THE JUST PRICE

By Scott Silva

Editor,  The Gold Speculator

4-25-11

It the price of gold too high?  Or gasoline? Are high commodity prices unfair? Are high prices the result of greedy speculation and market manipulation and therefore, unjust?

Many, particularly in government think so, and have set out once again to get to the bottom of market manipulation and criminal speculation. Thursday the president ordered the Department of Justice to investigate price gouging in retail gasoline sales now that the price of gasoline has topped $4.00/gal in many states. In January, the Commodities Futures Trading Commission

(CFCT) put forward new rules aimed at reining in “runaway speculation” in the commodities markets.

Is there a case for government control of commodity prices in the name of justice? What is the just price of a good or service? What does that mean for the current bull market in gold, silver and commodities in general?

Historically, market prices have been considered to include a moral component. One might think the Bible might define the concept of just price, but it does not directly. Although the term “just price” does not appear in Scripture, “just measure” and “just balance” appear several times. The Book of Proverbs states that "a false balance is abomination to the Lord: but a just weight is his delight."  It follows that commerce is moral or just absent fraud or deceit in transactions.

But commerce has not always been considered a pious activity, even when conducted honestly.

Plato saw man’s role as subservient to the greater welfare of the collective. Aristotle distained commerce, money-making and especially retail trade, because his concept of fair exchange centered on utility rather than the accumulation of money. The ancient Athenian government set grain prices under law at a level it thought to be just, which inevitably led to severe grain shortages. But the shortages created by the price control laws also created a thriving black market for grains, which ultimately saved thousands from starvation.

Under Roman law, prices were generally determined by the interaction of buyers and sellers. Under the Justinian Code, laissez-faire in transactions was the norm; buyer and seller each expected to buy cheap and sell dear. But there were limits; it was considered immoral to buy and sell for gain, to speculate, or to buy goods to sell for profit without improvements, or sell an item at a higher price for a credit transaction, which implied usury. In AD 301, Diocletian, in an effort to curb inflation, fixed by edict the maximum sales price of beef, grain, eggs, clothing and other articles and prescribed the death penalty for anyone who sold items above the fixed maximum.

As a result, producers quit bringing goods to market, opting instead to supply the black market, which flourished despite the risk of the death penalty. The Edict was later abandoned.

The early Church Fathers saw commerce to be the result of greed. The assumption was all commercial activities involved immoral means.  One party's gain in a transaction was thought to only be achieved unfairly by another party's loss. These ideas continued into the Middle Ages.

The concept of the just price is most often attributed to the medieval Roman Catholic philosopher and theologian Thomas Aquinas.  In his Summa Theologica, Aquinas discusses the concept of the just price in his "Treatise on Prudence and Justice" called "Of Cheating, Which Is Committed in Buying and Selling."

According to Aquinas, trading is cheating, and therefore a sin. The just price is that price that covers the cost of production and market expenses and allows the producer to maintain his social status. In Aquinas’ view, traders and speculators produce nothing, therefore they cannot profit morally from trading goods or services.

But there is a more enlightened view of just price that accounts for not only the cost of production but also compensation for labor and risk incurred, or the labor theory of value as put forward by Locke, Smith, Ricardo, and Marx. We can see clearly from his arguments, Aquinas fails to recognize the economic value of labor and specialization in day-to-day commerce.

Thanks to Adam Smith, today many have come to know that the invisible hand of the market and the forces of self-interest, competition and supply and demand drive prices and economic activity. Some believe the invisible hand to be a secular force; others see the hand of God in the marketplace.

So what about the recent prices of commodities, in particular gasoline and gold? Are their current prices just? I say yes, and here’s why.

The price of retail gasoline is primarily based on the price of oil, the price of which is based on supply and demand. The market price for oil is high now because buyers fear supply disruptions due to popular revolts in several oil producing countries. Right now there are more buyers than sellers of oil, so prices have been bidding up. Last week, Saudi Arabia cut oil production  800,000 bbl/day, which likely will keep prices high. And demand for oil by China and India is growing along with their economies. China and India will require 8.5 million bbl/day more oil by next year. Should anyone expect prices to fall with growing demand and lower supply? The demand curve doesn’t slope that way. Market prices that accurately reflect supply and demand are just.

