Blog

Market pricing broken - no longer free, fair, or believable

Tuesday, September 30, 2008, 10:50 AM

While the actions of the SEC to suddenly change the rules mid-game were troubling, as were the recent Fed decisions to blatantly ignore its own charter, I am seeing something equally worrisome developing out there.

There is a breakdown between what the paper markets (futures, options, stocks, Foreign Exchange, etc) are saying is "the price" and what we are experiencing out in the real world.

Here's one example from the gas shortages plaguing the Southeast:

Quote:
The shortage began two weeks ago in Atlanta, the region's largest city, when oil refineries on the Gulf Coast were shut down by hurricanes Gustav and Ike earlier this month.

The effects on motorists have been dramatic. Most service stations in Atlanta are out of gas, with plastic bags placed over the pumps or signs saying "out".

As a result, drivers are cruising the city hunting for gas -- often with a fuel meter needle hovering close to empty. When they find gas, it's often above $4 a gallon.

"It's a little scary. It's concerning. You see how fragile our whole world and economy is and how reliant we are (on oil)," Stuart Canzeri, 39, a financial planner.

A free market can address a shortage in a number of ways, including raising prices to curb demand and increasing supply, according to Hashem Dezhbakhsh, professor of economics at Emory University.

I wholeheartedly agree with this assessment...the way a free market works is that together, supply and demand influence the prices of goods.

At least that is how it is supposed to work.  

Let's check our national supply of gasoline at the Dept. of Energy.

The blue smear undulating across that graph is the five-year average range for gasoline stocks.  Well before the hurricanes ever hit, gasoline stocks began to fall pretty seriously, and are now farther below the five-year average than I have ever seen them.

This represents a severe shortage of product.

So we know we have a shortage of gas.  In a free market that is functioning, we would expect to see a sharp rise in the price.  Let's check on that.

Huh.  How about that?  During the exact same time that gasoline stocks began their plummet to all time lows (in mid-July), price also began its harsh decent, culminating in an astounding 9% decline just yesterday alone. 

What sort of 'free market' mechanisms can we concoct to explain this backwards supply/price behavior?  Did demand drop enough to explain all this?  Well, demand has dropped 3.4% from last year, but supply is down 6.6%, more than canceling that out.  The only possible "free market" mechanism that makes any sense is that the free market has decided that demand is going to start dropping faster than supply, and soon.

Otherwise, we have to admit that something is broken here.  We don't know what, we can speculate about what it might be, but it doesn't matter.  A country with broken supply/demand markets is a country in trouble.  It is a very serious issue, as it prevents accurate and timely information from reaching people.  At this pace we could easily see a severe gasoline crisis for this country, coincident with a return to wholesale gasoline prices in the single dollar range. That's what I'm talking about.

The same situation exists in the silver markets right now in an enormous way...the US paper markets are setting one price, while in the real world there are shortages and a very different price.   Try finding retail silver in any appreciable quantity, and you'll find your self on a long search and paying anywhere from 30% to 40% over the "official" spot price for silver.  Why?  A severe imbalance between price, supply, and demand.

And this is true for a lot of other commodities out there.  Very strange behavior indeed.

And here's the most mystifying of them all:

USD index chart

This massive move is utterly counter to everything contained in any economic textbook regarding supply and demand.

There are two possibilities here:

  1. The free market is speaking, and all price levels reflect all available information.
  2. Price levels reflect heavy interference by market-movers (governments, central banks and/or their proxies), who are attempting to set prices for key items because they don't like, or are afraid of, the free market prices for these items.

One of these possibilities requires believing that market behavior that's held true over thousands of years suddenly no longer applies.  The other requires believing that its possible that the many known and admitted market interventions might have been extended into a few other not-as-yet-admitted areas.

Your faithful information scout,

Chris Martenson

P.S.  For the record?  The last time I saw such a mystifying move in gasoline prices was in September/October of 2004....also a presidential election year.

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

50 Comments

johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
gold and silver prices

Not to mention gold and silver.,..there is very little gold 1oz bullion supply..the mint just announced buffalo rationing. And silver, there really is no supply; and the markups over spot are 3 buck and up. It is clearly paper manipulation of commodities; like stocks were made to manipulate things that are really valuable..

what are etf's for but to keep the prices down 

 

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
True with gold too
I can tell you for an absolute fact that it is extraordinarily difficult to find gold in any quantity in the Seattle metro area.  Last week I learned that I would have had to drive 40 miles to buy about three coins -- that was all that was available.  Six months or a year ago a person could pretty much get what they wanted when they wanted it.
ike's picture
ike
Status: Member (Offline)
Joined: Sep 17 2008
Posts: 19
Great read on hows and whys of Fed commodity manipulation

I'd never heard of Don Coxe but came across him last night thanks to CMIs newsletter. Here's how greenlight advisor describes him:

Donald Coxe, Global Portfolio Strategist of BMO (Bank of Montreal?) Financial Group, has established a great “big picture” track record and built a large following over the years. His eloquently phrased investment recommendations are particularly insightful.

