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Sounds of silence

Silver is trading over $20 an ounce as this is written. Wow. That’s up by more than one-third since the year 2007 ended at $14.797. Gold is not yet at $1,000, but can this milestone be far behind? It began the year at just over $834.90.

What’s the Treasury doing about it? Nothing I can see. Should it? That I even  ask such a question may be a generational disconnect.

It used to be that the Treasury was terribly concerned about the price of precious metals. In the 1960s, the Treasury dumped huge quantities of what had been a 2-billion-ounce hoard of silver to try to maintain its official price of $1.2929. Same with gold. Large amounts went into maintaining the $35-an-ounce figure.

The sense of crisis and the public pronouncements all indicated officials considered something amiss.

The free market eventually won, but it was treated like a course of castor oil – unpleasant but necessary.

Even in 1979-1980, there was a sense of crisis despite the fact that the markets were free. Interest rates were raised to tamp down speculation. One Federal Reserve chairman was pushed out and another, Paul Volcker, was put in his place.

Not this time. It’s different. Buyers of gold and silver are starting to sound like buyers of real estate did two years ago. You can’t lose, they say.

The similarity is unsettling. That is perhaps why the echoes of the 1960s, 1970s and 1980s are in my ears. They may be part of the past, but are all of their lessons now irrelevant?

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One Response to Sounds of silence

  1. Scott says:

    "Those who cannot learn from history are doomed to repeat it."

    This quote by philosopher and author George Santayana was never more significant than it was today. We found that the trying to control the market by flooding it with product did not work in the 1960s. Trying to create free markets in a controlled manner in the 1970s did not work as free markets could not be controlled. In the 1980s the markets were opened and free to move as they saw fit. To create the markets, credit had to be loosened to force the circulation of money. This eventually lead to a credit crisis that lead to Black Monday in 1987 and the subsequent Thrift Savings crisis.

    Today, Ben Bernanke has tried to dump dollars onto the market to loosen credit. In the process he devalued the dollar by producing more than the market can bear. Credit crises are once again a credit crisis is causing problems with the market. But the private sector has learned from the past allowing the largest mortgage companies to sell their assets rather than create the Thrift Savings crisis. However, there will be a number of small and medium size banks that will need to be bailed out–creating a new crisis.

    George H.W. Bush called these economic policies "Voodoo Economics" in 1980. He was proven right when he inherited Reagan’s mess in 1989 and when his son is not heading Santayana’s advice.

    So what are the lessons learned? Money has to move and not sit in metals. If the opportunity to move money is made by the next administration, precious metals will dive like they did in late 1980 as money moves to other investments. Opportunities will open elsewhere, like depressed housing markets, and the money will be put to work. It will take the right mix of policies and opportunities.

    It will also take Bernanke to use other mechanisms to control money. Maybe he should raise the reserve rate to reduce the amount of money on the street. It will create a higher demand and raise the price as the supply-and-demand curve looks to equalize.

    But this is not going to happen until someone is in the White House who can understand that gas will hit $4 a gallon while his oil company friends get rich off the miseries of the American people.

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