Thoughts on Markets

Monday, May 26, 2008

Silver, Gold, GDX and Economics

It is early in the day, but from the graph, above, it is obvious that silver is moving up. It is about time for silver to begin to catch up with the movement of gold. Though it is an industrial metal more than gold, it has lagged. I expect that we will see at some time in the future silver move upward percentage wise more than gold.

Gold looks to be holding its own at present. However, it is not matching the early move of silver. Once again it is important to remember that with these precious metals, we are preserving wealth more than making an investment. As this is published silver is at 18.26 and gold 926.90. Both are moving upward at present.

GDX which is an index covering a number of mining stocks seems to be finding support at the 50 Day Moving Average. However, the last four or five days have presented a miniature head and shoulders formation which from a technical perspective is generally followed by a downward movement. Perhaps, the 50 Day Moving Average will hold. It is early in the day and there is much time for all to play out.

The place of mining stocks in a portfolio is to catch the third wave of the blow off of gold. The leverage which mining stocks offer at a times such as the fall and winter of 1979-1980 is the advantage. This wave is when "everybody" wants to get on board and we hope to be in a position to give them the opportunity to buy our stocks. This could happen at any time, but I believe it is months, if not years away. Timing is for us guessing, for our God timing is fully known and under His absolute control. We must do our best with our limited knowledge and depend upon Him for results.

Back to our discussion of Economics:

Before leaving computers, I wanted to relate to you a saying by the grand old lady of computers, Commander Grace Hopper. In the early days of the 3rd. generation of computers, we began speaking of nanoseconds. In her classes, she would always say, "There are more nanoseconds in one second than there are seconds in 30 years." We now speak in terms of gigahertz. One of the great advances in speed was to reduce the distance the electrical impulses in the computer had to travel. After all, 186,000 miles per second is much to slow for the signals to travel over long wires. That was one of the main goals in reducing the size of computers.

Last time, we showed how the "invisible hand" of the capitalistic free market reduced monopolies. Today, lets look at the biblical support of this concept. Pr. 11:14, "Where there is no guidance (vision or law), the people fall, but in the abundance of counselors there is victory (deliverance)." Pr. 24:6, "For by wise guidance you will wage war, and in the abundance of counselors there is victory." Pr. 5:22, Without consultation, plans are frustrated, but with many counselors they succeed."

The foundation for these wisdom words can easily be seen in the requirement of De. 17:6, "On the evidence of two witnesses or three witnesses, he who is to die shall be put to death; he shall not be put to death on the evidence of one witness." Note, this requirement is restated in numerous places in the bible.

These quotations from the wisdom book state that it is important to have an abundance of counselors for war or planning. This is easily expanded to all of life.

There are many buyers interacting with many sellers in a free market at the retail level. There are many manufacturers interacting with retailers at the wholesale level. There are many suppliers of raw materials interacting with manufacturers even before products were made. Before that, there were many construction companies interacting with manufacturers to build plants and equipment which would be used to build and equip the manufacturers to enable them to produce products and services. Each of these "counselors:" buyers and sellers would be involved in the negotiations for their own individual benefit. The competition among the buyers and sellers would determine the price. As I have previously stated, each would leave the transaction satisfied; that is, the buyer would value the purchase more than the currency he paid and the sell would value the currency received more than the product or service he sold. That is the way of the free market.

With government intervention into markets, the nation is faced with centralized planning. This involves central planning agencies and replaces the multitude of counselors with a limited number, likely a committee making the decisions which have impact in the market place. Distortions are introduced into the market place which penalizes the consumer by artificially raising prices by forcing them to buy "safe" products at extra cost or lays requirements on producers and businesses which adds to their cost of operation. Every one of these increases in cost is past on to the consumer.

One example is readily apparent. Have you ever though of the number of different items in different sizes are available in a hardware or building supply store? Now multiply that by the number of such stores in America. Do you think that any central planning agency could equitably put price controls on each of those items? Well, it has often been tried in the past and been a miserable failure, because some items would be overpriced and others would be under-priced. What would be the result?

The producers would begin to divert manufacturing effort toward those items that were overpriced and reduce or eliminate production on those that were under-priced. This would result in an over supply of the profitable items and shortage of the under-priced items.

Another example: If the government would increase the subsidies to farmers and producers of gasohol from corn making corn very valuable. Do you think that farmers would be selling most or at least an increased amount for that purpose? Yes, they would and that would cause a short of corn for food for people and feed for animals. This shortage would cause the prices of corn for all purposes to be much higher. In fact, the demand for other grains for food and feed would also climb. Have you experienced that today? I certainly have. Look at the prices of bread and milk as you shop? The tragedy of this is that it costs more in energy to produce gasohol than the energy available from gasohol. And it produces only about 80% of the usable power of gasoline. It is a lose, lose situation except for the select few who receive the subsidies, without which it would not be produced.

More on Economics with the new posting.

Best to each, Doug

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