Don does a monthly newsletter called Basic Points. Here's a link to download a pdf of the September issue where he does a great job explaining his view on how and why the commodity crash/financial stock boom was orchestrated over the past few months.

Basic Points September 2008 http://freefilehosting.net/download/3mf8d

I'll definitely be adding him to my reading list. This issue also covers "autarky, a policy of nation states aim at self-sufficiency in important products—food, metals, energy, etc. As national policy it is completely antithetical to free trade. Supply and demand will be coming under constraints as nations re-evaluate their policies at a time of high food and fuel prices." Coxe illustrates Russia's move towards this stance.

ps - Just looked him up on BMO's website and this publication is supposed to be for clients only, but it seems someone found it important enough to share. Chris, hope you're ok with it being linked here...

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Don Coxe

He's one of the best.  I like his ability to communicate and connect dots.  I trust his long experience and always  read what he has to say.

The September 2008 document you linked is a keeper.

Regarding gold and silver availability I've now heard from people all across the US and in Europe reporting product being very hard to find and usually running well over the spot price.

At some point we might have to admit to ourselves that a disconnect exists between reality and the "official prices".  

Laughing

What do the former soviet crop reports and the Comex pricing have in common?  Everything.

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Silver & gold are about to blast off

Last week I drove around the San Francisco Bay Area like a madman trying to locate the last supplies of pre-1965 90% silver as well as gold coins.  This is an example of how it went:

"Hello, do you have any 90% silver?"

"Yes.  It's going fast though."

"Okay, I'll be right down."

20 minutes later I arrive.  During that time, three people had come in and purchased everything they had (which wasn't much in the first place.)  Same story over and over again.

I finally located both gold and silver, and was lucky to pay only a very small premium over the price I was seeing just a few days before, prior to the serious supply crunch.

It's difficult to imagine any free market mechanism that would explain a falling or even flat silver price when the demand so obviously exceeds the supply.  I tend to agree with Chris here... something fishy is happening.  I've seen commentaries elsewhere which suggest manipulation is occurring by banks holding large short positions in silver.  Apparently two U.S. banks recently increased their short positions by 450 percent and controlled 25 percent of the market.

The Commodities Futures Trading Commission's enforcement division is now investigating the silver market. 

See here for more info: http://arabianmoney.net/2008/09/26/best-outlook-for-silver-since-the-days-of-the-hunt-brothers/

BTW, apmex.com had 90% bags of silver yesterday "in stock" (I didn't call to confirm, but they said clearly on their website that they were out of stock up until yesterday).  If you're still looking, you might want to check them out.  Sell price is at 10.35 right now.  Probably a better price that you'll get locally - assuming you can find any. 

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
I am not saying you are wrong .. but..

Thats a quick conclusion to come to. 

A shortage of gas in Atlanta at this time is to be expected given the disruption of supply.  Prices rising in such a situation are normal, and illegal, price gouging I think its called. 

As for gas stocks going down - That does not necessarily mean anything other than less stocks are held.  In tough time it makes sense to carry the least amount of inventory you can.  Especially in what is a declinging market place.

So you have not actually shown any shortage at all, only that less stock is being held and the market place is shrinking at the current time - For this you would expect to see prices going down, not up, which is what is happening. Atlanta is a local supply issue only, it will be resolved after necessary infrastructure repairs.

In your example you have interchanged stock with supply, they are not the same thing at all.

I do not see any supply issues other than a local one, which the origination of this problem is well known

I see less demand , so hence dropping prices, this is normal.

I see less demand, do decling stock levels, this is normal.

I think you have read this completely wrong Chris, sorry.

ike's picture
ike
Status: Member (Offline)
Joined: Sep 17 2008
Posts: 19
August issue on Freddie and Fannie

Here's a link to a summary of his August issue. At the bottom of the page there's a link to get the full pdf of the August issue.

http://www.investmentpostcards.com/2008/08/08/donald-coxes-investment-recommendations-august-2008/

Norbody's picture
Norbody
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 8
supply and demand: oh my!

there are a number of things that are inconveniently "sold out"--gold, silver, platinum, GRAIN, MREs, paper money....

(recently went to a local branch of usbank, asked to withdraw $5K. they said, "umm... you can take $2K." whoa! several people had been in that day withdrawing any funds in excess of $100,000, leaving the bank short.) 

fascinating.

not only are items out of stock or limited in inventory, but these necessities can take a LONG time to move from a shop or bank to the safety of your home storage center. 

if you're purchasing anything (food, precious metals) online, keep an eye on the shipping policy. if they don't ship it immediately, a sudden fuel crisis can leave your purchases in a UPS truck several states away. fun! :)

i'm guessing some things will be in surplus soon: plasma tvs, gas-guzzling trucks...

trying to time my purchases just right.

has anyone else noticed that this backwards supply/demand phenomenon is happening in the service industry, too? companies seem to be pretty stingy about dropping prices. they're obviously feeling "the pinch" and can't afford to give a deal. ahh, the house of cards continues...

now's a good time to use your bank card as a debit card, and pull out ALL possible cash on each purchase. saves a trip to the bank. (also--now's a BAD time to lose your bank card in the ATM machine in the next town over) oops!

