Why Have Gold and Silver Fallen?

[jimmy]

The article makes a few assumptions about things, not all of which are set in stone:

@Jon Irenicus

In July, the commodities market did begin to fall. I think this publicly marked the end of the commodity bubble. One thing could bring it back: war with Iran.

I think this is a bit naive. Gold (which is one commodity) is generally priced according to people’s expectactions of future inflation. If people think inflation will be a problem in the future then gold goes up in price and vice versa. Which leads me to the next point (the fundamental assumption that the author makes, which is no doubt the reason he’s ignoring inflation as a “second” possible reason why the commodities market could come back):

@Jon Irenicus

In a recession, consumer demand falls.

True. However if production falls more than consumer demand then prices will go up anyway… So thinking only about demand will only give you half the story. Some manufacturers will cut back production because they see demand slipping. Other manufacturers will cut back production because they’re broke! If, for example, GM were to go broke and stop making cars then it’s entirely possible you could see the price of cars go up in the states. The same is true of any number of companies in other industries that might fail in the wake of the inlationary boom that was going on from 2000 to 2005.

I could go on and on but basically what it boils down to is the assumption that recessions are deflationary. However this quite simply is not the case. See the following post of mine for more on that (I asked this question a while back and eventually tracked down some answers myself):

Recessions are deflationary by nature?

Thanks Mark. I finally found some answers on the deflation problem, in the very stats published by the St. Louis Fed: http://tinyurl.com/2lylec In short, recessions aren’t deflationary at all. None of the last 9 recesssions show any decrease in consumer prices during these recessions. On the contrary, many of them saw sharp increases in consumer prices. One noticable exception in earlier recesssions is the Great Depression, but then this was accompanied by monetary contraction (so we could har…

Clearly the issue is more complicated that most commentators let on - the vast majority of them rolling with the popular assumption that recessions are deflationary (never even considering the alternative realities) and very few of them explaining how or why they can be otherwise (as they so often are).

If we see deflation then yes, commodities will likely sink in price. If we see inflation then they’ll likely keep going up. The chances (historicially) are about 50/50 - so I’m holding about half cash and half gold and silver myself (as a hedge against both possible eventualities - not looking to make massive profits, merely to save about half my skin).