"I am going to ask you a few questions that frankly embarrass me, but I thought
that there might be some other dummies out there too.
I've asked before about the gld/slv ratio and about what is significant about it. You answered it's all about liquidity. Well if that is true, what is the definition of liquidity? It probably has something to do with money available for investment, but can't the government make all the money that is needed by making a few electronic manuevers?
And I might as well make myself look even more stupid by asking what is significant about a rising or falling gld/slv ratio and why choose this ratio to show rising or falling liquidity.
Please spell it out for me and it might help some of your other subscribers who can't spend alot of time thinking about investments." --FM
I've asked before about the gld/slv ratio and about what is significant about it. You answered it's all about liquidity. Well if that is true, what is the definition of liquidity? It probably has something to do with money available for investment, but can't the government make all the money that is needed by making a few electronic manuevers?
And I might as well make myself look even more stupid by asking what is significant about a rising or falling gld/slv ratio and why choose this ratio to show rising or falling liquidity.
Please spell it out for me and it might help some of your other subscribers who can't spend alot of time thinking about investments." --FM
"Frank, if you don't mind I am going to pose your question on the blog and then
spell it out there.
There are no dumb questions! It is not easy weeding through all the
perceptions and competing viewpoints that are flying around out there.
But basically, you are right. They just print new money. But think of a
rising GSR as a lever that needs to be pulled. They need deflation, contraction
or the pretense of those things in order to commit new inflation or else they
would be exposed as the chronic infators they are. They need to look like
saviors instead of destroyers or else public opinion would go 'off with their
heads!'
I hope this helps, but I will try to be more clear in a blog post later
today." --GT
I have used this theme of 'levers' before. Prechter, when you see him on CNBC is a lever. Public opinion is a lever. Bearish and bullish activity are levers. Whatever puts Dear Leader in a position to inflate is a lever to said inflation. Do you think Bernanke can panic with tech stocks screaming and interest rates ramping?
Why do you think I obsess on Treasury yields? Because Ben was powerless last spring when the bond yield was at the top line (monthly EMA 100). The decline in yields since then has given him back his mojo and helps put him squarely back in control, stock market relief rally notwithstanding and should he choose to exert that control.
Indicators like the gold-silver ratio and associated indicators of draining liquidity are an inflationary policy maker's reason for being. Ironically, deflationary environments can be the triggers or 'levers' to coming inflationary policy.
Why can't I write simpler? Does this make sense?
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This is how I think about it. My simplistic, perhaps flawed perspective.
ReplyDeleteGold and silver are competitors. Both are monetary metals, so they can be thought of as forms of wealth. Due to this fact, gold and silver are correlated for the most part. So, on any given day, gold and silver tend to both rise or both fall. However, the amounts that they rise or fall are different and caused by a few factors.
First, market size. Gold is a bigger market than silver. So, when money flows into both, silver rises more and when money flows out of both, silver falls more.
Second, industrial use. Silver has an industrial component, so when the economy is doing well, companies will purchase silver and provide a boost to silver.
Finally, the fact that both metals are monetary metals means that money supply influences their performance. Think of money supply as grease for the monetary machine. The machine needs a certain amount of grease/money to run properly. When only that much grease/money is present, the system is in balance and the grease/money is absorbed.
However, if you want the machine to run faster, then you can add more grease/money. However, while it gets the machine to run faster, it also is more than is needed and so some grease/money is not absorbed. This excess floats around through the monetary machine making grease/money less valuable. This situation would be inflation.
Finally, certain economic conditions can use up grease/money, which causes the monetary machine not to run properly and makes grease/money more valuable. This situation would be deflation.
Put it all together and we get the phases of the market.
Rising GSR - Both metals rising/gold rising more than silver: There is excess money/grease, but the economy is not yet doing well. Early inflationary phase. Relatively rare and only happens for short periods.
Falling GSR - Both metals rising/silver rising more than gold: There is excess money/grease and the economy is humming along. Normal inflationary phase.
Rising GSR - Both metals falling/silver falling more than gold: There is a lack of money/grease and the economy is performing poorly. Normal deflationary phase.
Falling GSR - Both metals falling/silver falling less than gold: There is a lack of money/grease, but the economy is holding up. Early deflationary phase. Relatively rare and only happens for short periods.
In short, ignoring the turning points, falling GSR is inflationary/excess grease/high liquidity environment and rising GSR is deflationary/lack of grease/low liquidity environment.
Just one man's two cents.
Oh, and as far as levers, Bernanke needs a lack of grease/low liquidity environment to get away with adding more grease/money. So, he needs GSR to rise.
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