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Say what?

How is it possible for me to confuse "stock with supply"?

They are the same thing.

And re-read that part about supply dropping faster than demand...that covers the rest of your objections.

Norbody's picture
Norbody
Status: Member (Offline)
Joined: Sep 16 2008
Posts: 8
ask and you will receive

guess what! i found silver in the trash! keep your eyes open--america is still 95% sheep. sheep who have no idea what they're throwing away. from what i found in the trash, it looked like a previous tenant got rid of reminders of a marriage, including a decorative silver cup. also found a windchime made of old silverware--at another rental.

bizarre.

 

ACT TODAY! :)

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
Sorry - Still disagree

that happened here :

"Let's check our national supply of gasoline at the Dept. or Energy. "  - You then showed a graph showing stock levels.

Here is an example - A gas retailer supplies 1000 Gallons/day, they have a stock of 200,000 gallons.  Demand drops by 10% - the amount they supply has dropped, not the normal stock the company holds.  To ensure that the the company maintains maximum profits in a shrinking maket they decide to reduce their Stock by 100,000 gallons to 100,000 gallons a stock reduction of 50%  , Supply on the other hand dropped by 100 gallons (10%). 

I have re-read, other than a shortage in the south, there are no other shortages being reported that i am aware of - and we understand why this is the case in the south.  Again you are confusing 'Stock' and 'Supply'.  Stock is what you hold, supply is the your ability to meet the demand on time. If you have no stock , you cannot supply.  If you have stock , you can supply.   Stock has gone down, that is what it says on the graph, not supply.  If it said supply, it would be like saying sales have dropped.

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Nouns vs verbs

Oh - now I see where you are getting confused.

Stocks and supplies  (or stock and supply) are precisely synonymous when we use them both as nouns.  This is how I use them and it is traditional to refer to commodities this way.

The act of providing supply - a verb - is a totally different thing and it is indeed confusing to try and compare nouns to verbs. It shouldn't be done.  Supply can be either a noun or a verb depending on its use.

Here's a representative sentence:

The nation's supply (n)  of gasoline can be measured as the sum of its stocks (n).

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5422
silver

Seems like there is an opportunity to exercise the "take delivery" feature of the futures exchange for some of those big silver bars to see if it works.  Get five of your best friends together, take delivery of a futures contract, and theoretically each person walks away with a 1000 oz silver bar.  Seeing if that works would be just about as much fun as trying to withdraw large sums of money from my local bank.

Oh my God I just realized each bar weighed 62 pounds.  Maybe "walks away" is more like "staggers away groaning under the load..."  :)

Grade and Quality Specifications
In fulfillment of each contract, the seller must deliver 5,000 troy ounces (±6%) of refined silver, assaying not less than .999 fineness, in cast bars weighing 1,000 or 1,100 troy ounces each and bearing a serial number and identifying stamp of a refiner approved and listed by the Exchange. A list of approved refiners and assayers is available from the Exchange upon request.

Some of the online shops I've seen offer "comex bars" for a small premium over spot.  Maybe those are more expensive, but easier to execute on because they will ship to you, and you don't need all those friends to split the contract with.

Dave Fairtex 

 

gauntlett's picture
gauntlett
Status: Martenson Brigade Member (Offline)
Joined: Aug 25 2008
Posts: 49
Disagree

Stock vs. Supply

To be sure of what you are saying I'm going to go over it in my words first:

1) Supply: The amount of product, in this case gasoline, that is taken out of the tanks at the station and sold to consumers.

2) Stock: The amount sitting in their tanks

I'm going to place #1 in the demand category, and call #2 supply.  The amount that people are purchasing and taking out of the station's tanks is the amount demanded and taken from supply.  Hence, supply and demand.  

I don't follow nor do I agree with your terms for supply and stock. 

"To ensure that the the company maintains maximum profits in a shrinking maket they decide to reduce their Stock by 100,000 gallons to 100,000 gallons a stock reduction of 50%..."

Also, why would a company decide to reduce their stock (supply)?  If they are out of gas they are not making any money.   

-T 

 

Jeremy's picture
Jeremy
Status: Member (Offline)
Joined: Mar 19 2008
Posts: 4
With markets around the
With markets around the world plummeting could money repatriation from foreign markets be behind the dollar rise?
scotttherrien's picture
scotttherrien
Status: Member (Offline)
Joined: Aug 26 2008
Posts: 13
Firms must sell the good stuff first...

My understanding of why gold and silver are artificially low is that financial institutions are being forced to sell off the good assets (gold, silver, commodities) to raise capital and cover the losses from the bad assets that they cant sell.  At some point this will end and gold should eventually pop...

srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Lowest since 1967

[quote]That leaves the United States with the lowest fuel stocks since 1967, when America's gasoline demand was just 5 million barrels a day, almost half its current daily consumption of 9 million[/quote]

Link

If things don't reverse in the next two weeks (especially if Oil and Gasoline stocks continue to fall hard), expect to see an enormous gasoline / oil cost spike come this winter.  

