Sunday, November 1, 2009
Happy days aren't here again, Part 2.
When the Bush Administration started bailing out poor struggling capitalists, first one at a time and then the entire banking industry, the news media were finally in agreement that there was something seriously wrong with the economy. But even before that, some very weird stuff was going on with the markets, and the weirdness continues to this day.
This chart shows the prices of one ounce of gold compared to sixty ounces of silver over the past two years. I chose those numbers so that both graphs would be at about the same height at both the start and the end of the graph. As you can see, silver reached higher peaks and lower valleys. In March of 2008, silver climbed to over $20 an ounce (which shows as $1,200 for 60 ounces on the graph) at the same time gold climbed to just over $1,000 an ounce for the first time. While they don't always move at the same rate, the very strong rule of thumb is that when the gold price rises, so does silver, and likewise they fall together. When both metals started falling, gold lost about 20% of its value, while silver lost over 50%, going from a high of over $20 to a low of under $10 in the space of a few months.
Right now, both metals are generally on the rise, and the trading website kitco.com now shows the correlation between the fluctuations in the strength of the dollar and the price of gold. In general, the dollar and metals show negative correlation, so when the dollar goes down, gold and silver go up and vice versa. This rule isn't as hard and fast as the positive correlation between gold and silver, but kitco.com has still decided to put the information front and center as of the past few weeks.
But gold and silver are mainly the concern of people with money to invest. The commodity that impacts the economy of the entire world is still crude oil, and its ups and downs are not tied strongly to changes in the metals. As we can see on this chart, the price of gold was languishing when crude made its insane run upwards in the summer of 2008 to over $140 a barrel (shown as $1,400 on this chart because we use 10 barrels as the unit so that the charts can be roughly the same heights), and likewise gold was seeing only marginal price changes when crude oil shed 75% of its value in the space of six months, down to a lowest point under $40 a barrel in early 2009.
Depressingly, crude's wild ride is not over. Since the beginning of the year, when the economic news worldwide has been consistently downbeat, crude has doubled in price, climbing from just under $40 a barrel to a current price of just under $80. The changes in supply and demand worldwide have seen only minor fluctuations in that time span, and U.S. demand is actually slightly down, which should put downward pressure on the price.
I heard a comparison I liked during the time of the big bad news last September, and I don't mean the introduction of Sarah Palin onto the national scene. The sudden news about the dire state of the banking industry was like the entire world woke up to discover it was married to a compulsive gambler, and all the finances were effectively gone. The problem is the financial derivatives markets, the casinos where the banks lost all that money, are still open, and I'm guessing that's where the money that is still fueling the very odd changes in the price of crude oil is coming from.
With all the rest of the news, from health care to two wars to massive job losses tied to alleged robust economic growth, the story that Congress is doing a very bad job passing any kind of serious regulation on the derivatives markets is not exactly front and center. It is both disappointing and not surprising that it's the Democrats who are dropping the ball on this, and those who point to a main culprit are tagging Barney Frank for this snafu.
Breaking our dependency on crude oil is important for a lot of reasons, but if crude wasn't the game that speculators enjoyed the most, it would just be some other commodity. We need to curtail the source of the currency the speculators are using to manipulate markets, and that means we have as much attention to frankly boring legislation as we do to the gossip and nonsense that passes for the rest of the news these days.