Sunday, April 23, 2006

All aboard...come ride the commodities train

What a ride on the silver and gold train. There is only a tenuous connection between gold prices and inflation (despite what gold bugs claim), and this is no different. Inflation appears to be in check, and “Helicopter Ben” probably has at least a tacit inflation targeting system in place (as silly as I think that is given the $ is the world’s reserve currency and is not, for the umpteenth million time, backed by gold) and has access to the most and best information regarding same.

No, the reason the price of gold is rising is because the price of gold is rising. It is now a competition between the predators of our little capital markets ecosystem…hunting, attacking, and shaking the daylights out of weak shorts (and weak longs, like Friday's vertiginous ride). They are saying to the would-be commodities investor (witness the explosion of people who are “experts” on gold, silver, oil. It is a truism that the growth in "experts" is a linear function of the price of the underlying commodities) “come on in…the waters fine!!! It reminds me of a pack of Hyenas bleating about a kill…everything goes well until the Lions arrive.

Some would brazenly refer to this as a “bubble”. Count me among their number. How long until the “Grandmas of the world” to start melting down her gold jewelry (yes, I know its not the same in bullion, but you get the point) to increase supply?? China and India cannot (and are not, in my opinion) grow 10% per year indefinitely.

I also do not believe oil will remain at these levels. Every indication of actual oil supply reveals ample stocks. And yet, the refinement capacity remains an issue. Now, there is no way that oil companies would ever think of colluding to limit refining capacity, (right?) so one would expect refinery capacity to increase, or consumption to decrease.

Like Milton Friedman said (paraphrasing): “There is no better cure for high prices than high prices”.

But: Bubbles go on a lot longer than most “rational” economists would account for in their nice little equilibrium models. The increases and decreases effecting economic systems are not instantaneous by any stretch. The big guys want to lure every last sucker before they turn out the lights…

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