It Takes High Prices to Fix High Prices and It Takes Volatility to Reach Stability - Philosophy

When you study complexity and chaos you begin to realize that many systems are self-sustaining, close looped, and end up solving their own problems. Any large complex system which is ongoing generally has these characteristics. In fact, we see them all the time in nature. In fact, I've often considered this whole issue of global warming, climate change, ice ages, and warming periods as part of the Earth's cycles. If things move too far in one direction, the pendulum shifts, and things go back the other way. In other words there's nothing to be alarmed about, it is the nature of things.

What type of things you ask? Well, perhaps many more things than you've ever considered. For instance our economy, the jobs market, the stock market, and all sorts of other things as well. How about commodity markets? Okay so, let's talk about that for a moment shall we?

There was an interesting article in the Wall Street Journal on October 4, 2012 titled; "Recent Rise in Natural Gas May Be Smoke," by Spencer Jakab which had an interesting bit of insight;

"Whenever consumers complain about the cost of heating their homes, feeding their families, or driving their cars, commodity traders love to remark that 'it takes high prices to cure high prices'. The same thing works in reverse."

Of course in reverse he was speaking to the glut of natural gas on the market causing low prices due to the new fracking technologies creating abundance, and Matt Damon's new movie aside, these new fracking techniques are astounding at freeing up this energy. Now then, when the prices are too low, producers see no profits, thus, some stop producing and through supply and demand things equal out, and the price comes back to meet the demand curve. So, it seems that the Ying-Yang of commodities and free-markets need little intervention to work their magic.

Since free-markets solve their own problems based on willing buyers and sellers, it seems rather ridiculous for lawmakers, regulators, or consumer groups to demand more price scrutiny. After all, these problems will be solved without intervention, and perhaps much faster as well. Further, price intervention for whatever reason or by whatever scheme only seems to exacerbate the volatility causing even more unintended consequences.

For instance, propping up prices in any way creates a bubble, while scarcity creates a run on that product or service, creating artificial scarcity isn't wise either, nor does it prop up prices long if the market allows new entrants. Price limits or price controls also cause shortages as fewer producers find it worth their while to enter the market to provide those goods and services.

Perhaps, we ought to think twice about voting for any politician who suggests big time intervention in commodity, stock, or free markets. Please consider all this and think on it.

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Gas Prices Jump More Than Expected

The recent jump in gas prices were expected to be much more gradual. We saw commercial traders as strong buyers of crude oil below $80 as June came to a close. We firmly believed that this would be the bottom of the cycle as the national average fell to $3.30 per gallon. What no one expected were the simultaneous mechanical failures of some of the main pipelines and refineries. This has caused the price of petroleum products like heating oil, gasoline and diesel fuel to skyrocket by 25% in little more than one month.

The refineries here in the U.S. use about 9 million barrels of crude oil per day. The last two weeks has seen nearly 2 million barrels per day taken off supply as unplanned shutdowns due to various mechanical issues and fires have popped up across the country. Further adding to the refinery issues is a cutback in supply that will be coming from Canada due to a leak sprung in the Enbridge pipeline, which has spilled more than a thousand barrels of unrefined crude oil in central Wisconsin. Enbridge has fallen under increasing regulatory scrutiny, as this is just the latest of a trail of pipeline failures. The most notable was a 2010 incident, which dumped 20,000 barrels of oil into the Kalamazoo River.

Mechanically, major refiners near Chicago and San Francisco have both been shutdown. There are two refineries that have been shutdown simultaneously in the Chicago area and both of them are among the 10 largest refiners in the country with the Whiting, Indiana facility ranking 7th and the Wood River, Illinois facility ranking 10th. These outages combined to raise the price of gasoline in the Chicago area by more than $.44 in less than a week. The Chevron facility in Richmond, California is responsible for 10% of the gasoline production on the west coast. Reports are conflicted on the how long these refineries will be out of operation. Estimates range from weeks to months on each individual facility with consensus that the Chevron facility in Richmond will probably be out of service the longest.

