A Silver Lining to the Economic Cloud

07/11/2011 7:30 am EST

Focus: MARKETS

Peter Way

Founder and CIO, Peter Way Associates

Gold held its own during the market turbulence, but silver has been all over the place… that may be changing for the good, notes Peter Way in Block Traders' ETF Monitor.

Arriving at my first investment industry job, with a fresh-minted MBA and a still-untested BS in Economics, my employer’s spokesman—a renowned economist, advised me: “Only in the USA do they teach economics. Everywhere else in the world, they teach Political Economics.”

The longer I studied the investment scene, the more I came to understand just how much BS there is in the subject of economics. This was back in the late 1950s and early ‘60s, when computers were precious grunt-work machines, too valuable at handling great volumes of repetitious jobs to be squandered on the esoterica of economic theory—let alone pondering how to evaluate the future values of common stocks.

Politics then was dominated by world power balances and the Cold War, not by how a country might spend its way out of a recession or a foreign adventure.

Economics did not dominate US political considerations the way it has come to now. We were the 800-pound gorilla of military, business, and technology. The US dollar was the unquestioned world medium of exchange.

A wise person once said, “The only constant is change.” Now the rest of the world is catching up on many of the advantages we once had mostly to ourselves.

It remains to be seen how well we will compete in these increasingly rigorous surroundings. But some major changes in the country’s evolved political orientation must come about before the US is forced to join Rome, the UK, and other once-dominant governments.

One of the most apparent change factors in our lifetimes is evident in the field of communication. Some of us were born before TV. Many others before the Internet.

Most investment professionals alive today have seen markets evolve from stock quotes in fractions of a point to decimal numbers sometimes having five or more digits of significance. Along with that, new quotes and response times in nanoseconds.

When Greece’s (or any PIIGS) politicians get crazy with their country’s income and spending balance, it quickly gets transmitted to the worldwide, interconnected marketplace.

One not just dealing with bonds, but stocks, commodities, and currencies. And one where political patience can wear out, magnified by the anticipations of players in the marketplaces.

It can happen, even when the pig happens to control what at the moment is the world’s basic monetary exchange currency. If it does, the transformation from what has been to what may be next will be sudden.

We can hope that the ending of “quantitative easing,” and the implication that a QE3 or 4 is unlikely, will be followed by some real budgetary retrenchments. Like the flushing of a $6 to $7 billion a year methanol boondoggle.

Our government needs to be forced to prioritize its spending into those things that are constitutional and essential, instead of what helps private industry get a leg up on its competition.

How we do that, I don’t know, but it is evident that the whole beltway bureaucracy crowd, regardless of political party, is of a common mind to resist. What they have to sell is the power to plunder the treasury. It won’t be surrendered easily.

Since an accelerator of change is the anticipation factor in markets, it is important that both citizens and investors stay alert to developments that may warn of deterioration in the attitude of ex-US investors toward the true value of the US dollar.

Another obvious arena is fixed-income investments, particularly US Government bonds. But for some time now, this has been a rigged, artificial market controlled by Federal Reserve actions, at the behest of the US Government. Our analysis in that domain has no meaning because of those conspirators.

Early and obviously, price change in gold has tracked the world’s evaluation of the dollar—from a $430 average in 2005 (itself a record) to $1550 now, an 18% a year depreciation.

Present gold-futures prices anticipate another 13% loss of value by 2016. Gold’s price path in ETFs has been fairly steady upwards, while silver has been volatile.

The silver market is much smaller and susceptible to influence by more limited amounts of capital, so our information from time to time can be quite productive. This may be such a time.

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