08 December 2007

Broken Windows

I'm not sure there are a lot of little fiends going around breaking windows to improve the economy, to borrow the broken window metaphor by Leonard Read (which he borrowed from Bastiat). Similarly, I'm not sure how various villainous polluters and subsidized producers are getting along.

But, I'm powerfully convinced that the free market provides really accurate pricing data. I'm equally convinced that, although interventions in the market do interrupt the smooth transmission of pricing information over a short time period, such interventions cannot have longevity. The very mechanisms which cause them to come into existence are by their nature transient, and the costs involved are passed along very quickly.

There are, for example, quite a lot of people in one of my favorite industries, gold selling, very caught up in the idea that the government intervenes with taxpayer money and Treasury gold in the market. Which accusation I have seen repeated, and repeatedly analyzed, since at least 1999. I know many of the individuals who perform the research and write up the analyses personally, and I have met nearly all of them at one conference or another, or watched them speak. In short, I've made gold my business by going out of my way to meet such people.

And, over short periods of time, it is true, interventions are occurring in the gold market. I know. I've watched the predictions come true. I've seen the patterns followed time and again. There's no question it is happening. And, equally, there is utterly no question that intervention has little effect over any length of time greater than, say, two weeks.

Because, look, if the interventions were powerful, if the gold sales and the injections of taxpayer cash in short positions, and the sundry other things that have been done to "suppress" the price of gold since 1999, you would expect to find the price near the 1999 level. $252 gold.

It isn't around. The price is well over 3 times as high, and the trend is very much in position to send gold even higher, this year, and next, and quite likely through the end of 2010. The trend has been assailed a number of times. Dramatic events in May 2006 and November 2007 have curtailed, briefly, some of the rally. But the rally remains, and the general public is hardly noticing gold. All the past long term bull markets in gold have blown off with a huge amount of public participation. So, we are just moving from "wall of worry" toward the Moonshot, to borrow Doug Casey's terms.

Anyone who thinks that governments can intervene in the gold market and suppress the price over a period of years is nuts. Central bankers don't control that much gold, governments cannot paper markets that require delivery, and there are far too many buyers with way too much at stake to allow the long term obfuscation of prices. Even dramatic changes to margin requirements and other baloney does not change the long-term price trend.

Now, the government can waste a huge amount of taxpayer money, and people can publish a lot of studies showing that a lot of gold and a lot of cash has been spent, but the trend is not significantly affected over any length of time.

Free markets are powerful. They are really, really good at pricing in the costs of things, including taxes and subsidies. Short term interventions do not generate long term effects.

Governments are mayflies. Markets are Methuselah.