But some say it is unjust to buy a futures contract for $108/bbl expecting the price to be higher in three months. Speculators are vilified for “greedily bidding up the price of oil, which has led to $4.00/gal gas”. But there are speculators that have shorted oil, too. And if price controls for oil are implemented in the US today, traders would simply move to other markets to trade. The oil market is global.

Recently a US Senator proposed that the commodities markets such as the CME require 50% margin to trade futures contracts. He reasoned that the additional capital requirement would limit the number of open contacts held by speculators. But changing margin requirements has had little effect on open interest volume in the past. The CFTC adopted position limits on 28 commodity futures and option contracts on exempt and agricultural commodities. It is not clear that position limits will have its intended effect.

 Anti-gouging legislation has proved equally ineffective. The federal government can prosecute companies and people for price fixing, that is, conspiring with each other to raise prices, but not for price-gouging. Many states have anti-gouging statutes, but few complaints ever result in charges, fines or trials. Cases are hard to prove, since most businesses tend to raise prices for items important to people. Today’s concern is not new. In 2005 Hurricane Katrina knocked out about 95 percent of oil production in the Gulf; refineries there produce about 25% of US domestic consumption. Gasoline prices spiked 40% to reach just over $3.00/ gal. Government anti-gouging rhetoric filled the media. $3.00/gal gas sounds like a bargain today!

Like oil, gold prices have climbed to new highs over the last several years. Unlike oil, the price of gold is driven primarily by investment demand.   Investors are attracted to gold for its intrinsic value and its ability to insure against instability and protect against risk. Since 2009, gold prices have climbed 209%

What price is the just price for gold?  The market price at any given time is the just price, because that is the price agreed to by buyer and seller. In the exchange, each party enters into a just bargain; otherwise the trade is not made. For gold, the price includes a risk premium for economic uncertainty, political unrest, war, inflation and the debasement of fiat currencies. The price of gold captures precisely the future outlook without the baggage of earnings-per-share, book value or any other accounting measure of worth. Gold has proved to be an excellent investment for the investor and the speculator for the last several years, and it will continue to preserve wealth for individuals who own gold.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the higher prices and economic uncertainty?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio gained 66.7% in 2010, and 55% for 1Q2011. Subscribe at our web site www.thegoldspeculatorllc.com  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

THE SQUEEZE IS ON

By Scott Silva

Editor,  The Gold Speculator

4-19-11

The squeeze in on. Yesterday’s downgrading of the US economic outlook by Standard & Poor provided the catalyst for US Dollar shorts to cover, which drove the Dollar index up, breaking

its 15% decline over the last 10 months.  S&P revised its outlook on the US AAA credit rating to negative from stable, citing the massive US debt and Washington’s apparent inability to cope with it its fiscal problems; "we believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013."  While the S&P maintained the country's top AAA credit rating, the rating agency called the odds at one in three that the U.S. credit rating could be downgraded within two years.

The US stock market responded with a broad sell-off; so did the FTSE in the closing hours.

Actually, the Dow had opened 60 points lower on renewed EU worries over the imminent default in sovereign debt by Greece, but the S&P announcement on the wires soon after the NYSE open drove the Dow and the S&P 500 down.  The US Dollar, on the other hand, traded up as short sellers scurried to cover.

Gold and silver, however, traded up to new highs as investors traded out of stocks and into safe-haven positions in the precious metals. Gold nearly hit the psychological $1500/oz benchmark reaching $1497.20 before closing at an all-time high of $1490/oz on Monday. COMEX May Silver closed at 43.275, a new 31-year high.

Did Monday’s gains in gold and silver come by way of the short squeeze?  Maybe so. Many believe that rise gold and silver over the last several years is the result of a “bubble” in the precious metals. Certainly, there are shorts in gold and silver. But the shorts are hurting today, to the benefit of the longs. (Full Disclosure: I have been long gold and silver and gold and silver stocks for years, now). The simple truth is there is no better safe haven for investors facing uncertain times than the precious metals. Despite the shorts, gold and silver have made dramatic gains over the last ten years, while the stock market has limped along. In the last decade, the S&P 500 index has gained 16%. In the same period, the price of gold has more than quintupled. And silver has outperformed gold over the last twelve months.

