It is natural for observers to break down complex topics into manageable or useful sound bites or chunks. It not only makes it easier to digest, but also helps serve any biases. But when it comes to perception of the markets and the proper assessment of risk, it is imperative, however tedious, to step beyond the noise. This is especially true when it comes to managing wealth.
Don't Be Fooled By Simplicity
It's more complicated that most people think, though we are programmed to oversimplify and generalize to get by.
Sophisticated traders do it...
The worst is the sophisticated analysis in which we see orders of magnitude removed from the source of price discovery. Technical analysis based upon using a "spot" price is as much a figment as the measuring stick it is used to price in. Yet we are tethered to an array of charts and averages that light up a million glowing screens in an elaborate display of tea leaves.
Outside observers do the same. And sadly, in order to communicate the need for true diversification, our language must be titrated to conform to the commentary based on price action and sound bites.
Speaking of Price Discovery
It would be more efficient to speak of the foundation for price discovery; for example, the ease with which market manipulation can eventually be used to forecast moves.
Through the work of GATA and Bill Murphy's brigade of commentators at Lemetropolecafe.com, it is now very easy to forecast the follow up action to any upward movement in gold - nearly to the dollar. With almost 90% accuracy, up days will be capped at 2%, followed by 1% the following day, and then down hard the next - with no limit to the downside.
The professional trader who gains his/her identity from the idea of a 'sacred market' cannot argue with that kind of predictability, though they certainly try in their (at one time) noble attempt to defend the idea of what was once a fair market.
The hidden danger is when people who hold real wealth, or at least the potential to influence, begin rationalizing past performance with the sound bites of today's market news.
How does this market look to an outsider?
Finance versus Economics
Price discovery is one of many complex components of the precious metals. Unfortunately, price action is only the tip of the iceberg.
To go beyond price action, the open-minded observer must be willing to consider the implication of a market that epitomizes the concept of over-financialization.
It should be crystal clear, given the odd presence of the largest multi-national investment banks on the largest futures exchanges. Yet it is one glaring symptom of a disease that manifests in the physical realm. The (self) destruction of the mining industry and the communities they support is just one manifestation. The destruction of the last remaining hard assets that can be stored by the average person is perhaps the worst.
Obviously, lower prices have stoked investment demand, while industrial demand remains relatively unchanged given the constant (though fragile) trickle from just-in-time inventory stocking.
Yet, many are led to believe that silver is as ubiquitous as, say, copper. Furthermore, even the most sophisticated have only a surface understanding of industrial demand, while the perception of investment demand is mire in the political aftermath of decades of financial sector gluttony.
A minority has taken advantage of these low priced hard options, while the great majority will watch as the freight train roles by on its way back the fundamental value equilibrium.
Swimming Pools and Monetary Stars
The recent remark regarding the value of equities is a perfect example of how dangerous things have become. John Williams of the Federal Reserve opined recently that stocks are not overvalued at the present time.
You have to step back and consider how far off the mark a comment like this is coming from a central bank. Reminisces of Greenspan's opinion of stocks or housing come to mind. But this is the true mandate. The belief in the so-called wealth effect - or that it is possible to not direct inflation and its behavioral effects.
The dangers of the current monetary regime are directly proportional to the fame of their masters. The need for a central bank is a debate in and of itself. The fact that the U.S. Federal Reserve bank operated somewhat aligned with its original mandate prior to the 1970's is evidenced by the mainstream popularity of its Chairmen.
Apparently, as fiat currencies go, the closer one travels to the end, the greater that popularity grows. And now, with the very first female chair on the 100th anniversary of the banking cartel, the building of America's team is now complete.
Precious Metals - Beware of the Sound Bite
Has there been real capitulation of the core long term investor? No.
If anything, long term investors have been emboldened by how things have played out. Skin in the game, plus time, reveals the truth about the unnatural price mechanism determining prices.
For all its modern complexity and academic hijacking, economics is still a simple behavioral science at the heart of functioning civilization. Savings and capital formation lead to innovation and progress. Using a fiat currency to hide that is only a temporary illusion, however real the damage can become when it finally dissolves.
The distinction between making money and preserving wealth should not be understated. When the metals overshoot equilibrium, money will be made - but priced in what? It will most likely consist of the inflation protection you would have otherwise preserved.
When we finally hear the details of the mechanisms of price manipulation described by the mainstream media, we will know whether the fair value of all assets have moved closer or beyond their true equilibrium.