Is silver a precious metal or an industrial commodity?

This is a chart of the price of silver divided by the CRB commodities index. It shows that Silver is rising strongly compared to the CRB index. All moving averages are in bullish alignment. The 200 week average is steadily climbing. Silver is outperforming the CRB. I think this indicates that silver is regaining its status as precious metal. The MACD has recently crossed over.
This might simply mean that commodities are going to crash, but silver holds its own. That would be the deflationary view. It's a question. In last fall's deflationary collapse, silver fell harder and faster than just about everything. That might change. There is less silver than gold in the world today. The bullish case for silver is stronger than ever.

View of the New Depression

President-elect Barack Obama is wasting no time addressing America's, and the world's, economic crisis. His administration is naturally being compared to the Roosevelt presidency.

So, can Obama fix things? Unfortunately, he can do almost nothing to fix the economy. He can bring "change". Change is coming no matter what, but a competent and inspiring leader, which Obama seems to be, can at least steer the nation in sensible directions, instead of making it all worse. But one thing he can't do is fix it. BTW, Roosevelt wasn't able to fix much either. I am inclined to believe there is no way to fix it: the world's economies simply need to slowly build up from the ground level.

Many writers are wondering if the nation is facing a recession or a depression. Joe Nocera, in the New York Times, says America is not as bad off as it was when Roosevelt took office, "not even close", he says.

Nocera is deluded. It is far worse this time. Nocera points out that numbers for unemployment are not as bad as they were in 1933. But when Roosevelt took office it had been three terrible years since the famous stock market crash of 1928. We have only had about three months. Nocera says in the Great Depression there were far more bank failures. Joe, two more banks just failed yesterday (Franklin Bank of Texas and Security Pacific of California). But really, the number of banks failing is not the problem. The failure of thousands of local banks in the Great Depression was catastrophic for millions of Americans, but it is simply nowhere near as bad as the linked chain of derivative defaults that characterizes the current global crisis. The losses are in the trillions. This process has only begun. The real problem with Nocera's shallow analysis is that it ignores the fundamental source of America's problem: in 1933 we were self-sufficient in the three key areas:

• Energy
• Manufacturing
• Capital

Sadly, we have none of these left today. We are broke, busted, and up shit creek. Maybe we can scrape together enough cash to fix our railroad infrastructure, as James Kunstler proposes. That would help.

For those who think the American economy is on the mend, I would refer to the weekly chart of the Philadelphia Housing Index. This is not showing any signs of turnaround. It would help to at least get a bounce here. If we break down through the lower trend line, there will be yet another shit-storm of huge defaults, and end-of-the-world panic newscasts. It will probably be big enough to bring about the State of Emergency I predicted in my last post. If we get a bounce, say up to the upper trend line, we'll have one of those delusionary interludes where we'll be sing "Happy Times Are Here Again" and Jim Cramer will start jumping up and down saying we should BUY FINANCIAL STOCKS. Don't fall for it. Not unless the housing index punches up from the upper trend line (not likely), the banking system will continue to suffer catastrophic losses every quarter.


Meanwhile, the international finance system is on the verge of systemic breakdown. I'm not talking about some secret cabal of Swiss bankers. The international finance system is what trades clear in every day for doing ordinary business. The currency of international business happens to the US Treasury Bill. T-bills are very precarious right now - they have been in a year-and-a-half rally, but have broken that rally. If treasuries collapse, we will have a US dollar crisis. This is looking increasingly likely, and is the direct result of the Fed and the Treasury selling all these bills to raise the money to bail out everyone on the whole planet who looks like they might be about to default. This will be the crisis that stops virtually all trade.

State of Emergency Coming

The recent catastrophic drops in equity markets, worldwide, are the coup de grace of the whole financial debacle. Now we know: no bailout, no stimulus, nor rescue plan will save the American, nor the global economy. We have to take stock and look at what's coming to us. What does it mean for the United States of America? It means that we are a hair's width from a State of Emergency being declared. When this occurs, all banks will close for a time. When they re-open they will be practically unified under a government umbrella, with all deposits in all accounts collateralizing the whole system. There may be a new currency.

The rest of the world is through trying to save themselves by saving our butts. Now foreigners need to save themselves by isolating America. There will be no more foreign capital coming to the USA. Global market contagion has made it imperative that foreign nations protect themselves from the now toxic, sub-prime currency.

Paradoxically, one of the few things that has not plummeted in value in the past two weeks is, oddly enough, the US dollar. Unfortunately, this is not a sign of strength. The dollar has risen because all over the world people have been selling anything denominated in US dollars.

