L'Argent Provocateur

Why get your haute couture knickers in a twist? Here, courtesy of Chris Duane is probably all you need to know to avoid financial meltdown. Alternatively put a pair on your head and buy two pencils.

Crash the system...buy silver

In a binary world sometimes you have no other choice than to reboot the operating system. If it had been designed correctly in the first place you could argue this shouldn't ever be necessary but alas in practice its 'a different gether altomatter'. Frequency of reset often depends on the underlying quality of the system itself and the same could be said of non-binary systems such as governments and our monetary system.

If we take a look at what's really happening with our system of paper money then its unsustainability is clear to anyone willing to open their eyes.  As Herbert Stein once remarked "Something that can't go on will stop" and stop it will. However just because something is inevitable doesn't make it imminent. When is the question, not whether.

So as of today the US national debt is just shy of $16.2 trillion. Sounds like a lot until you realise that this along with nearly everything else within the financial system is a manipulated fantasy. According to Laurence Kotlikoff, Prof of economics at Boston University, if you take all the unfunded liabilities into account (which is the honest way of looking at it) then the real debt figure is over $200 trillion - He's already declared the USA bankrupt...OUCH!

Let's remind ourselves of the Woody Allen quote employed at the front of the book, "Down one road lies disaster, down the other utter catastrophe. Let us hope we have the wisdom to choose wisely"

 

This somewhat neatly ties in with the Austrian school of thought or as Ludwig von Mises put it "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
 

So if you believe all this to be the case then kicking the can down the road only has one real effect - to make the collapse worse when it does happen. OK, but if it's going to be worse later on isn't there a do-gooder case for helping getting it underway a little earlier? Perhaps there is something wholly righteous about taking down a system that is so corrupt that it is even in danger of stealing your liberty? Threats to your freedom are a discussion for another day - let's just focus on monetary matters and what you can do about it.

Our monetary and banking system should be like a utility - moving money into productive activities and where it is needed. What it shouldn't be, but has morphed (further) into, is a parasitical model that is killing the host. Now I have postulated in the book using John Mauldin's fingers of instability concept that the whole shebang might not need any help in collapsing - it may just happen anyway. Or as Nassim Taleb and Mark Blyth state:

'Complex systems that have artificially suppressed volatility tend to become extremely fragile, whilst at the same time exhibiting no visible risks.'

So what's the problem? Mmm... that's a long list - but for today's post let's focus on the derivatives market. A derivative is a security (contract) between two or more parties whose value is derived from the price of the underlying asset. It is not itself a 'tangible' asset. The second aspect is that many of these derivative contracts are extremely difficult to undo as Warren Buffett found out after trying to unwind one - despite his best efforts he didn't manage it and just had to let it run its course. The derivatives market is larger than 1 quadrillion dollars per year (that's bigger than Bernard Manning's underpants). Much of it is also based on margins (you don't have to have all the money down - just a small %) - so not only is it ridiculously large in terms of $$$, but highly leveraged - or put another way, if it all goes wrong the SHTF in a spectacular fashion.

Many commodities are traded via these 'paper' derivative contracts. If we take gold and silver for example it is estimated that the volume of paper contracts exceeds the actually physical metal availability by 100:1. So in effect there is a lot of fresh air being traded. It's the emperor's new clothes scenario in that it is a construct that only requires a change of perception to negate. So in the case of paper contracts supposedly backed by the underlying asset - it may only take one of these contracts to be fictional to have everyone suddenly questioning, not only other contracts in that asset class, but every other derivative contract based on that system. Just like the Emperor's attire - it may not be there when everyone has a reality check. Being leveraged to the moon and not being able to extract yourself - now that's what I call a proper financial panic.

So what's special about silver? Well, it's not the only Achilles heel out there but it is the one that the general populous can most easily influence. The derivative fantasy game ends when no-one can get their hands on the physical. And whilst silver is similar to gold in that its partly a monetary metal its has some unique characteristics. Firstly a lot of the silver market is used for industrial purposes - so it has more 'intrinsic' value than gold. Its unique characteristics e.g anti-bacterial, high conductivity etc means its uses are expanding in many fields. Most smart phones use silver as do many solar panels etc but as its cost is relatively low it is rarely recovered for re-use and ends up in land fill. Its currently being depleted at an increasing  rate. The large stockpiles of silver that did exist have dwindled and there are now predictions (always dangerous!) that Ag will be depleted within the next 9 to 29 years.

Whilst the natural ratio of silver to gold in the earth's crust is approx 15:1, current estimates mean that the ratio drops to 1:1 when it comes to above ground stocks. Industry accounts for over 50% of its usage so the size of the investment market for silver is much less than gold and is therefore subject to much higher volatility. The price of silver normally gets temporarily battered in a recession because of this industrial aspect. But let's return to the physical Vs paper market discussion and also possible price manipulation. The price of silver is based on the Comex (or Crimex as some wits prefer to name it). In fact rather than have me explain it all let's enlist the help and hilarity of the two bears. Its a couple of years old but the arguments are still applicable.

Alles klar? You can't fight the FED and JPMorgan right?  You can if you are the Chinese government or maybe if your name is 'Wynter Benton'. But in the case of silver you can even do it as an individual. Buy physical silver and help return a bit of honesty and freedom to the market. Industry needs physical not paper silver. Once there is none for delivery its game over. If the system crashes whose fault is that? Don't take it personally, it was going to happen anyway.