Let's say we consider a bubble the phenomenon whereby the prices paid for a given commodity, be it homes, coffee, copper, rubies or tulips, rises rapidly relative to an average market history timeline as a result of sudden and irrational investor demand, and then shortly thereafter sees a price collapse to a point lower than when the bubble started.
Consistent with all commodities that can have been categorized as recipients of bubble phases over the last 200 years is that at that onset of the bubble formation phase, the utile value of the commodity in question becomes the subject of elevated speculation in anticipation of an increase in demand as a result of a predicted rise in utile consumption.
In the bubble phase price curve, the steepness in the growth phase is exacerbated when the predicted increase in utile demand materializes, or is exceeded, which in turn fuels speculative demand for the commodity and its derivatives (ETFs, futures, options, etc).
Without exception, when speculation combined with enhanced utile demand take prices for the commodity to such high levels that they start to negatively impact utile demand (as replacements are sought and/or fresh momentum forms in supply to capture the advantage of elevated prices and margins), the demand curve weakens, which generally triggers a massive bolt for the exits of the specs who are most on top of that data, which in turn starts a chain reaction whereby successively more distant speculators from the negative data source panic and sell as the price drop accelerates, precipitating the proverbial popping of the bubble.
That, in essence, is the bubble life cycle as it applies to commodities.
Bubbles were once more or less the result of natural market forces, the cyclical essence of markets driven by supply and demand. With the advent of massive capital concentrations (MCCs, or multibillion-dollar investment funds, mutual funds, hedge funds, sovereign wealth funds, private wealth trusts, etc.), the effect on commodity prices from these speculative positions far exceeds, in many cases the potential effect from fluctuations in utile demand.
Now banks, and their very close and incestuous relative, hedge funds, are generally in a position to occupy two distinct advantage points over Joe Blow investor on the street:
- They have greater access to capital; and
- They have superior access to data. In speculation, information is everything.
Now in the era of instant data flow and algorithmic decision processing, not only can MCCs encourage bubbles with surgical precision, they can very deftly manage the curves associated with the bubble phases. Profit is maximized when you can buy your entire position at the low, and then sell all or as much as possible at the high. Then, if you are in a position to control markets, you go massively short at the high, knowing that your influence and your capital resources will both drive the bubble pop phase into a nosedive, but you will be able to suck up all the shares all the way down, or at least half way down, covering your short when all the Joe Blow suckers sell you all their stock in utter desolation, not understanding that they've been played like a tiny little fiddle.
The two commodities on the planet that are the exception to qualification for this scheme now are gold and silver. And that's because they have an intrinsic monetary value that all other commodities lack.
A thing can only be said to have monetary value if it is universally (globally), or nearly universally, accepted as a medium of exchange for goods and services. Very few people on earth would not take gold or silver as payment for a service or good they were interested in selling. But only very specialized traders will take a barrel of oil off your hands or a skid of copper cathodes or a house or equities as a form of immediate payment for anything they might want to sell. This is the primary fallacy in the mainstream financial media's categorization of gold and silver as mere commodities. They are not. They are disqualified from that definition because of their intrinsic monetary value.
And it is precisely that monetary value that prevents MCCs from participating any longer in the precious metals markets. The transactional volume in the physical gold and silver markets is puny. ETFs generally preclude manipulation because they need to take delivery of the physical gold and silver, unless they are ETFs based on derivatives, which are intrinsically worthless and most likely to collapse if they incorporate any kind of short/hedge strategy.
The prices of both gold and silver have long been subject to price manipulation for various reasons.
Most recently, silver has been the target of ebb and flow bubble-manipulation schemes that have more or less been caught red-handed by serious market analysts who scream and shout from their hilltop epicenter embodied in the Gold Anti-trust Action Committee. GATA has been stridently screaming to anyone who would listen (which was mostly no one for the last decade) since 2000 that gold was being methodically price suppressed to impart the perception to the market by the largest criminal enterprise on earth, the U.S. Federal Reserve and the United States Treasury, that the U.S. dollar was a well-managed and healthy currency.
As we now almost universally know, that is not the case.
One must be diligent not to buy the pure propaganda that emanates from the top universities on down to The Wall Street Journal that the Fed is an independent private enterprise. It is only private and independent in that it is not subject to the oversight and laws governing federal financial institutions. It's influence, abuse and fraudulent manipulation of markets and global economic public perception while using the public coffers of the United States citizenry makes these two institutions unequivocally a single criminal enterprise operating as public institutions.
The now famous manipulation of silver prices in an effort to "corner the market" by the Hunt Brothers in the 80s, and JP Morgan's incrementally growing infamy as perpetrators of the latest fraudulent silver market manipulation, share as their motive only profit.
Gold, on the other hand, whose motive for participation in a scheme perpetrated by the Fed, the U.S. Treasury, certain banks and possibly a certain major gold producer, were in the past initiated for profit. And I suspect that the value of the enterprise in orchestrating confidence in the U.S. dollar throughout the past decade was initially a serendipitous discovery that was promptly deployed as a weapon.
