Thursday, February 24, 2011

Something's going on but I don't know what it is.
Do I, Mr. Jones?

Since late in 2006, I've been following the price of silver and gold. I haven't had enough money to invest, I just was surprised at how high gold was and decided to pick something to compare it to.

If I had been serious about investing, I might have looked at other stuff, like the guys in Michael Lewis' book about the last gigantic crash, The Big Short. But I wasn't nearly as diligent as those guys. The problem that would bring the whole economy down was the bursting of the housing bubble. In effect, I was just watching a few corks bob up and down on the tumultuous sea that was the financial markets.

I'm still watching the corks bob, and I'm here to report they are bobbing in new weird ways I haven't seen before.

The big idea of gold is that is the hedge against bad times, but when everything went to hell in 2008, gold took a hit as well, just not quite as bad as everything else. In 2007, gold seriously outperformed silver, 35% to 17%. In the beginning of 2008, gold was still rising even though anyone watching the financial markets knew there were troubles like never seen before. When the dust settled, gold was up a very modest 1.4% at the end of 2008 while silver had taken a 30% hit.

Since then, both have been rising, but not in lockstep. When silver was at its worst, it would take nearly 80 ounces of silver to equal an ounce of gold, a far cry from the standard exchange rate of 50 to 1. In the past 26 months, the market has decided that silver was underpriced in comparison to gold. In 2009, gold rose 27% and silver rose 50%. In 2010, gold improved by 30% and silver by 83%. Now, silver is at its best position in many years compared to gold, where it only takes 40 ounces of silver to buy a ounce of gold.

This may just be the market finally realizing that silver is actually much more useful than gold, but when I see numbers I've never seen before, I start worrying about a correction.

And then there's the third thing I've been watching, crude oil. It had been trading between $85 and $90 a barrel this year after being in the seventies most of 2010, but now it's sneaking back up to the $100 a barrel range. Smart people are in consensus now it was the financial markets that caused the big crash, but the cost of the life blood of the world's economy can't be ignored. As bad as high unemployment is, high fuel prices are often the cause of stagflation, that dreadful economic effect that means the economy isn't growing but prices rise anyway, a pair of symptoms many useless by still popular economic models says cannot happen at the same time.

I don't know what's the cause of all of this. I don't even know if the numbers I'm looking at are worth a rat's rectum. But I do get the feeling that a new tsunami is coming, and the class warfare we are seeing now is just the start.

A quick reminder of which side I'm on. Class warfare is better than class genocide.

Fight back, y'all.


dguzman said...

I had a friend a few years ago, maybe 2006 or 2007, who kept telling me we should pool our "spare" money and buy gold and other metals, that it was THE sure bet. Had I followed her advice, I'd probably be kinda rich right now. But I'd also be disgusted with myself.

Matty Boy said...

It would be a pretty good bet, but it takes a butt load of money. It's five grand at least before tax, tip and dealer preparation, and some of the dealers are right villains.