Gold has been considered the safe-haven asset since ancient times. Whether coined, exchanged and accumulated as money, or purchased as a hedge against debasement of fiat currencies, political crises or economic instabilities, the yellow metal has maintained its intrinsic value against all other commodities and asset classes.

Following WWII, US inflation was highest in 1946, 1974, 1975, 1979 and 1980.  During those five years, the Dow stocks returned an average -12.33% in real terms; in those same years gold returned an average 130.4%.

History shows gold moves up with higher oil prices. In the ealy1970’s, when oil prices climbed from $2.44 to $10.36/bbl, gold prices rose 268%.  In the late 1970’s, when oil jumped to $26/bbl, gold prices gained another 254% to $631/oz.  

The current oil shock, caused by civil war in Libya, pushed oil to over $108/bbl. Although there is now a shooting war in Libya and continued violent unrest in the Maghreb and the Middle East, political risk in the oil producer states accounts for only a portion of the oil premium- maybe $15 a barrel or so. We can see this in the long term chart for oil and gold that West Texas Intermediate oil closed at its support level of $108/bbl seen before the run-up to $152/bbl in 2008, and before the collapse in 2009. But there were no popular uprisings in northern Africa in 2007. So what has driven the price of oil, gold and silver up since 2009?

The major reasons for the rise in gold, silver and oil are easy money and deficit spending policies. Since 2009, central banks have flooded the world with more and more paper money. More dollars, Euros, Yuan and Yen have steadily pushed up commodity prices at the expense of currency values. The US Dollar, for instance, has fallen 17% since February 2009, when the $838 Billon American Recovery and Reinvestment Act of 2009 was passed. The current US deficit is $1.6 Trillion; the US Debt is $14.2 Trillion, nearly 100% of GDP.

So now Standard and Poor has sent a dunning letter to the Washington central planners, warning it will downgrade the US sovereign debt rating if serious fiscal reforms are not implemented in the next two years.

We’ll see. In the meantime, I’m buying long the precious metals.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the continued deficit spending and growing inflation?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio gained 66.7% in 2010, and 55% for 1Q2011. Subscribe at our web site www.thegoldspeculatorllc.com  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

ROADS TO PROSPERITY

By Scott Silva

Editor,  The Gold Speculator

4-12-11

Today, the US government is open for business, having narrowly averted a budget driven shut-down at the stroke of midnight Friday, the Dow is above 12,400,  reported US unemployment is trending down, the Fed is closer to ending Quantitative Easing on schedule in June, and the government reports inflation is low and the economic recovery is taking hold.  But also today, gold hit a new all-time high and silver is trading at a 31-year high. Can a strong US economy and high gold and silver prices go hand-in hand? Why to people continue to buy gold and silver?

Historically, investors and speculators alike tend to shun precious metals in
good times, favoring instead almost any other asset class (e.g. equities, debt instruments and real estate).  So are we really headed for good times in the near future?  Comparison of today’s situation to the Reagan years sheds some light on this important question.

            Like Reagan, Obama came into office during recession. Gold had quintupled during Jimmy Carter’s recession; gold has hit a new all-time high under Obama.  Gold prices fell 40% (from $750/oz to $450/oz) under Reagan’s 8-year presidency.

In the current recovery, real GDP has averaged 3%.  Employment as defined by nonfarm payrolls and reported by the BLS has edged down from 10.2% in early 2010 to 8.8% in March.  During Reagan's recovery real GDP averaged 7.7 percent annually while nonfarm payrolls rose by 5.3 million.  Reagan reduced inflation from 12.2% when he took his first oath of office as president to 4.4% in his last year of office. Today, inflation is negligible at 2.1%, according to the Fed.

Why are there such major differences in US economic performance under Obama and Reagan?  Reagan saw free market, private-sector enterprise as the road to prosperity.  Obama has chosen massive expansion of the federal government as the way forward.

Obama's first act was an $835 billion government-spending package.  One of Reagan's first decisions was to cut $50 billion (($100 billion in today’s dollars) from domestic spending.  Obama focused priorities on nationalized health-care, energy cap-and-tax-and-trade, and pro-union card check. Reagan focused on free market measures; he ended wage and price controls, deregulated all energy prices and fired the striking federal union air-traffic controllers.

