Deflation and Silver Price Mechanics
|March 9, 2013 |||Comments Off ||
The worldwide tug of war between the world’s major central banks has created a de facto Currency War involving the competitive devaluations of major fiat currencies.
The move to debase national and multi-nation currencies like the Euro in virtually every major economy has fueled fear about reducing the standard of living and real wealth of everyone affected.
Risk On, Risk Off
In today’s artificially inflated economies, and from an investment standpoint, we exist in a world of “risk on, risk off” or RORO. In the currency, stock and Precious Metals markets, “risk on” will generally signal a flight to “risk assets”.
The misnamed risk assets, while representing real wealth like precious metals, also include fiat currencies from countries such as Canada, Australia and the Euro.
The opposite of “risk assets” is a category ironically made up of U.S. Dollar denominated “assets”. The misnomer is intentional, since real risk is inherent in a currency of a country with a debt to GDP ratio of over 100 percent, like the United States, and where every dollar printed by the privately owned Federal Reserve Bank represents debt.
This risk on, risk off policy is structured to protect the interests of the wealthiest one percent and provide adequate cover for the banking institutions that prey on the populace. The policy effectively prevents deflation and places more of a burden on defaults.
Inflation and Deflation
Even though Deflation is prevented through the risk on, risk off policies, swings toward deflation in a country as its economy suffers will tend to put downward pressure on precious metals prices expressed in that nation’s currency. The reverse is true with Inflation.
As inflation increases, precious metals prices tend to increase in the country experiencing inflation. The key to precious metals pricing is in the currency it is priced in. For example, Gold Prices expressed in Japanese Yen may appear to be in a bubble or at mania levels, especially given the massive amount of Quantitative Easing and other stimulus measures unleashed by the Bank of Japan.
The dilemma exists in the combination of easing measures with price manipulation. Price action drives commentary, which helps form market sentiment. Manipulation leads to artificially induced volatility, which not only diminishes the “natural” role played by precious metals as a hedge against money printing, but it also creates a darkened sentiment, which confirms faulty beliefs about the otherwise intact fundamentals that should be the main determinants of price.
Silver Prices When the Traffic Lights are Blue Today
The view of the Silver Market from ten thousand feet away shows what is really going on behind the scenes. The Silver Price Manipulation in the market by deep pocket bullion banks with a hugely concentrated combined naked short position has become increasingly evident.
Furthermore, their market spoofing practices that involve dropping their bids to give the indication of a weak market and then quietly buying back their short positions for a profit are well known.
Silver Market Regulation Remains Ineffective
Despite these highly questionable practices, the more realistic silver traders and investors also know that the CFTC’s purported investigation into the manipulation of the silver market will never resolve successfully because the regulators have already been captured by the manipulators.
Most silver market observers — even some of the most influential and bullish members of the analyst community — simply refuse to acknowledge this absolute key to understanding how silver trades and is priced.
Economic Data Effects and Explanations
So, what is the observed effect on perception and the surreal world of market pricing that keeps the price of precious metals artificially suppressed?
First of all, when good economic data comes out, stocks tend to rise and precious metals typically decline. The explanation for this reaction is asset rotation because a better economy means there is less need among investors to own “safe haven” assets like the precious metals.
Nevertheless, when bad economic data comes out, stocks tend to fall but precious metals also decline. The apparent explanation for this is that a worsening economy means more margin calls and greater cash needs that result in the liquidation of precious metal holdings.
Then, when so-so economic data is released, dividend stocks and bonds tend to go up, but precious metal prices again drop. This is explained by the idea that precious metals do not pay a dividend.
Quantitative Easing Effects and Explanations
Quantitative Easing, or money printing as it is sometimes called, should ideally dilute the value of a paper currency and therefore increase the value of commodities like the precious metals when expressed in the paper currency.
Nevertheless, when more quantitative easing is announced, precious metal prices fall. This is explained by investors forgoing owning the precious metals when stocks are now expected to outperform. Another explanation is that a QE program signals that deflation is coming, so there would be no need to own precious metals as an inflation hedge.
On the other hand, when no new QE appears to be forthcoming, precious metals also decline. Supposedly, this happens because the paper currency’s value will not be further diluted by more money printing.
Given the prevalence of such explanations, it sometimes seems that silver simply cannot win the game of perception. Nevertheless, what is really going on is that the price of paper silver is being talked, explained and pushed down so that the smart money can buy the physical metal at an artificially low price.Courtesy: Dr. Jeffrey Lewis via silver-coin-investor
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