Political and fundamental factions had already begun battling over the true value of crude oil from March through July. This is seen as the battle between speculators and commercial traders. Commercial traders had been heavy sellers of crude oil futures from March through May when the market was trading above $103 per barrel based on Iranian threats and general unrest in the Middle East, which led to speculative buying. These threats were competing with a market that was massively over supplied. Eventually, over supply won and the Commitment of Traders analysis generated sell signals at both $109 and $106 per barrel. June's precipitous declines moved commercial traders to the buy side as they covered short positions and increased their positions by more than 30% during the month of June.

The final fuel to this petroleum rally is the expectation of further government stimulus to the economy. We've suggested over and over that the key to the upcoming election is the domestic economy and recent polls concur. The biggest thing President Obama could do to help himself would be to force a resolution in the Eurozone. The markets hate uncertainty and any conclusion to the drawn out death spiral of Ireland, Portugal, Spain and Italy would create a huge relief rally in the stock market. However, since his sphere of influence doesn't extend far past our shores, he'll do the next best thing by flooding the market with Dollars, which will lead to nominally lower interest rates and show that he is taking action.

Regrettably we will bear the unintended consequence of higher gas prices as our Dollar is devalued on the global market and our refineries find it more profitable to ship finished petroleum products overseas, rather than sell them on the domestic market.

Pent Up Silver Demand and The CFTC Linchpin   Pointers for Commodity Traders   The Gann Technical Analysis of Price Movements   Various Orders in Futures Trading   Reasons Why China Wants Its Citizens to Own Precious Metal   How and Why CFD Traders Fail?   

Silver Prices: When Schrodinger's Cat Jumps Out of Pandora's Box

Although silver is traded as a commodity, it is also a form of money. You only have to go back less than a hundred years in the long span of human history to discover that silver once circulated widely as currency, typically in the form of silver coins.

In fact, the UK's paper currency the Pound Sterling originally obtained its name from the British currency that once represented the value of one pound of sterling silver, which is a mixed metal that consists of more than 92.5 percent pure silver.

Furthermore, as you look closely at the supply and demand profile for silver, the issue of its monetary status seems increasingly important.

Silver's Supply and Demand Profile Make it an Attractive Store of Wealth

All the silver ever mined that is currently available for use is known as the stock of silver, while the yearly amount of silver mined is known as its flow. Silver has a relatively high stock to flow ratio compared to other commodities, as does gold.

This means that silver's intrinsic value should remain fairly stable over time because the annual increase of the available amount of the metal is relatively low compared to the amount already in circulation.

This gradually increasingly supply of silver has supported its use by investors as a store of wealth over many centuries, and it makes silver far superior in this regard to easily printed paper currencies that facilitate an ever expanding money supply and which consistently lose value.

Despite Silver's Price Discovery Issues, it's No Schrödinger's Cat

Furthermore, a closer examination of silver's supply/demand situation and the nature of price discovery leads to a puzzling question: Why has silver's price remained muted for so many years?

Beyond any benefit that the few consistent shorts that make money covering when the price drops might reap, the current price of silver seems just too cheap on a historical basis. It typically falls far below conservative inflation-adjusted price estimates.

When this apparent undervaluation of silver is investigated further, one might just find a faulty price discovery mechanism. When seeking a motive for this apparent market inefficiency, the conversation typically morphs into a demand issue.

Nevertheless, a commodity that trades largely via synthetic derivatives, such as futures and options,means that its price is determined by those derivatives markets, rather than by actual physical demand. This situation reveals the paper market for the sham that it is.

Looking closely at price discovery reveals that silver trades like a commodity, but its price is dominated and even manipulated by the very entities that benefit the most from keeping the over-inflated financial system from naturally imploding.

Despite these ongoing price discovery issues, silver seems far from being a bouncing dead cat and seems more akin to Schrödinger's paradoxical 'half dead' cat that could well surprise the market by making a dramatic price recovery. The fact remains that silver is a valid form of currency, especially in a crisis situation, as well as a valuable commodity with strong underlying industrial demand.

Silver's Price Locked in Pandora's Box?