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
Stock -  what you have on

Stock -  what you have on the shelf and in the store room out back.

At this point no supplying has occured has it ? You just have ... stock ... your product (s)

When you make a sale , you have supplied somthing, your stock.

If i make a deal to supply you with 1000 pairs of shoes a month for the next 5 years, I almost certainly will not have that in stock, I will however be able to supply you as I will have the shoes made to replenish the stock I sell to you.

The graph Chris has included shows us how much gas is available. This available gas is stock, it does not tell us about how much gas has been supplied, is being supplied today, or will be in the future.   

"Also, why would a company decide to reduce their stock (supply)?  If they are out of gas they are not making any money."  - Again , it is not supply.  And reducing stock is not the same as having none at all.  Reducing stock to levels that you don't need immediately is considered a sensible management move in a contracting market. If you have not ordered the product yet , you don't need to pay for it yet, thats just cashflow.     I included some links to help. 

Perfect stock is to only have one gallon of gas (or any product ) more than is needed in that moment and have the gas arrive at the required POS , JIT.  Many many businesses (and governments) work this way, it has advantages and dangers.

Supply and Stock are NOT the same thing at all.

http://tutor2u.net/business/production/stock-control-introduction.htm  

http://www.jstor.org/pss/223140

http://logistics.about.com/od/supplychainmodels/Modelling_the_Supply_Chain.htm

supply is a process, an event or series of events.  Stock is a product(s) that hopefully is part of supply.

dcary's picture
dcary
Status: Bronze Member (Offline)
Joined: May 31 2008
Posts: 25
Silver Action

Silver seems to be under attack today...with huge volume relative to normal levels... all selling.  The dollar is going up, gold more or less holdings its own.  The dollar action and silver decline make no sense to me...and the fact that silver is dropping much faster and deeper than gold or the dollar suggests that market is being attacked because it is thinner, perhaps hoping it will spill over to gold market.

It certainly looks like manipulation and I am sure it is, but I am a bit confused as to the point. The fact that silver is falling does not give me confidence in the dollar, it perhaps does make me nervous about buying even more...for fear my wife will kill me, ha...but logic tells me to buy...just wish the premium had not shot up so high.

Six months ago I paid about .40 per ounce premium for junk...today the premium is 2.05 per once and two days ago it was only 1.00 per ounce for physical...just as Chris has pointed out.

I am interested in what the manipulators are trying to accomplish...any thoughts?

Reuben Bailey's picture
Reuben Bailey
Status: Silver Member (Offline)
Joined: Mar 17 2008
Posts: 138
Supply
gsti,

You seem to be correct that in certain circles supply and stock are not used as synonyms, but as Chris notes in a post below, there are two ways the word supply can be used.  The following is a quote from dictionary.com.  Definition #8 is the appropriate one in this case.

sup·ply1     [suh-plahy] Pronunciation Key verb, -plied, -ply·ing, noun, plural -plies.
–verb (used with object)
1. to furnish or provide (a person, establishment, place, etc.) with what is lacking or requisite: to supply someone clothing; to supply a community with electricity.
2. to furnish or provide (something wanting or requisite): to supply electricity to a community.
3. to make up, compensate for, or satisfy (a deficiency, loss, need, etc.): The TVA supplied the need for cheap electricity.
4. to fill or occupy as a substitute, as a vacancy, a pulpit, etc.: During the summer local clergymen will supply the pulpit.
–verb (used without object)
5. to fill the place of another, esp. the pulpit of a church, temporarily or as a substitute: Who will supply until the new minister arrives?
–noun
6. the act of supplying, furnishing, providing, satisfying, etc.: to begin the supply of household help.
7. something that is supplied: The storm cut off our water supply.
8. a quantity of something on hand or available, as for use; a stock or store: Did you see our new supply of shirts?
9. Usually, supplies. a provision, stock, or store of food or other things necessary for maintenance: to lay in supplies for the winter.
10. Economics. the quantity of a commodity that is in the market and available for purchase or that is available for purchase at a particular price.
11. supplies, Military.
a. all items necessary for the equipment, maintenance, and operation of a military command, including food, clothing, arms, ammunition, fuel, materials, and machinery.
b. procurement, distribution, maintenance, and salvage of supplies.
12. a person who fills a vacancy or takes the place of another, esp. temporarily.
13.
supplies. Obsolete. reinforcements.
14.
Obsolete. aid.

[Origin: 1325–75; (v.) ME sup(p)lien < MF souplier, var. of soupleer ≪ L supplére to fill up, equiv. to sup- sup- + plére to fill (see full1); (n.) late ME: aid, succor, deriv. of the v.]

sup·pli·er, noun
I hope this helps.

Sorry about the formating - I can't seem to copy as text only.

Reuben

rlee's picture
rlee
Status: Silver Member (Offline)
Joined: Sep 18 2008
Posts: 148
You made perfect sense of it!

