The financial markets have always been manipulated and always will be manipulated. They are manipulated when they are free and they are manipulated when they are heavily regulated by government. If you choose to be involved in the markets, you should accept this reality. If you cannot accept this reality then you should get out of the markets and never return. If you try to change this reality by advocating greater government regulation of the markets then you are part of the problem.

Manipulating a market involves attempting to give yourself an advantage by encouraging the price to move higher or lower. For example, if you wanted to buy you would possibly try to create the impression that there is greater supply than is actually the case, prompting other traders to sell and causing the price to decline. If you wanted to sell you would possibly try to create the impression that there is greater demand than is actually the case, prompting other traders to bid-up the price. Whether currently legal or not, there is nothing ethically wrong with private entities using such tactics*.

A hundred years ago the manipulation of market prices was generally not considered to be unfair. In fact, highly-respected traders such as Jesse Livermore would sometimes be hired for the purpose of manipulating a market in such a way as to allow a large position to be either bought or sold at a better price than could otherwise be achieved. The best traders could do this by selling and buying in such a way as to create a false impression of the underlying market strength in the minds of other traders.

These days, governments are heavily involved in the financial markets in an effort to create a “level playing field”. As a result, the average investor has never before been at such a disadvantage. Rather than the likes of Jesse Livermore manipulating prices of individual securities from time to time, we now have central bankers treating the major financial markets as if they were puppets that could be moved in any desired way by pulling the right strings.

Never before have prices in the financial markets been so distorted and deceptive, but people now feel more secure because it is clear that the government and its agents are hard at work ensuring that nobody can take advantage of anbody else. Moreover, whenever anything goes wrong in the markets the popular outcry is: “The government oughta do something!” So, everytime something goes wrong and a lot of people lose money it creates the justification for even greater regulation with the stated goal of making the markets safer.

A lot of people are horrendously misguided. They believe that the right government regulations are needed to create a free market, but this only demonstrates that they have absolutely no idea what a free market is. A genuinely-free market is one that is devoid of government intervention. As soon as the government starts regulating a market, the market is no longer free. The greater the regulation, the less free the market.

Is there a reason to be optimistic that a shift towards freer markets lies in the not-too-distant future?

Unfortunately, no, because very few people are prepared to give up even an ounce of perceived security to gain a pound of additional freedom.

*Note: Not all actions that fall under the “manipulation” umbrella are ethical. For example, whether legal or not, it would generally not be ethical for a bank or broker to front-run the orders of its customers if doing so resulted in the customers getting a worse price. Such actions are a breach of trust and/or fiduciary duty. Also, regardless of whether or not its purpose is price manipulation, government involvement in the financial markets is generally unethical because governments operate with stolen money.

This post is a modified excerpt from a recent TSI report.

A popular view is that silver outperforms gold during bull markets for these metals, but that’s only true if the entire bull market is considered. That is, it’s true that silver has in the past achieved a greater percentage gain than gold from bull-market start to bull-market end. However, since the birth of the current monetary system the early stages of gold-silver bull markets have always been characterised by relative WEAKNESS in silver.

To check that this is, indeed, the case, refer to the following long-term chart of the silver/gold ratio. The boxes labeled A, B and C on this chart indicate the first two years of the cyclical precious-metals bull markets of 1971-1974, 1976-1980 and 2001-2011, respectively. Clearly, silver underperformed gold during the first two years of each of the last three cyclical precious-metals bull markets that occurred within secular bull markets. Therefore, assuming that a gold bull market has either just begun or will soon begin, on what basis should we expect to see persistent and substantial strength in silver relative to gold over the coming 1-2 years?

The one plausible answer to the above question is that the scope for additional weakness in silver relative to gold has been greatly diminished by the extent to which silver has already fallen relative to gold. In particular, in gold terms silver is now almost as cheap as it was in early-2003 (2 years into the most recent previous bull market), which means that it is close to its lowest price of the past 20 years. Silver is also now vastly cheaper relative to gold than it was when cyclical bull markets were getting underway in 1971 and 1976.

In summary, history tells us to expect continuing weakness in silver relative to gold during the first two years of the next precious-metals bull market (which has possibly just begun), whereas the unusually-depressed current level of the silver/gold ratio suggests that the historical precedents might not apply this time around.

I don’t have a strong preference either way.

There are things that monetary enthusiasts* such as me take for granted that are not widely understood. In an email discussion with a friend and fellow monetary enthusiast it occurred to me that the treatment of interest paid on the debt held by the Fed might be one of those things. That’s the reason for this short post.

The Fed currently has about 4.2 trillion dollars of debt securities on its balance sheet, about 2.5 trillion dollars of which are US Treasury securities. The interest that the Fed earns on all of its debt securities — less a relatively small amount to cover the Fed’s own operating expenses — gets paid into the General Account of the US Treasury. In other words, the interest that the US government pays on the Treasury bonds, notes and bills held by the Fed gets returned to the government. This effectively means that any US government debt held by the Fed is interest free.

An implication is that if government debt is held by the Fed, the interest rate on the debt is irrelevant. An interest rate of 20% is essentially no different to an interest rate of 1%, since whatever is paid by the government returns to the government.

Another implication is that when considering what-if interest-rate scenarios and the ability of the US government to meet its financial obligations under the different scenarios, the assumption should be made that the portion of the debt held by the Fed has an effective interest rate of zero. For example, let’s say that at some point in the distant future the average interest rate on the US government’s debt has risen to 10% and the Fed owns 80% of the debt. In this hypothetical — but not completely farfetched — situation, the effective average interest rate on the US government’s debt would only be 2%.

The bottom line is that it’s not so much the Fed’s interest-rate suppression that benefits the US government, it’s the fact that the interest-rate suppression is conducted via the large-scale accumulation of the government’s debt.

* People who spend significant time every week tabulating/charting monetary statistics and poring over reports published by the US Federal Reserve and other central banks.

In the blog post “Some gold bulls need a dose of realism“, I noted that relative to the Goldman Sachs Spot Commodity Index (GNX) the gold price was at an all-time high and about 30% above its 2011 peak. I then wrote: “Rather than imagining a grand price suppression scheme involving unlimited quantities of “paper gold” to explain why gold isn’t more expensive, how about trying to explain why gold is now more expensive relative to other commodities than it has ever been.”

A rational explanation of gold’s relative expensiveness begins with the premise that major trends in the gold/commodity ratio are invariably associated — in an inverse manner — with major trends in economic confidence. Since credit spreads are one of the best indicators of economic confidence, with generally-widening credit spreads signifying declining confidence and generally-narrowing credit spreads signifying rising confidence, it would be logical if there were a positive correlation between the gold/commodity ratio and credit spreads. As evidenced by the following chart, that’s exactly what there is.

The current widening trend for credit spreads dates back to mid-2014, which is when the oil price began to trend downward and obvious cracks began to appear in the global growth theme. More recently, cracks began to appear in the US growth theme and the pace of credit-spread widening accelerated, leading to an accelerated rise in the gold/commodity ratio.

Could gold become even more expensive relative to commodities in general? The answer is yes, but only if economic confidence continues to decline.

I doubt that the decline in economic confidence has run its course, so I expect the gold/commodity ratio to move further into new-high territory before something more important than a short-term top is put in place. However, there’s a good chance that the gold/commodity ratio will make a multi-year peak this year, due mainly to increasing strength (catch-up moves) in other commodities.