Thoughts on Markets

Thursday, May 22, 2008

Precious Metals and Economics (Monopolies)

Below, you will see two graphs of two of my core holdings in mining stocks: DRD Gold and Harmony Mines. Both are South Africa based companies. Both have been hit from time to time, by unrest among the workers in the mines and by the shortage of electrical power in South Africa. I believe both of them are sound companies and well managed.

Of the two, I believe that Harmony Mines is the better one. It is also a bit higher priced. As you can observe in the following graph, HMY has broken through both the 50 and 200 day moving averages. This is a strong indication that it could go higher very soon. This, of course, is subject to the price of gold and the availability of electrical power which is critical to mining operations.

Gold pushed higher earlier in the oversea trading, but is a lower to 920.60 at present. The same is true for silver which was above 18 earlier, but is now at 17.88. The manipulators are back in operation putting another temporary cap of the price of precious metals, but we need not discuss that further. Our task is to just wait and see. Gold, in relation to the depreciation in the value of the dollar since 1980 peak for gold, should be in the 2,000 to 2,500 range.

In our study of Economics, we will look at how the free market restricts monopolies.

In Proverbs 31, we are shown the virtues and value of an "excellent wife." She is presented as a wise shopper and industrious entrepreneur in seeking wool and flax and food from afar which she uses with diligent hands to care for her household. She is an early riser to make proper preparations. She even "considers" a field carefully and purchases it to make it a vineyard. She continually looks to the welfare of her household and does not "eat the bread of idleness. Therefore, her children "call her blessed" and her husband "praises her."

We can certainly conclude that she is a wise and thrifty shopper who has an influence in each market where she shops. She with the other consumers determine, by voting with their cash for the products and services from efficient producers who meet their needs. This puts a great pressure on producers to meet consumer needs at reasonable prices.

As we participate in markets and shop for various products, we can find that the latest and best in technology often hits the market at very high prices. Of course, were we wise in shopping, we would not have to have the latest and greatest or the newest fad. However, many less knowledgeable consumers rush into the market to have the latest. This provides extra profit for the business that first introduces what is new. However, it does not take rocket science for other businesses to eye the large profit margin.

This potential for big profits, encourages others to make similar, often better products as rapidly as possible to take part in the early profit serge. As each of these businesses move into the product area, competition among the businesses reduces the profit margin. This impact eliminates the monopoly of the first entrant who marketed the new or greatly improved product. Left alone the free market without outside intervention into the market place by government, insures that monopolies are of short duration. Another great benefit, it that in the long run prices drop and become more reasonable. Wise, thrifty shoppers have a tremendous impact upon the market.

The elimination of monopolies is particularly evident in the American computer industry. In 1946, we saw the introduction of the ENIAC (Electronic Numerical Integrator and Computer) at a cost of about $400,000. This was a difficult machine to use, because programming was done by plugging wires in different configurations.

It was during the 1950s when the prior experimental computers started being replaced by business computers. In 1953 IBM planned the introduction of their "650" in a quantity of 50 which grew to over 1000. Remington Rand and IBM were the leading competitors in this new business. Early on, Remington Rand outsold IBM, but by 1956 IBM had delivered 76 to Remington's 46. From that time on, IBM was the industry leader.

I got into computers in the mid to late 1960s about the third generation of computers. The computers of that generation were still those that were housed in air conditioned large rooms and warehouses with costs measured in 6 to 8 digit numbers of dollars. The cost of the facilities and operating costs were very high, as well. However, there was a growing number of manufacturers in the industry and prices were becoming very competitive. I remember dealing with IBM, Burroughs, RCA, Univac, CDC, National Cash Register and others. The invisible hand of the free market began to bring prices down considerably as the greater number of manufacturers competed for consumer business.

Jump forward to today and it is easily seen that not many of the original manufacturers have left the computer manufacturing business. Also, there have been tremendous improvements in technology which provide much more computing and storage power in micro size computer systems today. The two in my office are faster, have greatly increased memory and storage space at a very small fraction of the cost of those we tested in 1968-1975. That is the free market in operation to provide the consumer with the best possible products at the least cost.

I have told some of you, but I believe it is worth repeating. I had the privilege of meeting and speaking with a grand old lady of the early computers: Commander Grace Hopper of the Navy. She retired several times from the Navy, but was called back to active service time after time to solve problems. She was a gracious lady and a real expert in computers from the very earliest times. She spoke often related an experience with one of the earliest computers which operated with solenoids which operated relays. One time the computer quit working and there was much concern as the problem eluded the experts for a long time. Finally, they found a moth which had been executed in and blocked a relay. They the "debugged" the computer and it worked. Thus, the phrase was born!

What beautiful weather the Lord is giving us here in central Texas! It is getting warm, but He has blessed us with rather cool nights for great sleeping. We must continually praise Him for each and every blessing He brings into our lives. Praise the Lord, without ceasing.

Best to each, Doug


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