Anyone who’s paying attention has probably noticed that commodities prices have been, shall we say, volatile?
Most economists worth their salt will generally proffer opinions on the sometimes erratic moves in the prices of commodities based on their views of inflation, deflation or possibly even their perceptions regarding where we are in the business cycle.
If we take a stroll down memory lane and unearth a few comments of gold market impresario, Doug Casey, from a 2002 essay titled, Gold During Inflation, Deflation and Chaos, they tell quite a story:
...Yet serious deflation would likely also cause the price of gold to explode. It is the only financial asset that's not simultaneously someone else's liability. And if we have deflation this time around, it won't be possible to buy government paper and wait in safety, as was possible in the 30s, for at least two reasons.
First, a deflation would set off all kinds of spending programs and bailouts. The USG would go from being a questionable risk to a bad risk as it was forced to borrow on a huge scale to finance emergency spending, much of which is already mandated by law, while tax revenues were falling. Second, a deflation would almost certainly result in calls to reinflate as rapidly as possible-a course of action unlikely to inspire confidence in the dollar. Gold would soar in a serious deflation…
By most accounts, whether you believe we are living in inflationary or deflationary times – the price of gold and precious metals has not exploded – it has fallen. Furthermore, it would also appear that, to date, U.S. Government Securities have counter-intuitively provided exactly what Mr. Casey predicted wouldn’t happen – a bastion – despite federal bail-outs and profligate spending?
So what really happened?
First and importantly, Mr. Casey made the assumption that “gold” is not someone else’s liability. In theory this is correct but in practice – where a great many gold investors view leveraged ownership of futures and / or gold equities as possessing the same margin of safety as physical – this is simply not true. Leveraged investments in futures and / or equities have become liabilities – especially in a world of credit constraints we are experiencing today.
Interestingly, Mr. Casey did not get it all wrong. Physical bullion prices have done EXACTLY as he predicted, having decoupled “soared” relative to futures and equity proxies of the same in recent weeks and months.
It is the decoupling of physical bullion prices from futures prices that is the strongest evidence, to date, that futures markets are not serving their intended uses of price discovery and instead have become vehicles of price determination / suppression.
Amazingly, this is a HUGE story getting ZERO airplay in the mainstream financial press.
Secondly, Mr. Casey spoke of the unlikelihood of U.S. Government Securities being a safe-house during a period of deflation [like we are experiencing now, perhaps?]. What Mr. Casey would likely not have been cognizant of, circa 2002, was the manner in which J.P. Morgan’s Interest Rate Derivatives Book had been harnessed to render interest rates [usury] ineffective. This is all laid out in, The Invisible Hand and the Pox Known as Usury.
It is important that we understand why Mr. Casey’s predictions haven’t panned out; namely and especially because he was fundamentally correct. Only through carefully planned and executed market manipulations, utilizing derivatives, have his predicted outcomes not become reality.
The use of manipulative derivatives has not been limited to the gold space. Just take a look at how incredibly “obedient” the oil price has been over the past two election cycles in the U.S.:
Just think of it; two price collapses in Crude Oil, each of them commencing – almost to the day – the same amount of time prior to November Elections in the U.S.A.
With U.S. elections out of the way tomorrow, it seems we can all look forward to a new Administration, a jolly holiday season and the likelihood of increased heating costs to keep us warm through the upcoming winter months.
Today’s Market
In overseas equity markets the Japanese Stock Exchange was closed Nov. 3 in observance of Culture Day. North American markets began the week on a mixed note with the DOW giving up 5.20 to 9,319.80, the NASDAQ gaining 5.38 to 1,726.33 and the S & P dropping 2.45 to 966.30. NYMEX crude oil futures lost 3.53 to close at 64.28 per barrel.
On foreign exchange markets the U.S. Dollar Index gained .73 to close at 86.34.
Benchmark interest rates ended the day with the 5 yr. Government bond yielding 2.70% while the 10 yr. bond finished at 3.91%. Folks should take note that the yield curve has STEEPENED quite dramatically in recent weeks. This makes “funding the government” more attractive [profitable] for commercial banks [see: Negotiating Curves].
The precious metals complex ended the day mixed with COMEX gold futures giving up 2.60 to 722.10 per ounce and COMEX silver futures losing .07 to 9.82 per ounce. The XAU Index added .65 to 81.71 while the HUI Index gained 2.97 to 196.84.
On tap for tomorrow, in the wee hours Oct. U.S. Truck Sales are due – expected 5.5M vs. prior 5.3M. Then at 10:00 a.m., Sept. Factory Orders data is due – expected – 1.0% vs. prior – 4.0%.
Wishing you all a pleasant evening and a reminder that America votes tomorrow, Nov. 4, 2008, so to all concerned – do get out to vote!
