Beating a Dead Horse: PM Blowout Underway

Well, two significant crosses today with gold now above $1,500 and silver topping $45 (now pushing $47).  When things are moving this fast, we should be hearing warning bells of some kind.  As Jim Rogers notes in a recent interview, I too would rather see an orderly rise in these prices over a relatively long time frame.  To wit:  “All parabolic moves end badly.”

Gold, at present, is now up 8.2% for the year, indicating an annualized rate of 28% or so, which is only slightly accelerated from it’s long-term trend.  As expected, silver is another story….now up 50% on the year, projecting annualized gains of more than 150%.  

And, for the record, I’m not saying that these rates can be so easily extrapolated.  Of course, there are a number of fundamentally sound reasons for silver to be rising more rapidly than gold. (See a somewhat dated review of these issues here.)  On a historical basis, the traditional 20:1 relationship between silver and gold should support a price nearer to $75 per ounce with gold at $1,500.

But, regardless, should we find these rates to be at all alarming?  You might think so.  They might, after all, signify either:  a) a growing speculative bubble forming in precious metals (that could subsequently burst) or, alternatively, b) the growing likelihood of – and, perhaps, imminent – collapse of the world’s various fiat currencies, the US dollar most prominent among them.  So, take your pick, it’s probably one or the other in the offing.

For the record, Roger’s comment about “parabolic moves ending badly” may be applied equally to the parabolic increase in debt that has accrued since the 1970’s, accelerated in the last decade, and is, even now, still being desperately propagated, if more so in the public sector.     

In our mixed up fiat money world, you see, credit market debt is our money supply.  It’s creation has been relegated to each and every loan officer in each and every bank in the nation.  Of course, the Federal Reserve exerts ostensible control over how quickly and easily these folks are able to hand out newly “minted” dollars.  But, generally speaking, this task has (or had) become a virtually unfettered digital printing press that was allowed to respond rather freely to the insatiable demands of the market.

So, this is what a “parabolic increase” actually looks like:

That curve you see is roughly approximate to an annually compounded growth rate of 8% or so.  Of course, an any viable economy, the growth of the money supply should roughly correspond to growth in the economy, thereby preventing inflation.  For this reason, it is more typical to see this plotted as a function of GDP growth.

In this widely distributed (if, now, somewhat dated) chart produced by Morgan Stanley, it may be noted how the rate of growth in credit market debt has greatly outpaced that of the economy as a whole….and who has contributed the most to the accumulation of “excess” debt.

 Clearly, up through 2008, the “blame” for excess debt accumulation may be shared almost equally, especially between the household and financial sector.  The GSE’s (mostly Freddie & Fannie) were, of course, rather integral to the latest expansion.  Only more lately has the Federal government’s role begun to explode. 

Here’s another take on this process and, as it happens, one of the most cogent pictorial explanations of the underlying problem (from Eric DeGroot via

What you see there, again, is the “parabolic rise” in the debt-to-gdp ratio.  This accumulation of debt, unsurprisingly (to any non-Keynesian at least), produces fewer and lower returns on investment over time, which guarantees the eventual “popping” of the credit bubble as the cost of the debt eventually exceeds the borrower’s ability to pay for it.  These “diminishing returns” are charted below.

Simple, n’est pas?  Ahhh, yes.  Why, might we ask (ever so reasonably), does the government continue to insist on “picking up the slack” caused by the ongoing reduction in private sector debt, even when it is clear that such debt:  a) only adds to the crushing burden already accumulated, and b) is certain to add little in the way of new, real and sustainable growth?

Good questions, those.  It could be stupidity, of course, but is more likely stubborn desperation.  As I’ve had reason to note frequently enough in the past, the collapse of this Ponzi scheme is more-or-less inevitable….either in a depressionary default of a goodly share of all debt instruments (and associated money supply) or via the current path of the continued inflationary flooding of new money into the market with fewer and fewer net gains in productive capacity. 

So long as we pursue the latter course and continue to destroy the dollar, precious metals, along with other “hard assets” will continue to be the only reasonable refuge.  Simple, n’est pas

Harry Tuttle    



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