My silver theory,(this can also be applied to other commodities):
I believe that originally a defacto cartel was set up to allow excess post-communist(era and other) inventories to be liquidated in "an orderly fashion" (floor price) and in an environment of commodity deflation. I say this because when you look at inventories (of silver and other communist, cold war stockpiles) in the 90's, they were pretty large, especially so in the early to mid-90's. The same thing happened in other commodities like grains. By the late 90's these markets were actually moving back into equilibrium. At some point (perhaps 1999, after the Asia Crisis settled out), the real market started to shift to towards supply disequilibrium (the need for more production to offset the reduction in stocks and inventories). However, because there was a massive price fixing scheme and late stage communist era dumping still in effect, the supply side of the equation failed to respond (and there is a long lag period for response, as input commodities can't be created out of thin air) and the price fixed "market" moved toward even greater disequilibrium.
Overlaid on this structure (using silver as a prime example) are the Comex silver sellers, who were still playing by the old commodity deflation playbook of the disgougement period (1989-1999). Additionally they used silver sales (shorts) as a way to play the other great deflationary playbook trade of the last half decade: the sell silver/gold, buy bonds carry trade. As we moved into the new century this created even more distortions and maladjustment. Against that backdrop, you have China and Greater Asia moving in and engaging in the process of consuming large amounts of incorrectly price fixed resources to meet the credit induced demand created by the other price fixed driver in the world economy: interest rates and bonds. This boom is now terminal. There is an interesting paper by Prof. Obstfeld that developed an analytical framework one could use in any market for an exhaustible resource where govt intervention (and by extension price fixing by piggy backing speculators) has prevented prices from rising to sustainable long term equilibrium levels. The short version of the Obstfeld theory, is that things get real distorted, manifesting itself in exhaustion of the resource (Train Wrecks). There is a good essay on this here, note link to Obstfeld work, called "Logic of Currency Crisis".
goldensextant.com
This is the nexus of my Train Wreck theory. This price fixing (mostly in bonds now, with residual effects in some commodities like silver) and disequilibrium has gotten so severe that it is creating rapidly developing shortages and price spikes. The "real" market never had the proper chance to adjust. The real resources were never really in place to support the kind of boom now underway either.
So the steps of this process:
Price fixing, manipulation (example: BOJ controlling and setting interest rates, or 753 million oz Comex silver short sales, i.e: wildcat moral hazard finance) = false market signals= severe disequilibrum.
Next is exhaustion of production input inventories leading to Train Wrecks, the stage now underway.
As exhaustions and Train Wrecks are highly inflationary events this leads to the crack-up boom or panic stage. Participants scramble into real assets (the Flucht in die Sachwert described by Mises). In silver this of course will lead to an absolute rout of the ingrained short carry trade. This makes silver perhaps the prime Flucht in Die Sachwerte (translate: flight to real assets) commodity to play, especially as it looks incredibly off-side. The risk is that all the powers are lined up to defend this false price fixing scheme, they still have water (higher interest rates) to utilize. The other risk is a complete collapse of economic activity brought about by the Train Wreck. But, and this is important, you must get the train Wreck (and squeeze) first, for the collapse to ensue. |