From stocks, to bonds, to real estate, everything is being sold. Selling a treasury bill (denominated in dollars) means buying dollars. And next, whoever used to have a t-bill, and now has dollars, wants to exchange the dollars for something else.. they just don't yet know what to exchange it for. But they will figure it out. Leaders of european nations and asian nations are meeting every day, trying to figure out what sort of common medium of exchange, or mediums, will replace the US dollar. It probably won't be another fiat currency. It will be some sort of gold backed currency. Russia, Germany and some Persian Gulf states have been accumulating state gold reserves in the past years. They may float their own currencies. Hopefully there is still some American gold hoarded in the vaults of Fort Knox. We will need it.

It is not just foreigners who are selling. Americans are also selling their own assets, and hoping to acquire dollars. Its called liquidation. For myself, I'm trying to sell my Mazda 3 (I'm getting no interest whatsoever). I'd rather have the dollars than the Mazda. If I do sell it, I'll try to buy some silver or gold coins with the cash.

Some commentators note that at least oil has come down in price. Actually, this is not a good sign. Do they really think that exporting nations will sell us oil for $85 a barrel? No way. They will sell it to other nations, such as asian nations, or Germany. They will sell it to the nations that have good credit. For America, cheap oil simply foretells shortages.

We will have shortages in almost every commodity soon. Gold is being priced at $850. Can you buy gold at that price? No. Can you buy gold at any price? Probably not - maybe a few ounces, and you will pay a fat premium. This is called a shortage. We will soon have shortages in the commodities we produce, not just the ones we import. I just heard from my stepmother that the fishing boats in Maine have almost all been hauled out of the water and put in storage. The fishermen can't make any money because the price of lobster is so low. A shortage of lobster is the probable result. In hard times, low prices create shortages.

A shortage in gold coins is not going to cripple the US economy - but shortages of food and fuel will. These will occur for much the same reason that shortages in precious metal have developed: the government will try to maintain current prices instead of allowing hyperinflation to occur. This will be the main reason for a state of emergency being declared. Army and national guard units will take over distribution.

Capital will be strictly controlled, and it will be almost impossible to take anything of value out of the country, and certainly not things like precious metals. Naturally there will be a black market. Speculation of all kinds will be outlawed and vilified, but will be essential. Great depression II, here we come.

Robert Reich's solution: honesty

The crisis on Wall Street right now is less about solvency and about capital than it is about trust. And the real question is, How do you restore trust to a system in which, basically, nobody trusts the numbers that are supplied by big banks on securities?
—Robert Reich, interviewed on Marketplace

That's a great idea, Robert (although America probably is insolvent). We could bring a culture of honesty and fairness to Wall Street. Brilliant. However, since Wall Street has never been honest, nor fair, ever, it might be a difficult idea to implement. But I have an idea for a good way to start: the US government could set an example. The government could instruct the Bureau of Labor Statistics to produce accurate statistics instead of horseshit for a change.

First, how about an honest CPI series, instead of ridiculous fantasy numbers? Even the mainstream media is starting to report the CPI with skepticism and sometimes sarcasm. Then, we could have an honest data series for the gross domestic product! Imagine - numbers that businesses and the American people trust.

Note that none of this would cost billions of dollars. The government could just stop lying.

After that, some pretty simple, common sense finance regulation would avoid all this insane mortgage bond trouble. Twenty percent down payment for a house. No off-balance sheet liabilities for corporations (or the government). Its not that hard.

I realize that admitting we have out of control inflation, negative economic growth, and un-payable debts would send this country into the worst depression ever, but that will happen in any case. We should admit our insolvency, and start building an honest nation.

Walking around Manhattan and seeing.. Lehman Brothers

My girlfriend and I were spending Monday in New York City after attending a wedding, and the only art museum open was the Modern, so that's where we went. I had heard the news about Lehman Brothers in the morning and was following the latest carnage on Wall Street, but I was mainly trying to enjoy a vacation day. After our art-touring, and looking for the mid-town subway stop we pause to gape at the most garishly lit building I've seen yet in Manhattan. It was a massive block of video display. This thing was zipping and flashing. Then I noticed that there were media crews up and down the block, with all cameras pointing to the flashing video building. I realized I was looking at Lehman Brothers!


I was of course thrilled to be looking at the eye of the financial storm. It turns out that Lehman had been in the World Trade Center, but had moved to mid-town after nine-eleven.

News reports were rather odd. NPR interviewed Gordon Steele, author of Empire Of Wealth, an very good economic history of America. Steele compared the Fed allowing Lehman to fail to the the New York banks letting Bank of the United States fail in the 1929. I don't get it. Bank of the United States was the immigrants bank. Lehman is an investment bank that caters to the ultra-rich. The failure of Bank of the United States did set off a chain reaction; a wave of bank failures across America that launched the real Great Depression, because it had far more impact of peoples lives than the more famous stock market crash. Steele wondered is Lehman's failure would set off a similar chain of events.