"If things don't reverse in the next two weeks (especially if Oil and Gasoline stocks continue to fall hard), expect to see an enormous gasoline / oil cost spike come this winter. "

And when will these price spikes come?  Winter?  After the election?  When the people who MUST buy for heat will be in the market for it?  Certainly not now, before an election, when the weather provides for much more latitude in lifestyles by the customer base!

We are being played.  I agree with Chris and the others who have ever taken Economics 101.  The current market defies all logic. 

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Silent Bank Run?
Let's see.  This morning Obama and McCain both happen to urge that the FDIC limits be increased to $250,000.  This afternoon, we hear that the FDIC will be requesting that the limits be increased to $250,000.  Is this a coordinated effort to stave off an impending (ongoing?) silent bank run?
everybodybutme's picture
everybodybutme
Status: Member (Offline)
Joined: Sep 30 2008
Posts: 7
rational market

Chris,

 Your insinuation that the whole pricing mechanism of free markets is now in question because of the gas shortage in Atlanta is misleading to say the least.  If you study energy markets you know that it is inefficient and regional. This is not new.  The refinery problem caused by hurricanes is a legitimate explanation for gas shortages in Atlanta. The fact that prices haven't adjusted on the futures markets suggest that professional traders see this as both temporary and regional. The fact that refiners aren't rushing to produce more gasoline can very likely be due to the velocity of the decline in oil prices and them waiting for a more attractive spot.  There seems to be quite enough panic and disconnected logic floating around these days so I see no reason to add to it in situations where reasonable explanations do exist.  I would suggest to you that the apparent pricing disconnects might also be a result of hedgefund and other distressed entities selling what they can to raise cash. There is also likely hoarding taking place. If this is the case it is not a sustainable price/availbility shift and will normalize in short order. 

 

Anthony

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Supply as a noun

I thought #10 was the best...

Economics. the quantity of a commodity that is in the market and available for purchase or that is available for purchase at a particular price. 

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5734
Re Rational Market

I did not say that there was a shortage because of Atlanta, I was using that article as foil because there was the perfect quote in there about supply and demand and prices.

I then posted a chart of our national supply showing it was in serious deficit territory.  I made that claim that there is something broken in our markets at the widest possible levels and across several markets.

And my point was that what we are experiencing is not representative of normally functioning efficient markets.  There is something chaotic going on and my job is to connect those dots early and often.  That's what I do.

I have found that by reading these signs for myself and thinking them through for actionable conclusions has been absolutely the right approach for the past several years.

What you call "disconnected logic" is what I call "reading the tea leaves" in an attempt to get people to see things in advance of reading about them on the front page a couple of days too late.

I smell something quirky going on here, it runs against all of my observations of the past years, and it bears mentioning.  Market breakdowns are indicative of change.  

Some people fear that, and that's OK, I find value in knowing about the changes early.

Bengt Englund's picture
Bengt Englund
Status: Member (Offline)
Joined: Sep 2 2008
Posts: 10
Silent Bank Run - Well, it's very possible.

In todays society, a lot of people are doing their bank business using Internet. There are no lines outside the banks to report of in the media.

When I am talking to my friends, a lot of them have recently transfered money from the banks to other secure assets. And one thing that I am sure of is, that no bank will admit this, unless they really have to.

So it very possible that something is going on...

phredd's picture
phredd
Status: Member (Offline)
Joined: Sep 9 2008
Posts: 16
Re: Rational Markets

I think I agree that you may have gotten the tea leaves wrong, here.  The gasoline markets largely depend on JIT delivery from the refineries.  You can argue about why, but the point is that there is never a large reserve in the system in terms of months of consumption available.  There has been a temporary disruption in that supply.  The disruption is national, but is being felt more keenly regionally.  However, prices may not rise if the expectation is that the JIT system can quickly and easily recover.

You said in your initial post that the only possible free-market explanation was anticipation that demand would drop to match supply.  I'm suggesting a second possible free-market explanation: the market expectation is that supply will increase sharply very soon.  This is consistent with what we know about this industry and experienced after Katrina.

Also, we know there are some non-free-market forces already at work.  Anti-price-gouging laws have been in effect in a number of the most-impacted areas, including where I live in North Carolina.  These laws intentionally prevent a price spike when supply is disrupted.  You can argue about the social merit of such laws, but we know they are there and that they have been enforced.  This would also help explain what we see.

affert's picture
affert
Status: Silver Member (Offline)
Joined: Sep 22 2008
Posts: 100
re: rational market

[quote=everybodybutme]

Your insinuation that the whole pricing mechanism of free markets is now in question because of the gas shortage in Atlanta is misleading to say the least. *snip*

[/quote]

 

It seems to me that he's not just talking about Atlanta.  The graph of supply from the DoE is not just for Atlanta.  It's for the whole country.  

 ---edit:

Ok, Chris brought up the same point I did while I was typing this.

