Thoughts on Markets

Wednesday, May 21, 2008

Precious Metals vs. Unbacked Paper Currencies IV


The precious metals are giving us a show this week. Both silver and gold are approaching a higher level and in concert with each other. Gold is at 934.40 and silver at 18.01 as this is written.

The mining stocks are virtually all higher today following the rise in the precious metals. Below is the GDX composite of the miners index ETF from the American Exchange.

Notice that the price has moved above both the 50 and 200 day moving averages. In technical terms this is very positive, and more upside should be expected. A move of the price above 52 would indicate a strong upward motion.

Back to our study of economics:

The advantages of the free market are many. At the very basic level, when sellers and buyers are allowed to operate in an environment unencumbered by government regulation and intervention, each party to a transaction leaves satisfied. The seller values the cash he receives in the transaction more than the item he sold. And the buyer values the item purchased more than the cash he paid for it. Both are pleased with the trade. The government's task is to punish those who commit fraud, theft, assault, murder, and deceit in a transaction. The government, as we are told in Romans 13:1-4, "Let every soul be subject unto the higher powers. For there is no power but of God: the powers that be are ordained of God. . . .(vs 4) For he (the ruler) is the minister of God to thee for good. But if thou do that which is evil, be afraid; for he beareth not the sword in vain: for he is the minister of God, a revenger to execute wrath upon him that doeth evil."

A free market environment encourages entrepreneurship. To start of new business or develop a new product involves a great amount of risk. Any government regulation or requirement greatly adds to the risk. Thus, the freer the market, the more entrepreneurs there will be stepping up to take the risk. Throughout the history of our nation, we have seen a great of great industries which have produced a variety of products for our consumption. Until about two decades ago, we still enjoyed the largest variety of products and services anywhere on this earth. No other nation had produced the variety of products at lower costs than our manufacturers. This was due to the blessings of God through the free market. As our government has intervened into the markets by regulation and taxation upon our businesses over the last three decades or so, businesses and industries have been forced to move out of America, because this was essential for them to be internationally competitive.

One result of the free market, which is of great advantage to a nation is that it inherently provides for the most effective use of scarce resources. It elevates the consumer to be in control of the market. Though there are many who would deny this, it is actually true. Successful manufacturers and businesses must meet the needs of consumers at reasonable prices or the products or services will not be purchased. Without purchases by consumers, these failing suppliers will either change their ways, improve their products, or find new ones to meet the demands of the consumers. Else, they will fail and disappear from the market place. The successful suppliers will remain. Thus, the more efficient businesses will be left. Of course, the opportunity for failure is seen by many in governments as a terrible event, so governments will move in to subsidize or regulate the industry to save it. This just enables inefficient businesses to survive whether they are profitable or not. This does not allow the free market to weed out the businesses which should not survive. Such intervention rarely does more than postpone the failure and cause more inefficient use of scarce resources. It is direct waste.

Though the free market is not explicitly called far in God's word, the foundations of the free market of capitalism are outlined therein. Tomorrow, we will examine how the free market prevents long term monopolies.

Best to each, Doug

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