 Reaganomics spurred growth through limited government, a strong dollar and lower taxes. Reagan slashed marginal tax rates from 70 percent to 28 percent. Reagan’s lower tax rate policy (attributed to the Arthur Laffer) actually raised tax revenues from $300 billion to $450 billion.

The current administration seeks to raise tax revenue, particularly for the nation’s highest earners. In his fiscal 2012 budget, released in February, the president would allow the Bush tax cuts to expire for income above $200,000 for individuals and $250,000 for couples at the end of next year.

Reagan increased the defense budget to defeat the Soviets and end the Cold War. Reagan did not win the Nobel Peace Prize. Obama is waging shooting wars in Iraq, Afghanistan and Libya; he accepted the Nobel Peace Prize for 2009.

Under Reagan, overall federal spending dropped from 23 percent of GDP to 21 percent. Obama has grown the size of government to 25 percent of GDP.

Reagan ran a budget deficit of about 3 percent of GDP, the same percentage left by Carter. Obama’s 2011 budget deficit is $1.6 Trillion or 11% of GDP.

 Reagan believed in sound money and a reliable currency. It was Reagan’s pro-growth tax cuts and counter-inflationary monetary policy that ultimately reversed the 15-year decline in the US Dollar.  Since 2009, the Fed and central banks have flooded the world with more and more paper money. More dollars, Euros, Yuan and Yen have steadily pushed up commodity prices at the expense of currency values. The US Dollar, for instance, has fallen 17% since February 2009, when the $838 Billon American Recovery and Reinvestment Act of 2009 was passed.

Overall, Reagan's free-market, pro-growth policies created 21 million new jobs as real GDP averaged 3.5 percent annually for seven of his eight years in office. The unemployment rate dropped by over 50%.  The stock market doubled, and household net worth expanded by

$8 trillion.

The Obama administration believes that increasing the size and scope of government is the path to prosperity.  In 2009, rather than allow large banks, insurance companies, mortgage companies and Detroit automakers to fail due to market pressures, Obama nationalized them using taxpayer dollars to bail them out.  That same year, the administration projected its new stimulus package would “create 3 to 4 million jobs.” But most of the funds went to state governments that used the windfall funds to close their own budget gaps. Few permanent jobs were created. The private sector jobless rate actually increased.

So which is the path to prosperity?  Gold and silver prices give the answer. The price of gold has nothing to do with political ideology or government reports on the status of the economy. The gold market sifts through the myriad of economic data, investor sentiment and global events to measure reality with crystal clarity. Gold is trading at all-time highs, in direct contradiction to reports of sustained growth in the world’s largest economy. It just might be that massive deficit spending and easy money policies have little or no stimulative effect on the economy and that government spending does not create jobs in the private sector. Because the government must tax or borrow in order to spend, it takes money from individuals and businesses that otherwise would go to consumption, savings or investment to produce more wealth.

Likewise, the gold market shows government reports of low inflation and growing employment to be false. We have seen on these pages before that actual US inflation is closer to 10% than the reported 2.1%, and the actual US unemployment rate today is 16%, a rate not seen since the 1930’s.  As many have correctly observed, flooding the markets with new printed money debases the currency and raises prices for all.

The precious metals market is also telling us that its move up has a long ways to go.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the continued deficit spending and growing inflation?  We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio gained 66.7% in 2010, and 55% for 1Q2011. Subscribe at our web site www.thegoldspeculatorllc.com  with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055

GOLD AND SILVER ON THE RISE

By Scott Silva

Editor, The Gold Speculator

4-4-11

Even if stability were to return to the Middle East and North Africa, and Japan gets its damaged reactors under control, gold and silver will reach new highs over the next several months. There is no doubt that the popular uprisings in Egypt, Tunisia, Bahrain and now Yemen and Syria, and the shooting war in Libya have threatened stability in the region. Oil prices have spiked to over $100/bbl as Libyan refineries shut down, cutting off 1.6 million barrels a day to global supply. Libya is the world’s 12^th largest oil exporter. Iran, emboldened by the fall of the Mubarak, long time US ally and friend to Israel, for the first time in thirty years sent warships through the Suez, an act Israel’s prime minister described as “a provocative, unprecedented Iranian military presence” in the Mediterranean. More than two million barrels of oil transit Suez each day through the canal and its adjacent pipeline, accounting for at least two percent of global oil output. The political upheaval in Egypt was a surprise to many on watch. Events moved quickly in Egypt; the regime toppled in weeks. Traders (and defense analysts) worry popular unrest will spread to other countries in the region, including the world’s top oil producer, Saudi Arabia. Already, new clashes have erupted in Morocco, Jordon, Algeria, Yemen and Syria.