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Chris's Tea Leaves

Now, I have no idea about the gasoline thing.  However, I can tell you for an absolute fact as someone "on the ground" that the physical market for gold and silver would suggest that there should be a substantially higher price.  No one is willing to sell physical at these prices.  Period.  I don't know what it means, but I do know that the physical market for gold and silver is not behaving like a normal market.

jrf29's picture
jrf29
Status: Gold Member (Offline)
Joined: Apr 18 2008
Posts: 453
$600 Billion added yesterday

 

According to the macneil lehrer newshour, the fed in conjunction with other central banks pumped $600 billion into the financial markets yesterday alone.  What do they even need congress' bailout for?

reistr's picture
reistr
Status: Bronze Member (Offline)
Joined: Jul 15 2008
Posts: 50
Gold from Canada

I'm in Canada and frequently buy gold (maple leafs). We don't seem to be having any supply issues, so I would expect you to be able to buy online from Canadian suppliers - I'm pretty sure it can be shipped South without any taxes.

 Best of luck.

 

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
This makes sense, and
This makes sense, and matches up with what I've read elsewhere.  But there's also the possibility of direct manipulation happening, i.e. banks holding large short positions in silver depressing the price.
everybodybutme's picture
everybodybutme
Status: Member (Offline)
Joined: Sep 30 2008
Posts: 7
markets and tea leaves

I'm all for tea leaves but really in this case we don't need the caffeine. The combination of seasonality with unwinding of winning positions which I believe one of the other posters mentioned explains it quite sufficiently I think. Nevertheless market prices don't follow logic when people hoard and hold. The best example is probably real estate probably because it is the least liquid. There is usuallly a big disconnect what houses are currently worth and what the people who own think they are worth. Oil, gold, silver and US dollars have all gone through convulsive movements. It is questionable how much supply and demand has been a factor in these moves. It is problematic looking at globally traded commodities priced in US dollars.  If you want a real read on all this then you have to look at purchasing power of each.  Things are simply changing too fast to expect efficient pricing. People are trying to anticipate what will happen next and making positions to hedge possible outcomes.  Possible outcomes has little or nothing to do with reality yet has an impact on pricing. The US dollar going higher during this time seems illogical. Everything is relative and the rest of the world seems to have as many problems as we do so why wouldn't the dollar go up. Dollar up - commodity prices down - no regard for supply and demand of actual commodity. It's just how it works. 

 Remember markets are rational until they aren't and that is usually when there is extreme of some emotion. In this case it is fear but things get just as out of whack when it is greed. It is a dark journey applying rational market logic to situations where logic has long fled. 

gsti's picture
gsti
Status: Bronze Member (Offline)
Joined: Jul 21 2008
Posts: 60
Guys :)

Thank you reubenmp3, Chris, I stand better informed , re supplies.

Still, there was still no confusion in the main part of my diagreement, as the case is, supply as you intended the meaning and stock as I intended the meaning, are the same thing.  How much gas is available.  As long as more gas is available than is required the percentages can move about as much as they like.  You would expect to see gas supply/stock reducing and prices going down in the current environment.  I think you need actual figures (which you may well have) to come to that conclusion Chris rather than percentages.   Useage may well be expected to go down, and it normally does after the summer.  And surely it would be expected to as we are in , well to look on the positive side , a recession. 

I am not saying you are wrong Chris, I am just saying from what you have posted, I think it is a hasty conclusion to draw.

http://tonto.eia.doe.gov/dnav/pet/hist/mtpupus1m.htm

That links to actual gas sales, although in this instance they are saying gas supplied..... god i hate symantics. :/

 The fall in gas sales I think is very low considering the current economic climate, and if I were a Bush I would feel quite happy with those stats :)

 

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Free Market Theory vs. Manipulated Market Theory

I agree Chris -

I think we need to rethink "free market" theory and paradigms, given the lopsided leverage available to the largest Central Banks, particularly when multiple CB's around the globe can, and do, act in concert.

The Precious Metals, due to their status as the "mortal enemies" of the carte-blanche Fiat-currency regimes, are particularly prone to Central Bank manipulation (oddly, the CB's don't appear ready to "let go" of the stuff, even given their definition of it as "relic" metals...)

Ted Butler, a well known Silver guru, had an article yesterday, in which he tracked for August 2008, the open positions and COT (commitment of traders) reports from the "regulators" of the futures markets - CFTC.

From that data, it is obvious that during August 2008,    "...one or two U.S. banks sold short the equivalent of 140 million ounces of silver in one month. That’s more than 20% of world annual mine production. Less than three U.S, banks sold more than 10% of world annual mine production of gold simultaneously..."

That kind of concentrated short-selling (in the case of silver), is unheard of in corn, oil, or other commodities.

Of course, the paper-price of silver and gold had the hardest falls in several years during July/Aug, and this must certainly be by design ("we certainly don't want the populus to flee to the safety of tangibles during a credit crisis......").

But you are correct, there is a large disconnect between the paper-price, and the physicals-price - i.e., the basis.

In fact, the huge degree of leverage between the number of open contracts in the futures market, and what can possibly be physically delivered, is similar to the "fractional-reserve" concept used in banking  in general. 

