First off, the commodities. The price of gold has fallen along with the stock market. What is emerging is a picture of technical traders and hedge funds that use gold as a swing value for storing money between plays. Many of them find themselves short on money when the market goes down so sell gold to cover their plays, which drives the price of gold down. If, for instance, a hot shot trader were playing the carry trade against a paper security such as a stock or bond, and suddenly had to cover because what he had borrowed against lost value, he'd have to sell what he hedged with, ie, gold.
Silver is a different story. Silver has a lot of transactions that are financed by paper silver, but they're short term. Parking a large sum of money is not an easy process; leaving it in a bank leaves you exposed to all sorts of risks, and means you aren't making any money. Raising finances is not so easy in the general market, so financiers can be seen to short sell silver as a quick loan, expecting to buy it back at a future date. For this reason, silver has, for some time now, not exactly followed any rational pricing system.
Of course, any time a pricing system is applied, someone will figure that out and develop a system to take advantage of the system. For instance, at one time, the analysts at the Bureau were fascinated by the ratio of gold and silver. For about a year and a half, a very solid picture emerged, with silver clearly leading gold. The analysts, confident of their system, were preparing to exploit it when it all fell apart. Fortunately, the analysts did not lose much money, but the point is that no system long endures in the face of the world economy, where some kid with a computer can be trading against you, exploiting your system for his gain.
What this means, partly, is that the system employed by thousands up until recently, that of buying and holding, is losing money. Other people, mostly short specialists, are making money at the expense of the buy and hold types. The way this works is that the talking heads talk up the economy, the politicians, desperate for good news, pile on, and the public slowly buys back in. Then the inevitable bad news comes, and the plugged-in professional trader dumps his long holdings and shorts the stock, which is essentially double-selling. The long holder is screwed.
Sun Tzu said, "In death's ground, stand." To apply it to today, when the stock market loses 30% in a short while, don't sell and lock in the losses. Ride the thing into the ground. Or were you dumb enough to sink your whole investment portfolio into the stock market?
Anyway, that's pretty much what is up with the market. With the next set of loan failures fixing to start and the situation in business real estate getting worse, we're looking at another spate of massive losses for banking institutions, leading, of course, to further losses in the economy. This means more losses in the stock market.
I suppose a little stock market theory is in order here. When you bought stock, you did not put money in the market; you put it in someone else's pocket. This is how stocks differ from bonds and bank accounts, where money has been sequestered in some way that is still considered at least semi-liquid. Stocks are securities that have worth rather than a face value and that worth changes. Many people view the stock market as containing cash, which it simply does not. So, a loss of billions of dollars in the stock market has not changed the cash situation one little bit. Major stock losses are not deflationary is what I'm trying to say.
When you sell stock now, someone else puts money into your pocket. The worth of the whole market is the amount that people are willing to pay for it. This means that a contraction in the stock market is actually an effect, not a cause. The cause is the tightening of belts everywhere. The problem is that people attempt to sell out of the market when there is little money for buying, establishing lower prices, making them 'marked to market', to use a banking term. The securities now so marked cause people to have to report their assets reflecting the lower price, which generally changes debt ratios and retirement plans, leading to greater savings, which reduces the amount of money in the general market. And thus the vicious cycle of deflation sets in, deflating everything from house prices to car prices to gold and silver prices.
But, not food and fuel prices. Why? Well, we're finally getting to the point of this post. Both fuel and food have been the subject of price fixing of one type or another and have not been truly free markets. Food, in particular, is heavily regulated, but is done so to drive prices up, not down, quixotically. However, this has still led to a reduction in the quantity of food available, as the mechanism of driving food prices up was to cause artificial scarcity by paying farmers not to grow crops.
We are now sitting on something like four weeks' grain reserves worldwide. That ought to be pretty scary, as three years' supply is not unheard-of. If we were to have one bad crop in one major area, we'd be looking at starvation for the poorer nations. This is all a result of price fixing. Were farmers allowed to grow and sell what they could, agribusiness would become ever more streamlined and productive, production quality and reliability would increase, and the general foodstock would be more abundant. I cite the tech industry as an example.
However, it is very difficult to get any sort of innovation into farming, as the governments of the world fall all over themselves to protect the small farmer, who inefficiently uses land. This has led to West Texas, of all places, being one of the fastest growing farming areas in the United States, due to very little regulation and no restriction of agribusiness. Oddly enough, the hardscrabble land and low rainfall have been overcome by technology to the point where West Texas is outproducing more fertile areas.
Of course, a contributing situation to the worldwide food shortage is the increasing usage of prime land as city and subdivision land rather than farmland. Most of the breadbasket of Southern California is so used already, and much of the Eastern farmlands are so used. This is another reason we're growing vegetables in the rock and limestone of West Texas. Ok, it's really not that bad, but, compared to Southern California or the Shenandoah Valley, it sucks.
That leaves fuel. Fuel is one of the most heavily regulated markets in the world. It is very politically sensitive. Most of this regulation is to effect some form of price fixing.
Most recently, the price fixing was in the form of an attempt to tax away 'windfall profits'. The funny thing is that there are no apologies right now from those who tried to do that, now that gas companies are seeing large losses, but that's the business cycle. Sometimes you win, sometimes you lose, and you need to keep the money from when you win to cover when you lose.
However, price fixing has been ongoing in this market for a long time. For certain tax breaks, the price essentially gets set at the producer, which is the refinery. Everyone after that merely takes a preset percentage. This seems perfectly fair until you discover that it means that a given gas station cannot take advantage of a local situation to make more money or to provide a price break to its consumers.
Of course, the whole point is to stop a local gas station making more money, but the truth is that if they make more money, they will drive more supply to the area. When the price is held artificially low, scarcity sets in and fewer gas stations exist. Further, when the price is held artificially high, it can be hard for a new gas station to get customers, as its prices are exactly the same as the other one down the street. Between these two effects, the failure rate of gas stations is startlingly high.
One other interesting fact is that OPEC learned its lesson in the seventies and will now trigger a massive price cut rather than risk training Americans not to use fuel again. Since the capacity to reduce consumption still exists in this country, any serious rise in prices results in a fairly rapid reduction in consumption, leading to a falloff in orders for crude, as inventories rise all over the place. By the time it works its way back to Saudi Arabia, the reduction will be magnified. Essentially, if we use domestic oil for, say, 30% of our fuel, and non-OPEC foreign for 30%, leaving OPEC for 40%, if we cut 20% of our fuel usage, that comes mostly out of the OPEC sources, it being the most expensive, so orders for OPEC fuel drop by 50% ( 20% is half of 40% ). Thus do the Saudis lose a pile of income.
However, despite all that, structural inflation is also at play. Thanks to the Obama stimulus package, tons of money have been injected into the economy. That money has to all go somewhere. For some time, it has been going into banks to keep them afloat, as their losses mount. However, lots of it got thrown into the economy as a whole, and that money is now starting to show up in bidding wars for resources, hence the increase in price of things that matter.
The Bureau remains unconvinced the bottom has been reached. The Bureau had been not buying precious metals on the opinion that they would go down even further, but the Bureau will now hedge bets and purchase some on this down cycle because inflation is a growing concern.
