The End of Markets?

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I’ve been musing about the world’s stock markets, and reading copious amounts on LIBOR rigging, Commodities rigging, High Frequency Trading, and the like, and reached the conclusion that the markets aren’t all they’re cracked up to be.

Of course when markets first arrived, roughly about the time that money was invented, they were meeting places for Farmers to exchange their wares – a sheep for a pig, a sheaf of wheat or oats, for some hens, A dozen eggs for a hind quarter of a pig, or a leg of mutton.

As time progressed these places became villages, and later towns. By the time of the Romans, there were already cities where people traded their wares, and of course these ballooned when money made placing a value on things much more easy.

By the time of Adam Smith’s “Wealth of Nations” written in the 18th Century, Britain was already a hugely successful trading nation, and well on the way to becoming the most dominant trading nation on the planet.

But it wasn’t just trading that made Britain Great.

People learn who they can trust and distrust from their actions, they learn where they can get a fair deal, and also where if there is a problem,  they can get fair representation and their case heard.

Britain, was at the forefront of all these by having that word “Honour” as part of the code that people no matter where in these islands, would treat others fairly, and they had a legal system that had evolved since the 13th century, and grown up, ever since in 1215, the King was forced to cede some powers to the Lords, and others of the Nobility in the Magna Carta.

A House of Parliament where discourse was carried out, and people respected that despite differences of opinion, they could be heard, and later a police and judiciary to enforce these legal pronouncements (Acts of Parliament)

Business exchange where there is free flow of information means everyone benefits, but in the last ten years, these tenets seem to be breaking down.

The creed in the City of London used to be “My word is my Bond.”.

But now, many in the world of Finance increasingly see their role as to “Pull the wool over the eyes of their clients, colleagues, financial industry participants and regulators”, and the devil take the hindmost.

Markets are like putty – you squeeze them in your hand, and the money (Putty) oozes out elsewhere – Always looking for the easiest most profitable exit.

For the last ten years as Politicians and Central Bankers have attempted to massage markets to their will, we increasingly find they fail to behave like true markets.

Interest rates are held artificially low, LIBOR and Euribor rates are illegally massaged to make then appear less than they actually are.

Commodity prices are manipulated to make those who trade these, believe that demand is less than it actually is.

A case in point is the alleged manipulation of Aluminium, as metals were moved from one warehouse to another, and delivery held up for weeks by the great Banking institutions of New York.

Gold and Silver prices were manipulated down, by the use of derivatives to attempt to fool the markets into believing that demand was lower than it is. And when this failed, they implored (or threatened) India into imposing tighter controls on Gold, by raising import taxes, and duties, and creating legislation that required 20% be re-exported, as Gold and Silver demand ballooned in that country.

Germany was told that it would take 6 or 7 years to return all their gold, and we know that the UK Bank of England lost several hundred tonnes early last year, when their web-site inadvertantly showed they had lost 400tonnes.

And High frequency trading, allowed after the trading rules were changed by the U.S. SEC, in 1998, has also contributed to manipulating the markets. The German financial regulator warned the media that precious metals markets are manipulated, and Deutsche Bank is to give up its seat on the LBMA, perhaps because it is seeking to distance itself from the forthcoming fallout.

The answer to all this of course is to ignore market chatter, and to follow your instincts, and your head.

Markets have a tendency to overshoot, but they also have a tendency to return to the mean.

At the moment, the RSI (Relative Strength Index) of Gold and Silver are showing the most oversold prices in the last 40years. This will soon return to the mean.

Sprott Group, who I have mentioned before, studied Gold and Silver production and demand, and reached the conclusion that world demand significantly outstrips supply by some 200million ounces, and the only conclusion is that the only way that Gold and Silver demand was being met in the near and Far East, was by selling short (Selling a derivative, or selling forward at a price below the current price) to manipulate the price lower, and releasing Central Bank Gold from the British and American vaults to meet unprecedented demand.

In China alone, last year they imported over 1,000 metric tonnes, and produced over 300million ounces of their own, while allegedly scouring the states of Africa to buy from artisanal miners at the spot price, possibly importing another 40tonnes per month.

One day soon when the precious metals vaults are empty, and the game is up… The price will go where demand and supply take it. That time is near.

You have been warned.

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