This leads to some possibility of a "run on the gold and silver supply" at some point, should a crisis-mentality continue to grow, particularly true with the huge volumes in the ETFs of SLV and GLD.

This possibility is one further reason that the CBs continue to strongly "participate" in the psychological trading of the gold and silver markets. 

It is also a reason that we need to broaden our understanding beyond "free market" supply & demand mechanisms, and not kid ourselves on how the "rules" are written.

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Free Market Theory vs. Manipulated Market Theory - Silver Link

Apologies - Here is the link to Ted Butler's analysis of the CFTC data:

http://news.silverseek.com/TedButler/1222712899.php

 

johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
yeah. and the stock market
yeah. and the stock market up really pisses me off even more. clear manipulation; when you consider theres no supply but huge bars...;/
johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
i dont think they have any
i dont think they have any gold! the modern money system doesnt require any; thats what is collapsing, the credit debt money supply IMHO. If they were selling, wouldnt there be supply?
johndaniels's picture
johndaniels
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 31
if you have a significant
if you have a significant amount of money in the bank, you need to call like a week ahead. it can take 1 month or more to pull 100,000. theyshould have done 5k; if they didnt then you need to seriously run that bank.
srbarbour's picture
srbarbour
Status: Silver Member (Offline)
Joined: Aug 23 2008
Posts: 148
Re: Why the bailout (if the fed can already give money!)?

Because the Fed is only supposed to provide lending and liquidity to banks.   Much of the almost completely unregulated shadow banking system filled with fun things like SIVs which rely on commerical paper (lent out at those skyrocketing libor rates).   You can just bet as those babies are going to be setting off Credit Default swap bombs all over the place.

There is also insurers.  Indeed, the Fed probably over stepped its legal bounds when it lent to AIG and effectively begged forgiveness for this error by tagging onto that $85 billion loan double digit interest rates (back then it was at LIBOR + 8.5%) -- so saying the Fed bailed them out is incorrect, it is more like the Fed told them to liquidate everything over the next year, and still gets 80% of what is left in the unlikely event AIG survives.

In otherwords, theres a lot of stuff the Fed can't reach.  With AIG the situation will probably at worst result in a slap on the wrist, but if they start overstepping their bounds in earnest they will be begging for a Judicial smack down.

--

Steve 

 

jrf29's picture
jrf29
Status: Gold Member (Offline)
Joined: Apr 18 2008
Posts: 453
Thanks
 
mcafeejs's picture
mcafeejs
Status: Bronze Member (Offline)
Joined: Sep 22 2008
Posts: 34
physical gold & silver
go to monex.com and buy some. Ijust made a huge purchase and received physical delivery. go to ebay and purchase numismatic...there are plenty of options
mcafeejs's picture
mcafeejs
Status: Bronze Member (Offline)
Joined: Sep 22 2008
Posts: 34
so how do these terms apply
so how do these terms apply to money supply/stock in the context of gas supply & stock? I see a classic deflationary environment where the "physical" existence of money is/was significantly created and is now being massively destroyed. An inflationary environment encourages people to spend money now b/c it is worth_less tomorrow. In a deflationary environment where the supply and indeed stock of money is being systemically destroyed by loans being defaulted upon on a massive scale, people are incentivized to hold cash and not depreciating assets. This is why Bernake "will throw money out of a helicopter" to keep us out of a deflationary environment. An inflationary environment is favored by neo-economists/politicians b/c it forces people to work through debt and essentially slavery while a deflationary environment rewards savers. gold is going up b/c of the palatable fear. The question I have is can Bernanke and Company print money fast enough and distribute that new money fairly enough to stop this continued depression
EndGamePlayer's picture
EndGamePlayer
Status: Platinum Member (Offline)
Joined: Sep 2 2008
Posts: 546
Senate voting on Bail Out Bill?

see: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2008/10/01/MN8Q138U8G.DTL

 

Time to ACT---  send the following link to every news paper, radio station and television station in your state. . . apparently the politicians didn't hear you the first time and are trying to pass the Bail Out through the Senate???-

Email a nice little note like: ---------------->
This explains why no one wants a bail out- EVER. And though I don't buy into the whole video - if ANY part of this is true -- God help us.

http://www.zeitgeistmovie.com/
let peace begin.
----------------------------------------------

Xflies's picture
Xflies
Status: Silver Member (Offline)
Joined: Aug 19 2008
Posts: 157
I've always admired people like Buffet- could he be so wrong?
He's got a team of some of the smartest people in finance working for him, he's got access to all of the same stats we're seeing here... so why is he buying equities?  Is there something we possibly don't see?  How long can the agents of change be delayed and is there profit to be had in the meantime?  Maybe financial doom won't come for another 5 years and it's possible that the US gov't will steer us out of this storm... I certainly don't see myself as being as smart and well connected as Buffet ... just something to keep in mind.  Personally, I am trying to educate myself on what signs to look for that will mark change but I also recognize that there are markets I can be involved in, trade, and make money doing it.  Panic blinds...
WildatHeart's picture
WildatHeart
Status: Member (Offline)
Joined: Oct 1 2008
Posts: 1
Buffetology

Thank you for your post, and exactly and precisely what I can't figure out and don't understand why more people aren't asking the same question. 

