Black Swan Insights

Showing posts with label purchasing power. Show all posts

Quantitative Easing Propaganda From the Bank Of England

I happened to come across the Bank of England's (BOE) website yesterday and saw an interesting article titled "Quantitative Easing: Putting more money into the economy to boost spending." I am always fascinated by how much contempt central banks have for the general public. They talk to us like children in an Orwellian police state. The purpose of the BOE's article is to convince the British public that inflation is a good thing. If the public wants a strong economy they should also want inflation. Of course to the rational person, inflation is a great evil and represents an illegal confiscation of purchasing power. It has ruined the middles class in western economies because wages never keep up with inflation, which results in a decrease in the standard of living. But lets see the Bank of England's propaganda in action:

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The Gold/Silver Ratio--Silver Is Not Cheap

You often hear proponents of silver argue that silver makes a great investment right now because it is cheap compared to gold. The argument goes that since there is approx. 15 times the amount of silver in the earth as compared to gold, than the price ratio between the two should be roughly 15-1 gold to silver. Following this logic silver does appear cheap considering the ratio is currently around 65-1. However, it is not a good idea to make an investment in silver based on this mythical ratio. Why? The ratio has never been followed at least by the market. If you look at a long term gold/silver ratio you will notice that the ratio has never been 15-1. At best it has gotten to around 20-1 and that was only twice in the last 110 years. On average the ratio between gold and silver is about 40-1 and trying to make trades based on this ratio have not proved successful. The only way to trade the spread is to take advantage of truly egregious spreads between the two (around 80-1 or more) and buy silver and short gold. Other than that you are wasting your time with this ratio because it means nothing in the real world. The reason the ratio ever existed was because the US had a bi-metallic monetary standard up until 1873. During this period the US government fixed the price of gold and silver and the ratio was around 15-1. It was only during this time did the ratio every have any real validity. Until the day we return to a bi-metallic standard, the gold/silver ratio will never be 15-1.

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Why Gold fell today

One of the more peculiar aspects of today's trading was the large plunge in gold. The yellow metal fell approx $43 to $1200 which seemed curious because the dollar was down against the euro. More importantly gold closed right at its lows for the day which could foreshadow further losses in the days ahead. But the question is why did gold fall so much? From what I have heard from a few commodities traders was that it was due to the surge in the Euro. After the Spanish bond auctions went relatively well investors seemed to interpret it as a positive the Euro and EUR/USD surged about 200 pips. Euro strength was seen against all pairs, even EUR/CHF (which has been in free fall). Traders said the move in the euro caused unwinding of the long gold/short Euro trade which many hedge funds and institutions had put on in recent months (worked pretty well too). This trade had become rather crowded and the large moves caused forced liquidations by some. Is this the real cause? I really don't know but it makes sense to me.

Good Luck

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