Today gold experienced it’s largest two day drop in 30 years crashing through its support at $1400 dollars an ounce, silver also dropped sharply, losing 6% in a single day and Bitcoin fell through the floor shedding 70% last Thursday, all the while the stock market is showing signs that it too is in a bubble and is is likely to face a serious correction in the coming months. What’s really going on here?
Many are saying the gold crash was sparked by indications that Cyprus may be forced to sell off its gold reserves and by fears that this policy may be implemented throughout Europe.
Others say that the drop in gold and silver is all being orchestrated by the Federal Reserve and other banking interests to protect the dollar. Those of you who follow precious metals have probably heard this explained as being driven by the dumping of gold and silver etfs, which are paper assets not backed by really physical commodities.
Now there may be some truth in these accusations, however if you take a step back and look at the trends that are developing across the entire market what we see points to a deeper underlying cause.
The first question one should ask when looking at the run up to these crashes is what was driving investment in the first place? Was the upward movement in the markets representative of an actual improvement in the economy? Were these movements in sync with the situation on the ground? Well no, not at all, in fact the disconnect between the speculative/investment markets and the real world economy has been growing, and a number of experts have been talking about this trend for some time now.
Not surprisingly some of the heaviest hitters in the investment world including Warren Buffet and George Soros have been quietly exiting the U.S. stock market, and corporate insiders have been selling instead of buying stocks over the past several months.
Now obviously when it comes to precious metals this dynamic is more complex. There is a difference in the investment mindset, because it’s viewed by many as a hedge against inflation and a sort of safe haven to protect wealth during a down turn, and you also have a number of countries like China have been buying it up in large quantities, however this does not make it invulnerable to market forces. If people start selling in mass the price drops. This crowd psychology, just like a herd of buffalo that panic and run off a cliff. It doesn't have to be rational at all. When comes to gold we do have some real world limits because it currently takes $1200 an ounce just to get it out of the ground, and mining companies aren't going to sell at a loss, so the price will stabilize somewhere above that mark in the long term.
We can't really discuss the upsurge in any kind of investments without looking at the Federal Reserve’s quantitative easing policies. For those who don’t know Quantitative Easing is a basically a fancy word for inflating the money supply. We used to say they were running the printing presses, but now a days they don’t print the money, they just type it into existence. We’ve had QE, QE2 QE3 and QE4 one after another flooding the market with dollars in a desperate attempt to prop up the economy.
Now this hasn't set off an inflationary tailspin because of the petrodollar, and that has resulted in a break from the historical relationship between money supply and gold prices. Those who don't take the petrodollar into account have a very difficult time explaining the way commodities have been behaving in the past 5 years. The fact that oil is only sold in dollars is spreading out the consequence of U.S. monetary policy across the globe making it much less noticeable to the American public.
If you were watching the stock market as your point of reference all of this quantitative easing appeared to be working, but again the real world economy has not been rebounding, and that means that what we have been seeing are speculative bubbles fueled by the influx of cash.
Whether we’re talking about the stock market, precious metals or bitcoin, these upward swings have been investment oriented. Obviously people are more likely to invest when more money is available to spend, and as the money supply grows so does investment of all kinds. The problem is that in the United States most of the investment that we have been seeing hasn’t led to real increases in jobs, and when investor enthusiasm surpasses productive returns and real world demand a correction inevitable.
Once you’re in a bubble almost anything can spark the correction. People are giving a lot of attention to the Cyprus angle, but it’s worth noting that these crashes just happened to occur during the build up to tax day in the United States. Could it be that people were selling bullion and bitcoins to cover their income taxes? The reality is that it could be a combination of factors. These kinds of market movements are often not traceable to a single cause. Multiple variables can influence market sentiment and coalesce into a panic. Again markets have be looked at in terms of human psychology, because in the end it all comes down to perceived value. This entire system is construct of belief. Those who become attached to a concept of the absolute of an asset open themselves up to severe losses.
So does this mean people should sell all their investments and stick to cash? Well some will promote that idea, but the dollar and the euro are both headed for a collapse, and once that happens all bets are off. In the short term gold will not go below $1200 an ounce for any significant period of time and it will most likely rebound in the next few months.
After the collapse who knows what gold will be able to buy. That will really depend on what people decide to use for exchange. It could very well be that tobacco would be the currency of choice. It's really impossible to predict that kind of thing.
So what’s the solution for the average Joe who doesn’t have the resources to buy up companies in emerging markets or to set up elaborate hedging strategies or who doesn't even have the resources to buy any meaningful quantity of gold or silver? I'm not here to give you investment advice, but my personal opinion… we need to pull out of this speculative mindset and start thinking towards an alternative economy. When we're talking about a real economy it's the means of production that count not the unit that you use for currency. People need to be looking towards things that they can produce in our own homes which will be useful to others during a crisis. We need to grow gardens. We need to be building up connections and relationships in our local area with other people in the same mind set. Buying up assets which you hope will increase in value is not likely to do you nearly as much good in the long run as building alternative means of production and exchange.
Obviously this isn’t an easy answer, and may be next to impossible in some neighborhoods just due to the mindset of the public, but realistically what other option do we have? In the speculative markets the little guy never really has a chance, if we try to compete with the elites on their terms we’re going to get eaten alive. We have to stop playing their games and any investment strategy tied to their current monetary system is still their game.
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