Lexicon

Monetary Metals strives for precise communications. Here’s a guide to the most important terms we mention. When it comes to economics & precious metals, we say what we mean, and mean what we say.

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.

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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.

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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.

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Capital is all that which provide leverage to productive human effort. We do not work any harder than they did in the ancient world, but we produce so much more due to accumulated capital, including education and organizations, plus technology, buildings, machines, tools, software, etc. The global economy is currently in a mode of capital destruction due to a falling interest rate.

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Capital churn is when perfectly good capital is rendered unprofitable, but by the new capital invested which renders the old capital submarginal. Not to be confused with Schumpeterian creative destruction, which is the result of innovation that occurs in a free market. An example of churn would be an established restaurant going out of business by a newer restaurant, with the only difference being that the newer place is financed at a lower interest rate. Churn is an effect caused by the falling interest rate, which occurs in irredeemable currency post-1981.

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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.

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People want to preserve and accumulate their capital. When the government passes laws to tax or inhibit capital, people do whatever they can to minimize the damage, including even breaking the law, in some cases. But a central bank can offer a perverse incentive to consume capital, when the interest rate is lowered. A lower interest rate raises the market price of capital assets, and people liquidate capital—or leverage it with borrowed cash—in order to consume.

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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.

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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.

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Compensation is doing the wrong thing, on purpose, purportedly to fix something else that you cannot or will not properly address. Like letting the air out of three tires, when you have a flat.

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.

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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.

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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.

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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).

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Deflation is a forcible contraction of counterfeit credit. See Inflation: an Expansion of Counterfeit Credit for a more detailed explanation.

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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.

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That which, when tendered to a creditor, makes the debt go out of existence. It must be a commodity, because as any financial asset is the liability of a counterparty. Paying with a piece of paper merely shifts the debt to another party, but does not extinguish it. Gold is the most marketable commodity, and hence is the extinguisher of debt in a free market monetary system.

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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:

  1. Manipulation of interest rates (typically lower)          
  2. Direct or indirect government control of banks and financial institutions
  3. Elimination of the convertibility of bank notes
  4. 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. 

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GDP (Gross Domestic Product) measures production + destruction. Capital churn and capital consumption both add to GDP, but really ought to subtract. A proper measure should account for the capital stock, not just income (the balance sheet, not just cash flow).

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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.

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In a gold investment, interest is paid in gold rather than dollars. For example, earning 5% interest on 100 ounces of gold as an investment would yield 5 ounces of gold.

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Gold Investment is the productive deployment of gold capital in to earn more gold. See the lexicon entry on investment and Gold Fixed Income. Gold Investment is the opposite of Gold Speculation which is the act of buying or selling gold based on price movement for more dollars.

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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).

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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.

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A working Gold Standard is when anyone who wants to, can deposit gold and earn gold interest on it.

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In a gold investment, interest is paid in gold rather than dollars. For example, earning 5% interest on 100 ounces of gold as an investment would yield 5 ounces of gold.

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When one makes a wrongful, though perfectly legal, rake over part of the economy. Examples would be municipalities issuing advanced refunding bonds as well as selling bonds for the sole purpose of buying Treasuries so as to profit from the tax arbitrage. Those that commit illicit arbitrage are profiteers on a government-created problem: falling interest rates.

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Inflation is an expansion of counterfeit credit. See Inflation: an Expansion of Counterfeit Credit for a more detailed explanation.

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In a gold investment, interest is paid in gold rather than dollars. For example, earning 5% interest on 100 ounces of gold as an investment would yield 5 ounces of gold.

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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.

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Four criteria are necessary—two of which apply to the lender and two to the borrower. The lender must know that he is lending, and consent to it. The borrower must have the means to repay, and the intent. All four are missing when the central bank borrows from the people, who think they hold money.

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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.

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Marginal Utility is the value one places on the next unit of the good compared to the previous.

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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.

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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.

Read the What is Money? essay from our Anti-Concepts of Money Series

Oversubscription is when there is more capital offered on an investment than what is needed.

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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.

A perverse incentive is often called the unintended consequences of a bad law. The focus should not be on the alleged intentions of the politicians, but of the economic cause and effect. A bad law—including all monetary policies—offers a perverse incentive. People respond to the incentive offered, and the effect is a perverse outcome.

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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.

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Silver Investment is the productive deployment of silver capital to earn more silver capital. See the lexicon entry on investment and Gold Fixed Income. Silver Investment is the opposite of Silver Speculation which is the act of buying or selling silver based on price movement for more dollars.

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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.

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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.

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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.

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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.

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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.

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The wealth effect is when the central bank makes people feel better by pushing down interest rates. Asset prices are inverse to interest rates, so asset prices go up. When people feel richer, they spend more. It should be obvious that when producing the wealth effect, the central bank is not creating actual wealth. It is perversely incentivizing people to spend their capital.

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In a gold investment, interest is paid in gold rather than dollars. For example, earning 5% interest on 100 ounces of gold as an investment would yield 5 ounces of gold.

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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.

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A zombie firm or zombie corporation has a profit less than the interest expense on its debt. It is only possible with artificially low interest rates and a very permissible credit market. Both conditions are consequences of central bank policy. Read more about our Zombie Firm Research.

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