Gold prices have jumped since the first protesters took to the streets in Tunis and Cairo. Gold is a traditional safe haven for investors. Gold has gained 7 % since January 28, the day that the Egyptian government shut down internet service in an attempt to deny communication among protesters. Silver has gained 37% over the same period. Although the military has assumed control of the Egyptian government, it remains unclear what form the government will take after the scheduled September elections. And the outcome of the war in Libya is far from certain.

But there are other reasons gold prices will remain high. As you have read in these pages before, US government intervention in the financial markets is demolishing the US Dollar. The primary causes are unchecked deficit spending and the Fed’s easy money policies. The conviction to continue massive deficit spending is evident in the president’s $3.7 Trillion budget request for FY2012. Analysts project it will double the national debt to $23 Trillion by 2021. House Republicans are proposing a 2012 budget that targets $4 Trillion in cuts over the next ten years. Whatever budget level is negotiated, funding for much of the budget will come from continued government borrowing, that is, selling US Treasurys to the public and foreign investors. But borrowing at extreme levels (over 100% of GDP) may jeopardize the credit rating of US sovereign debt. Moody’ Investors Service has already indicated that it may be forced to downgrade its economic outlook for the US based on current projected debt levels. Investors seeking to preserve their wealth flocked to gold when the president’s budget was released.

Another factor driving the price of gold higher is new evidence on rising inflation. Commodity prices have been rising steadily since 2009. In fact, commodity prices as reflected in the CRB index have broken through the 2008 high, last week reaching a new high at 689. Higher commodity prices are now flowing into producer prices. The Producer Price Index (chart below), has increased over 23% in the last two months, recovering from the lows of the 2009 meltdown and well over its 2008 high.

Consumer prices are moving higher now as well, despite statements by Chairman Bernanke to the contrary, prices for almost every consumer item (except single family housing) are on the rise, some at double digit rates. For the past 3 months, the core inflation, as measured by the CPI, has moved up 3.9%. Food and energy prices have pushed up 3.1% and 28% over the same period. At the same time, the US Dollar has lost value against other currencies, reducing purchasing power. The US Dollar has lost 35% of its value in just the last ten years. Together, the combination of rising prices and a weaker dollar is a recipe for disaster.

Investing in the stock market is not the answer. Easy money has buoyed up stock prices in the last few weeks; the Dow closed over the 12,000 mark last month for the first time since 2008. But stocks prices are likely to slide steeply when the Fed is forced to tighten in a belated attempt to curb inflation. Continued government intervention may cause the economy to slip into stagflation, that eerie economic nether land of slow growth, declining wages, high unemployment and double digit inflation reminiscent of the Carter years.

Prudent investors can fight the ravages of inflation and debasement of the currency by investing in gold and silver. Gold has maintained its value during periods of high inflation. For example, gold tripled in price during the early 1970’s oil embargo, when oil prices suddenly spiked. In the late 1970’s gold prices climbed as much as 526% in Carter's first three years in office as the president struggled with stagflation. Today, as the Fed continues to print money to support more federal deficit spending, we are seeing once again, the onset of debilitating inflation at all levels.

Investors from around the world benefit from timely market analysis on gold and silver and portfolio recommendations contained in The Gold Speculator investment newsletter, which is based on the principles of free markets, private property, sound money and Austrian School economics.

The question for you to consider is how are you going to protect yourself from the vagaries of the continued deficit spending and growing inflation? We publish The Gold Speculator to help people make better decisions about their money. Our Model Conservative Portfolio gained 66.7% in 2010, and 55% for 1Q2011. Subscribe at our web site www.thegoldspeculatorllc.com with credit card or PayPal ($300/yr) or by sending your check for $290 ($10 cash discount) The Gold Speculator, 614 Nashua St. #142 Milford, NH 03055