Saturday, September 12, 2009

Less chaos, but chaos nonetheless


It was about a year ago we were informed that the entire financial sector was up to its eyeballs in debt and had to be bailed out, lest another great depression started. We bailed them out, and we now have real unemployment levels in the double digits.

So glad we averted that crisis.

The news tends to focus on the stock market, which has seen major volatility. Two years ago, the Dow Jones was hovering around a high water mark of 14,000. One year ago, it was around 12,000. Six months ago, it bottomed out below 7,000 and has now climbed back to 9,600. A lot of people had a lot of wealth on paper vanish.

There were other madhouses going in different directions. The dollar was incredibly weak during the worst of the turmoil. Crude oil notoriously climbed to over $140 a barrel in the summer of 2008, only to plummet to less than $40 a barrel at the beginning of 2009. In the middle of this worldwide depression, where people are spending less in general, the price of crude oil is now at about $70 a barrel. That price is not as startling as it was in the last summer of George W. Bush's miserable stewardship of the economy, but I still don't see how the price doubles in less than a year when the economy is in such a bleak situation.

And then there's gold and silver. The metals often do well when there's either inflation or weakness in the dollar. The dollar is showing weakness in the short term, but nowhere near as bad as it was in Crazy '08. The CPI says prices are decreasing so far for the year. But, as of close of the markets on Friday, gold is selling for more than $1,000. This is only the second time in history an ounce of gold has cost more than three digits worth of greenbacks.

The prices of gold and silver correlate pretty well, but not perfectly. The last time gold was above a grand an ounce in March 2008, silver was over $20 an ounce, the high water mark for that commodity in quite a while. When both prices fell from their high points, silver fell harder. Gold lost about 25% of its value, while the price of silver dropped over 50%. Still, both metals made a comeback. In February, gold finished a week at $993.20 and silver was at just over $14. Both fell from those prices, but not as steep a drop as they saw in 2008. Now both are on the upswing, and silver is showing a better percentage increase. As gold closed yesterday at $1005.10, silver was at $16.73.

Matty Boy, Investment Advisor to the Stars*, is not in love with the precious metals right now. I don't pretend I can make sense of the markets, and I deeply distrust anyone who says that they can. Still, I think the $1,000 mark is a strong psychological barrier for gold, and that a lot of people put in sell orders when that price is reached. Moreover, if it's a hedge against inflation, inflation is the least of our worries right now.

My read of the situation is that the markets are still being gamed. The speculators seem slightly less insane than they were when they drove the whole of the world economy over a cliff, but things that are supposed to be historically linked aren't linked anymore. Americans are saving, and it's about friggin' time, but we have an economy based on the model of Americans having as much sense collectively as a group of sailors, each with his own personal fifth of Old Crow.

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