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News you can't use, and Mean Reversion.

|Includes: SPDR Gold Trust ETF (GLD), SLV, USO

     We were assured, not so long ago, that if oil (traditionally measured by the West Texas Intermediate contract) broke above $91/barrel, it would promptly zoom up to over $100. While no solid mechanism for this was presented to me, when the recent troubles broke out in Egypt, followers of that belief system (and that's what it is, really) were licking their chops at the prospect of that sweetest fruit the market offers: Vindication

     But a funny thing happened. First, while other oil contracts (Brent, etc) rose strongly, and ultimately broke $100, WTI languished, never getting much over $92. Mutters of 'manipulation' were heard, and the True Believers began citing Brent as the One True Indicator.
   (Note that WTI is a relatively "sweet" crude, easier to refine, and so usually commands a premium)
    Then a rumor appeared that Mubarak would resign soon. ALL the oil contracts tanked, and took a lot of other commodities with them. Then the rumor was debunked, Mr. M. was staying, and . . . oil stayed down. As I write this, WTI is under $90, though Egyptians still courageously fill their streets (now at risk of life and limb). 
   
    So what, really is the merit in trying to use news to predict these markets?

     Another "Sure Thing" we were being sold of late was the notion that the Gold/SIlver valuation ratio had far outstripped its historical mean, and therefor silver Must imminently take off to match gold's recent run-up. 
      The first part of this is plainly true. Gold and silver have been around a long time, and their relative valuations over all of recorded history are usually pretty stable. People will argue about the historical mean (sometimes to several decimal places), so I won't cite one here, but by any measure, gold has outstripped silver over the last two years. 
    So Silver Must catch up, right? That's just basic Mean Reversion.
    The simple item the True Believers are forgetting is that, when the valuation ratio of two items is away from the mean, that ratio can be normalized by Either item. So silver needn't go up . . . if Gold goes down. 
     And so it has been. Gold, despite all sorts of excuses, has been down to over $100/oz off a very recent high of $1420 & change/oz, and is still under $1350, while silver shows the required relative strength by languishing a bit under recent highs ($31/oz). 

     To add a bit of humor, a website that correctly mocks the SEC for blaming a "fat finger" trade by Wadell & Reed for the first, famous "Flash Crash", is now credulously embracing that notion that the recent drop in gold was caused by the liquidation of ONE trader's position. 
    Faith may not move mountains, but it can surely move reality out of consideration. 

   These markets moved the way they did because human beings 1) tend toward herd behavior, and 2) individually, or as a herd, they can't maintain the same emotional state indefinitely, These commodities dropped because it was Time for them to drop. 

     The True Believers are gearing up for inflation, because that was The Last War. But the money velocity is very low, and inflation would see broad classes of asset price rise. I hold this is not inflation; it is froth.