Moral Hazards Amok

Don't Believe the Gold Bears' Hype

There’s a simple reason to the price divergence of bullion gold and silver compared to the derivatives, such as the ETFs gld and slv, and it’s not a grand conspiracy. It's simply that the retail investor is still willing to pay much higher prices for gold and silver bullion and coins than they're actually worth.

Let’s put all this in perspective. The economy of this planet is in the early stages of the great credit supercycle collapse and the melt-down in the precious metals derivatives is only one if its manifestations.

Large financials and hedge funds, who are getting weekly margin calls, are being forced to de-lever their positions and restore their balance sheets, so they are liquidating their positions. As a result, along with the global economic slowdown, sector after sector is de-leveraging; housing, banking, energy, agriculture, and yes, even the shiny precious metals.

Back in January we wondered if our credit crisis would bring us hyperinflation or deflation. The answer is in; deflation. Credit is contracting, not expanding, as credit spreads are now high and the M3 money supply has collapsed from a over 17% a few months ago to under 3% today. The fed’s efforts of containing the credit collapse are limited as they are simply pushing on a string.

However, the retail consumer/investor who is still living off of their own leveraged debt of mortgages and credit cards, doesn’t yet get it, but they will. Soon, they too will get their margin calls as they get cut off from credit. In my opinion, the shiny coins they are buying today a premium they will be selling back again for much less in a year or two from now, just like they did in the 1980s.

Of course, Iran is always the wildcard.