 Here's a clue on what he's really up to, taken from his 2007 annual report,

"Despite our country’s many imperfections and unrelenting problems of one sort or another, America’s rule of law, market responsive economic system, and belief in meritocracy are almost certain to produce ever-growing wealth for its citizens".

Exactly.

He's wrong.

Economically of course he's been more correct than just about anyone, but as he approaches his last days I believe his real driver is nationalistic in nature, ie, he has a quasi-religious commitment to having the US win, even if it means buying up garbage in the hope that foreign investors won't be scared off.

Long Live America!

Or not..

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Senate Voting on Bailout Bill - Other Free Movies

Do not expect that the US Congress/Senate will let any facts get in the way.

While the above movie has a fair amount of drama, with some unsubstantiated historical claims, (primarily in the "non-economic" sections), it DOES serve to open the door to some economic history on which people are rarely taught in the US Educational system.

You might want to also watch these, all of which are freely available on Google Videos:

"The Money Masters (How International Bankers Gained Control of America)"  -  a long movie, but full of history, albiet with some conjecture:

http://video.google.com/videoplay?docid=-515319560256183936&ei=hdvjSL2FOo_o-AGH7azIDA&q=the+money+masters&hl=en

"The Creature from Jekyll Island" - an excellent background on the history of the Federal Reserve:

http://video.google.com/videoplay?docid=6507136891691870450&ei=MdvjSMvyLYKM_QHws5n4Dw&q=creature+from+jekyll+island&hl=en

"Money As Debt" -   a very good primer on what "Fractional-reserve" banking is, and why the US Dollar is a debt-based currency, by design:

http://video.google.com/videoplay?docid=-9050474362583451279&ei=YtvjSPiPHoGE_AGUhOQE&q=money+as+debt&hl=en

While important to keep an open mind and remain logical against unfounded "conspiracy" claims, it is nonetheless, unlikely that one can view current economic events the same after watching all of the above.

Ray Hewitt's picture
Ray Hewitt
Status: Gold Member (Offline)
Joined: Apr 5 2008
Posts: 458
Don't give up on the law of supply and demand

I see the problem as understanding how market forces are interacting. I'll give it a try: Housing defaults are putting enormous deflationary pressure on everything. That would account for why commodities are down and the dollar is up. Europe is starting to implode, driving the market out of the Euro and into the dollar. Massive hedge fund because of exiting depositers, bad investments and need for cash. Paulson't Plunge Protection team fighting a losing battle trying to keep the stock market propped up. All this masks the bank manipulation going on in the gold and silver markets. I'm guessing that at some point the deflationary forces wll lose momentum as hyperinflationary forces get stronger --between one to two years from now? Of one thing I am sure. The dollar and the Euro will not survive.

locklimitdown's picture
locklimitdown
Status: Bronze Member (Offline)
Joined: Mar 15 2008
Posts: 46
Silver """"market""""

Another attack as the supplier shelves around the world are bare. Gold as well sinking as fast as the US dollar is rising. But hey whats not to like? Jobless claims come in at almost 500,000. Now thats dollar friendly! Paper metals "markets" have become the joke of the planet as the COMEX is seeing traders take their chips off the table with no intentions of returning. Government sanctioned fixed markets will do that.

Looks like they are trying to kill the last place to hide. This kind of boneheaded manipulation will only encourage black markets as paper prices and what one must pay for the real stuff go in opposite directions

Spot silver off 72 cents now gold 18.00. What disconnect. What crime.

locklimitdown's picture
locklimitdown
Status: Bronze Member (Offline)
Joined: Mar 15 2008
Posts: 46
Farce
[quote=Lock Limit Down]

Another attack as the supplier shelves around the world are bare. Gold as well sinking as fast as the US dollar is rising. But hey whats not to like? Jobless claims come in at almost 500,000. Now thats dollar friendly! Paper metals "markets" have become the joke of the planet as the COMEX is seeing traders take their chips off the table with no intentions of returning. Government sanctioned fixed markets will do that.

Looks like they are trying to kill the last place to hide. This kind of boneheaded manipulation will only encourage black markets as paper prices and what one must pay for the real stuff go in opposite directions

Spot silver off 72 cents now gold 18.00. What disconnect. What crime.

[/quote]

 

As expected the shocking jobless claims numbers have lit yet another fuse under the dollar. Stock futures also getting a bid as unemployment is good for the economy. As soon as the US metal paper exchange the CONex opened for business at 0830, gold and silver got killed. You can set your watch by it

Price discovery in all things gold and silver during US hours of business is dead in the water.

Will the day come when the CONex claims silver is worth 1.00 and gold 100.00 but nothing is available around the world

I'm exaggerating but the situation has gone beyond ludicrous.

We are all going to have to get use to the new USSA

 

Dollar going absolutely ballistic in full blown melt up mode.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments