of financial repression today in the United States.
GOFO is short for gold forward offer rate, the rate at which gold is lent on a swap basis against US dollars, or the interest rate differential between dollars (i.e., LIBOR) and gold (i.e., the calculated Gold Lease Rate). GOFO = LIBOR – Gold Lease Rate. See About Monetary Metals’ Gold & Silver Forward Offered Rates for a more detailed explanation and our Gold Forward Rates page for daily live charts of MM GOFO™ rates.
Gold-Silver Ratio is the gold price measured in silver. The bid ratio is the amount of silver you would receive if you sold gold (on its bid) and bought silver (on its offer). The offer ratio is the amount of silver you would need to pay if you bought gold (on its offer) and sold silver (on its bid).
Gold Speculation is the act of buying or selling (shorting) gold based solely on the expectation of price movement. In gold speculation, gold is preferred to stocks, bonds, currencies, real estate etc., but serves the same purpose: a bet on the price action in the Fed’s casino. For more information, see this article and the lexicon entry on speculation. Gold speculation is the opposite of gold investment.
Investment is the act of deploying capital to finance a productive enterprise in exchange for more capital in return. Unlike speculation, which converts one person’s wealth into another person’s income, investment allocates capital to a productive purpose. The investment is used to produce new goods and services that otherwise wouldn’t have existed. Unlike speculation, investment isn’t zero-sum but rather a win-win-win deal. The investor, entrepreneur, and ultimately all of society end up benefitting as a result. See this post for a more detailed explanation.
Marginal Productivity of Debt
Marginal Productivity of Debt is how much additional GDP is added for each newly-borrowed dollar. See the article Marginal Productivity of Debt for a more detailed explanation.
Marginal Utility is the value one places on the next unit of the good compared to the previous.
Maturity Transformation is when a bank borrows using short term loans or bonds, but lends for a longer term. See Duration Mismatch for more information.
Permanent Backwardation is the withdrawal of bids denominated in gold for irredeemable government debt paper (e.g. dollar bills). Backwardations are usually “cured” by rising prices but if it is deepening as the price of gold is rising rapidly that means the backwardation may become permanent. See Permanent Gold Backwardation: The Crack Up Boom for a more detailed explanation.
Money is the most marketable commodity. Marketability refers to the bid-ask spread, and most marketable means the spread of this good is narrower than all others. Keith Weiner’s brief article on Forbes describes why this matters (see On the Origins of Money, by Carl Menger, for a complete discussion). A corollary to its marketability is that money is the extinguisher of debt. This is why JP Morgan said, “Money is gold, nothing else.” Money is used as a medium of exchange, but currency is also used as a medium.
SIFO is short for silver forward offer rate, the rate at which silver is lent on a swap basis against US dollars, or the interest rate differential between dollars (i.e., LIBOR) and silver (i.e., the calculated Silver Lease Rate). SIFO = LIBOR – Silver Lease Rate. See About Monetary Metals’ Gold & Silver Forward Offered Rates for a more detailed explanation and our Silver Forward Rates page for daily live charts of MM SIFO™ rates.
Silver Speculation is the act of buying or selling silver based solely on the expectation of price movement. In silver speculation, silver is preferred to stocks, bonds, currencies, real estate etc., but serves the same purpose: a bet on the price action in the Fed’s casino. For more information, see this article and the lexicon entry on speculation. Silver speculation is the opposite of silver investment.
Speculation is the act of buying or selling (shorting) an asset solely based upon the expected price movement of that asset. Capital gains from speculation convert the wealth of one party into the income of another. This is a hidden type of capital consumption. While it’s true that speculation adds liquidity to markets, speculation especially under an unstable interest rate is zero-sum and does not increase net economic productivity. For more information, see this article, this article or this article.
Stock to Flow Ratio
Stock to Flow Ratio is the amount of a commodity held in inventories divided by the amount produced annually. It is a measure of abundance. Gold has the highest stock to flow ratio of all commodities and as a result it should never normally remain in backwardation as there is no shortage of gold.
Temporary Backwardation is when the expiring gold or silver future contract flirts with or even slips into backwardation for a period before expiry. It is distinguished from Permanent Backwardation, which is when all contract months are in backwardation. See What Drives Negative GOFO and Temporary Gold Backwardation? for a more detailed explanation.
Unadulterated Gold Standard
Unadulterated Gold Standard is a free market in money, credit, interest, and discount based on the right of the people to hold and use gold coins, and which includes Real Bills and bonds. See The Unadulterated Gold Standard for a more detailed explanation.
Yield Purchasing Power
Yield Purchasing Power is the yield on assets divided by the Consumer Price Index (or other index). It is a measure of the productivity of assets. See Yield Purchasing Power for a more detailed explanation.