Muted silver prices in the context of higher production costs have relegated most silver mining activities to the 'by-product' variety. This situation makes it more difficult to make reliable predictions about the future supply of silver since it typically depends on the production of other mined commodities.

Furthermore, the 'Pandora's Box' of silver's price has been kept closed for years due to the official dishoarding of the precious metal by central banks that has resulted in price suppression or even manipulation, as some observers have claimed. When this box finally opens, the price of silver will be set loose to find its true level.

Taking a close look at industrial demand also involves peering into the depths of an economic crisis as a thirty or forty year credit expansion cycle unravels, often with disastrous consequences. When the solutions are examined, suddenly all of the commodities become attractive investment alternatives, and silver and gold simply rise to the top.

Basically, when you examine the roots of the current financial crisis, sooner or later one discovers that the use of an ever-devaluing and intrinsically worthless paper currency is the true weakness of the financial system, not a faltering economy. Silver will continue to offer investors a safer haven against both gradual and catastrophic forms of wealth erosion spurred on by ever-increasing national debts and quantitative easing programs.

Pent Up Silver Demand and The CFTC Linchpin   Pointers for Commodity Traders   The Gann Technical Analysis of Price Movements   Various Orders in Futures Trading   Reasons Why China Wants Its Citizens to Own Precious Metal   

Silver Prices and the Risk of Speculator Double Jeopardy

When the price of silver eventually explodes to the upside, the silver market and those who are responsible for regulating it will probably blame the speculators.

Specs, or those who trade in a market without having an underlying commercial interest,have become the modern day scapegoats for extreme market movements, even if such movements seem entirely justified by the underlying fundamentals.

When a Simmering Silver Market Begins to Boil Over

The silver market has been so notably dislocated from its real fundamental based pricing for so long.Indeed, one can only speculate at what will happen when the silver market is eventually freed to move closer toward its considerably higher fair value.

In fact, one could reasonably argue that last time silver traded based on fundamentals was just before then-President L. B. Johnson removed it from circulation as currency in the early 1960's. At the time, he justified this drastic move by declaring silver to be in short supply.

Then consider how the price of silver ran up throughout the 1970's and into 1980. Factors commonly cited include the removal of the U.S. Dollar from the gold standard, and the Hunt Brother's alleged corner of the silver market.

Nevertheless, rumors swirled about why investment legend Warren Buffet was forced to sell his huge hoard of roughly 100 million ounces of silver in 2006, which he had very prudently accumulated throughout the low price environment of the late 1990's.

Furthermore, today's price discovery mechanism for silver allows the actual physical supply of 40 or 50 million ounces of silver metal to form the basis for daily trading in 100 times that amount. Silver is also perhaps the most volatile of all commodity markets and one that has the largest concentrated short positions in terms of days to deliver based on world production.

After 47 years of industrial, technological and medical innovation involving silver, the shortage of physical silver continues in spite of the widespread government dis-hoarding of precious metals seen over the same time frame.

The Eventual Silver Rally Will Probably be Blamed on Speculators

While speculators may ultimately be considered responsible for taking the silver market higher, the specs are not and will not be responsible for what ails the silver market.

Deep structural deficiencies were put in place long ago when bullion banks were allowed access to the commercial categories in the silver futures markets. These banks soon became the only big sellers, while the regulators watched but did nothing as these banks routinely fleeced speculative longs and the retail investor by proxy.

The resulting over-abundance of paper silver has resulted in a prolonged pricing disparity that has created the fuel for a future inferno in the silver market.

Regrettably, this manipulative process remains very much alive, and the real risk for the new money coming into silver via the derivatives markets will be that they either failed to take - or perhaps did not want to bother to take - actual physical possession of metallic silver.

In all likelihood, not only will the specs be blamed for the upcoming silver rally, but they will very probably be shut out from profiting from it in the process. The time to get well invested into the silver market is now, while prices remain relatively reasonable, not after the speculation in silver that will eventually take the market much higher starts in earnest.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit http://www.silver-coin-investor.com

Pent Up Silver Demand and The CFTC Linchpin   Pointers for Commodity Traders   The Gann Technical Analysis of Price Movements   Various Orders in Futures Trading