Related topics: silver, gold, commodities, Microsoft, Bill Fleckenstein
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Sometimes financial markets can be mind-numbingly boring. The past week or so has not been one of those times.
The massacre in commodities a week ago yesterday (with more bloodletting this week), led by silver, has given us an example of how volatile the world can be, thanks to the insidious effects of money printing.
Regarding the action on May 5, the commodities and foreign exchange markets were total chaos. While many explanations were offered, it was really just an example of the flip side of frothy, momentum-based speculation.
In fact, a variety of factors exacerbated the rout and helped it feed on itself, not the least of which was silver being bludgeoned for about 10% (along with oil). As I noted last week, the silver market had become populated by so many speculators that a violent pullback was likely.
No shock in silver's struggle
Given my experience in the silver market over the years, I was not surprised by the nature of its collapse. That is the way silver trades -- that is its personality, and this is what happens in a leveraged, computerized world. Except that this time (roughly on the one-year anniversary of the flash crash), rather than stocks being pummeled, commodities and currencies bore the brunt.
Bill Fleckenstein
The bottom line: People need to plan for the fact that days like we saw last week can happen, especially in the silver market.
We can gain a small insight into the amount of speculation washed out by looking at the May 5 volumes in both iShares Silver Trust (SLV), a silver exchange-traded fund, and gold ETF SPDR Gold Shares (GLD, news). The former set a record by about 50%, while the latter's volume was among its top five days of all time. Clearly, a fair amount of shakeout has occurred.
Silver continues to thrash about between the low and high $30s an ounce and I would expect that to continue, though I can easily see the range stretching into the low $40s. After the move it has had, I believe silver is going to have to spend some time trading somewhat sideways (although it may sound silly to call a $15 range on a $30-per-ounce commodity "sideways").
As for gold, it has been reasonably stable, since it hasn't experienced anywhere near the same level of wild-eyed enthusiasm. Assuming the silver liquidation is nearly done, that means much of the hot money has been flushed from the metals sector. Perhaps gold can thus start grinding higher, though it may take a while for it to establish a new high as well.
What can Brown do for you?
While we're on the subject of precious metals, a column in the May 5 print editions of The Financial Times is so absurd it deserves mentioning. Under the headline "Britain Was Right to Sell Off Its Pile of Gold" (registration may be required), Alan Beattie claimed that owning gold is nothing more than a form of wagering.
His argument is that since gold has been rallying while interest rates have remained low, gold's performance can't be explained by increased inflation expectations. Thus, it must be due to gambling (his term), and he concludes: "On this occasion, Mr. Brown's decision was the right one."
He is referring here, of course, to former U.K. Prime Minister Gordon Brown's multibillion-dollar blunder of selling all of Britain's gold 12 years ago -- essentially on the lows -- when he was chancellor of the exchequer. This knucklehead thinks Brown made the right move, since gold is just a worthless asset. Ergo, whatever has happened since makes no difference.
Naturally, Beattie also does not believe a currency should be linked to gold: "This remains as bad an idea as ever. It would have meant sharply tightening monetary policy since the fall of 2008. This would have been madness."