Other reports described how upset Lehman's employees were at being made into such a spectacle. Most of those interviewed were angry that the Fed had not bailed out Lehman. Wow. They think we should be sympathetic?

I think what is going on today is that the Fed, and the press, and the public, are realizing that bailing out this bank (i.e. Bear Stearns) or that bank is not going to solve anything. We are facing a systemic crisis. The Fed is dealing with this by exchanging credit for just about anything at its many discount windows and TAF facilities. That sure sounds like monetization to me. But it is doing this for the few bank it chooses to save. Bank of America and J.P. Morgan seem to be on the A list. Merrill Lynch and WaMu are on the shit list.

So, what next for the financial crisis? The failure of Washington Mutual is only a few days away, if things keep going at this pace. And, after the elections, we'll have accelerating inflation, probably hyper inflation.

By the way, this financial crisis affects our ability to innovate our way out of the energy crisis. We no longer have an investment banking industry to supply capital to American industry on favorable terms. There is going to be a wave of innovation for alternative energy? Which of the almost-dead banks will finance this project? European banks will prefer to finance Euro companies like Airbus and Siemens over General Electric.

Those bonds we just guaranteed, issued by Fannie and Freddy? We will have to keep making those coupon payments even when the homes they represent are no longer generating income, because the occupants have left. More monetization. Our hapless government will monetize everything they can until our dollars are well and truly worthless.

Fannie and Freddie, ad nauseum

So, the goverment has taken over operation of the America's two giant, government sponsored mortgage brokers, Fannie Mae and Freddie Mac. News reports say ominously that the bailout "could cost taxpayers tens of billions of dollars".

Tens of billions? Who are they kidding? Fannie and Freddie's liabilities were in the trillions (btw, a trillion is a thousand billions). At the rate that American mortgages are defaulting, tens of billions are not going to fix anything. It's hundreds of billions if we're lucky, probably well over a trillion dollars that the government will have to pay. Remember that Fannie Mae was notoriously resistant to audits, and the SEC kept letting them postpone their statements? No one knows the true mass of the black hole at the center of the mortgage galaxy.

Supposedly the holders of GSE debt (collateralized debt obligations, mortgage backed securities, etc) are relieved that the US Treasury will guarantee the monthly interest payments on this debt. Not to worry, the freshly printed notes will keep arriving in the mailbox on schedule.. but something is different here. Think of what those bonds used to represent. All those people going to their jobs, bringing in paychecks, making mortgage payments to banks.. that was a lot of economic activity. That was the process of wealth creation. Now that those homes have foreclosed (not all of them of course, but a lot of them) and mortgages defaulted, the treasury will simple write out a check to cover the mortgage - even though the people who originally borrowed the money no longer even own the home! What economic activity does that represent? Not a lot. No equity is being accumulated, no wealth is created, or value added. The government simply prints the money. The government could try to cover the cost with increased taxes, but that would only suppress economic activity even more (not to mention cause riots). These bailouts are simply the next stepping stone to hyper-inflation.

In the end, who owns all those homes? Bond fund PIMCO does, and the government of China, which are both huge holders of Fannie and Freddie debt. These are the owners of American homes, along with many others. And if those homes go into foreclosure, the mortgages will still be paid by the USA. In soon-to-be-worthless American dollars.

The Terrible Silver Plunge

For all the people like me, who believe silver and gold are real shit, as opposed to fiat currency, the recent plunge in the futures price of silver and gold, was a crime against humanity.. well not really. But this is a prevailing view of many good and smart precious metals analysts. Heck, I don't see it. I think the major banks and nations that are aligned with the U.S. dollar have a very strong interest in not seeing the precious metals soar in price. So, they try to manage the price down. No conspiracy needed other than the usual corrupt shenanigans on Wall Street. Is anything new here?


Silver is still within it's recent uptrend, and may in fact be a spectacular bargain right now.

Silver was driven down very hard and fast by two New York investment banks. Almost certainly JP Morgan was one of them. Shorting silver is one of their lines of business. They probably had help from a variety of self interested parties: central banks, hedge funds. This is how hot commodities go: up and down. However there are repercussions to such savage price manipulation. Silver miners will find it impossible to continue operating. If not forced to shut down, because they'd be running at a loss, they might chooses to inventory their production. Artificially suppressed prices are a guaranteed way to create shortages, and shortages can then persist for some time. Even the arrogant JP Morgan, flush with their vanquishment and consumption of Bear Strearns, knows that they cannot control silver for long. Instead they will reverse their position and ride the precious metals upward, as the dollar renews its own fall into oblivion. If Bernanke is thinking the New York investment bankers are his friend this month for helping drive down commodities and prop up the dollar, he is crazy. Those guys are both ruthless and desperate.