In any case, the CFTC's increasing metamorphosis into a serious regulator from a puppet facilitator of such schemes has resulted in JP Morgan exiting the scheme largely as credible class action lawsuits from fleeced investors are empowered by the CFTC's own statements and findings. The outcome of that is decreasing macro and micro volatility (week to week) in both markets, and increasingly steady incremental price increases—especially in the macro view of the last decade). The ability to influence supply remains fixed at substantially less than 5% per year, thanks to the unavoidable difficulty in sourcing and extracting new supply. Therefore, the possible market, and potential bubble, cannot reach a sufficient size in terms of volume to accommodate the requirements of MCCs. They need massive volume of the physical commodity, and more importantly, an exponentially larger derivative market, that they can control and influence by virtue of the fact that they own the clearinghouses and up until recently, the regulators who helped these markets stay 'dark' or non-reporting.
The one downside as far as MCCs are concerned with the new instant world is that with it, comes increased transparency—whether they want it or not. The bigger an organization becomes, the more it must cannibalize itself to continuously evolve efficiently. People get fired, bumped, overlooked for promotion, shut out of deals, not invited to parties—all these things have the effect of originating new competing MCCs as resentment causes former members of MCCs to take their contacts with them and form new MCCs. The seeds of destruction of MCCs are thereby built into them in the form of egos. The one time the ruthless efficiency required from within MCCs gets trumped is when somebody's ego gets bruised. Thus, Wiki leaks. Thus, black swans. Thus, Bear Stearns and Lehman Brothers.
Wending our way back to the gold and silver issue, the underlying commodity markets for gold and silver are limited; and now, thanks to the whole idea of position limits and transparency and reporting for derivatives markets, the size of any given derivative market must be directly proportional to the possible size of the underlying commodities market.
Gold and silver exempt themselves from that manipulation because of their monetary aspect. They are complicated by their dual function designations. Each is money, as well as an industrial ingredient that is consumed. Because they are in growing demand as monetary stores of value as a direct result in the appropriately crumbling confidence in the U.S. dollar, pound sterling, euro, yuan and yen, which collectively constitute the five major currencies of global trade, they are sought increasingly (and somewhat ironically) by MCCs whose primary mandate is value preservation (sovereign wealth, private wealth) as opposed to more speculative MCCs (private equity buyout funds, hedge funds, investment funds) whose continued existence depends more on their ability to generate profit in some risk:reward ratio configuration that attracts their investors.
What is happening then, is gold and silver have left behind the human evolution point where they could be easily manipulated and are increasingly resuming their primary roles as the primary medium of exchange for global trade. MCCs are holding gold, silver and their derivatives, bought only as cash equivalents because they are now the lowest-risk currencies to hold out of all the global currencies. ETFs are, in essentially, a return to the original form of banking, whereby a certificate was issued to the bearer on whose behalf the bank was storing a quantity of gold equal to that stipulated on the certificate.
Gold and silver are reasserting themselves, in fact, as the only real money (in terms of the definition of a globally accepted medium of trade) whose supply cannot be arbitrarily influenced by any single government, MCC or special interest group. The more this awareness permeates the global general consciousness, the more that awareness will drive demand. Fringe pundits are absolutely right when they predict an exponential explosion in the prices for gold and silver. Never mind $2,000 an ounce or $5,000/oz. I'm increasingly convinced that $30,000–$50,000 per ounce for gold will be seen in this lifetime, especially as fiat currencies based on nothing are abandoned for mediums that more directly represent a real monetary asset like gold and silver bullion.
Why? Because when the five major currencies, currently embroiled in a competitive-devaluation strategy that is the only weapon in the global competitive economic marketplace as a means to attract that all important commodity and manufacturing production base. . .when they all collapse as is absolutely inevitable, the only viable alternative will be gold and silver, and a currency pegged sharply to both and as transparently monitored as a Nuclear Weapons program. The only other alternative is war—war for the now finite and known resources of the planet.
Because the only component of the human condition that outdoes the drive to compete fiercely for the ability to survive is the ability to cooperate fiercely with the same outcome in mind, it is my hopeful deduction that war will be seconded to this cooperative unified global cooperation economy approach.
The opponents to such an evolution, who would opt for survival of the fittest over a cooperative preservation of a general and, therefore, less-rich lifestyle (let's call them "Madoffs"), are the very same Madoffs who control the Fed, run Goldman Sachs and JP Morgan and occupy strategic roles within federal regulatory bodies. And they're justification for this thinking comes from a despicable sense of entitlement by which they view themselves as superior and, therefore, deserving of such a world and of such a horribly imbalanced standard of living between New York and Darfur.
But again, I digress. This time from the purely economic into the moral philosophic? Hmm. . .good thing I'm not a journalist or this would be much tidier.
To summarize and answer the titular question posed at the outset—gold and silver will not likely ever go down in any meaningful way, in my opinion (at least, not in my lifetime).
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