Monday, June 3, 2013

PM bid for real???

Milton Freidman famouly said that inflation is "always and everywhere a monetary phenomenon".
By this I presume that he meant that inflation is caused by the creation of fiat money which drives prices up and thus becomes inflation. Such as recently happened in the housing market, if recently can be construed as the last 15 years or so.

There has been a bid in gold and silver lately. Particularly in the gold and silver stocks. There is talk of a large short position that has accumulated in the gold market so buying in the stocks may be on the hope of a large short covering rally. Or, maybe the buyers are longer term holders who think the chances of inflation occurring are rising. Certainly the official numbers show no increase in inflation and if one considers rising long term interest rates one would consider that to be a headwind to inflation. I don't consider 2.5% 10yr rates as high and it may be that they are trying to normalize.

We who watch and trade the markets are fond of thinking of markets as predictive systems. Of course this is only true when they actually seem to be right in retrospect. With that said I want to redirect my attention to the energy situation.

If the relatively low prices of natural gas persist into the future this nation will have a strong "comparative advantage". And I, contrary to common "wisdom" think that low energy prices, or more accurately, plentiful energy leads to inflation. This is due to the role that energy plays in a modern economy. Plentiful energy that is relatively cheap allows an economy to grow. Energy is the primary input that lets people engage in activities. It allows people to drive a long way to their jobs. It allows retirees to travel in their motor homes. It allows and encourages the production of items that consumers want, in that way it is counter inflationary, but in the process contributes jobs to the economy. But basically by making it less expensive to engage in business, low energy prices allow bankers to have faith in the businesses that they lend to. And it is money creation through the fractional reserve banking system that creates the money that creates inflation. And it is "comparative advantage" that allows a country to prosper in a world economy.
The bid may be for real in the gold and silver stocks. It is about time, for Gods sake!!
Control risk,

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