21 February 2018

Stocks and Precious Metals Charts - Faith, Force, and Fraud - Comex Option Expiration on Thursday

It is in the upper 70's here today, so I will keep this brief because it looks like a good time to toss on a pair of summer shorts and do a little straightening up outside before the cold weather comes back again.

The markets today were 'whippy' to say the least.

Most of this churning was due to the release of the January FOMC minutes, and speculation about what this means for interest rates and the Treasuries markets.

Silver held its ground, albeit rather undervalued as it is. Gold took a hit again ahead of the Comex option expiration and more importantly perhaps another day of a strong Dollar.

The dollar is being driven higher on expectations of higher dollar-denominated interest rates. That will only take it so far.

The three major components if a currency are Faith, Force, and Fraud.

Unless it is backed by something, some external standard or a peg to such a standard, a currency relies on the faith of the holders of that currency and its associated debts.

Granted a sovereign can 'print' as much of its own unanchored currency as it likes. That is what is meant by 'fiat' currency.

However, the more of the currency it prints, and the criteria it uses to print more or less of it, affects the faith placed in its value.

Force should be familiar to anyone who has studied modern currencies. A sovereign can dictate the use of its own currency, and even set a value for it for some period of time, largely within its own sphere of influence.

The example of the former Soviet Union and its satellites is a fairly good recent example. The State can decree the use of its currency, in both official and ordinary payments and transactions. And it can even dictate the relative value of it by declaring an official exchange rate. The more out-of-whack that this official valuation becomes, the more use of force will be required to impress its will within its sphere of influence.

And this discrepancy in valuation, the conscious mispricing of risk if you will, can be covered for quite some type by fraud. This fraud includes the misstating of official actions, secret agreements with both foreign and domestic banks, and of course sheer market manipulation,

But all value pools, all such artificial schemes eventually crumble and fail, all other things being equal, as long as the mispricing of risks proceeds.

This applies not only to the official currency, but for semi-official and systemic financial assets and instruments as well.

Money is power. And like most forms of power, it proves attractive to all the worst sorts of behavior and unscrupulous market participants. This is why people create governments and laws, to restrain the powerful and wealthy, given the uneven performance of human nature over time.

Have a pleasant evening.