Why Gold and Silver Aren’t Going Higher

“Wise traders know to pay attention when stuff that’s supposed to happen doesn’t,” says Yahoo! Finance breakout correspondent and former CNBC Fast Money cast member Jeff Macke. “Right now, gold should be going higher, but it’s not.”

This is what we’ve been saying at Silver Monthly for quite some time now; and that doubles for silver, as well.

Now, when a talking head comes on a financial-news show to voice the opinion that gold and silver are not good investments, at least nine times out of ten, it’s because he is a fiat-money-loving regimist completely oblivious to America’s (and the rest of the world’s) real fiscal and monetary problems. This is not the case, however, with Tom Kee of StockTradersDaily.

“Clearly, we have printed so much money in the past. It’s ridiculous. Our economy is only surviving, it seems, because we’ve printed so much money,” says Kee. Nevertheless, Kee believes that gold and silver are still likely to fall.

Why? He says that the very fact that gold and silver haven’t gone through the roof is evidence that no further monetary stimulus is in the pipeline.

The market, in the aggregate, is a great prognosticator, because when you add up everyone’s self-interested predictions, their accuracy can be stunning. In his 2004 book, The Wisdom of Crowds, author James Surowiecki studied this phenomenon, pointing out that when a group guesses the number of jelly beans in a jar, their average guess is invariably much closer to the correct answer than the vast majority of the individual guesses. InTrade, which takes bets on the outcome of political contests, is almost always right. Thus, the fact that people aren’t buying gold and silver is strong evidence that monetary inflation is under control.

Time to Face Reality?

“We’re looking at higher taxes, we’re looking at lower spending,” says Kee. Reality is hitting home. We can’t keep inflating forever.

In a recent interview with Maria Bartiromo, Alan Greenspan — architect of the Great Recession — was asked if he agreed with Dallas Fed president Richard Fischer that monetary policy could not solve the nation’s financial problems. He laughed at the absurdity of the question. Clearly, printing money cannot solve anything — at best, it is only a temporary measure, and even Greenspan acknowledges that. But talking heads like Bartiromo rarely do, and even they are more educated than the vast majority of U.S. and global policy-makers.

Irrational Crowds

Markets are great predictors because, in the aggregate, even stupid people are smart. However, there are also deeply held beliefs that, when they dominate a culture, can ensure its downfall. For instance, the Aztecs irrationally thought the Spanish invaders were their prophesied gods. Their whole society was based around a false religion, with beliefs so deeply ingrained that they caused a great culture to submit to slavery without a fight. Beliefs in the inevitability of statism and the enduring supremacy of the dollar are similarly held by Americans — even smart ones with fat trading accounts.

In his June 3, 2012 article How to Make Money in the Stock Market, Alexander Green of the Oxford Club acknowledges that the EuroZone is a mess, and that that mess could easily spill over into the U.S. However, Green also states — correctly — that everyone knows this, and thus, it is already discounted in stock prices. No one really knows how that or any other mess will play out, and people who think they do aren’t smart enough to manage their own money. This echoes Mark Twain’s classic sentiment that, “It ain’t what you don’t know that’s the problem, it’s what you think you know that just ain’t so.” However, again, this presumes that people aren’t holding onto irrational and superstitious beliefs in the U.S. state and its fiat currency — and they are.

The Problem With Timing the Gold Market

“When gold starts to increase for no apparent reason, then maybe we can say that a stimulus program is down the road, relatively soon,” says Kee, but I think that will be too late. Gold and silver may soar by double digits without warning. This might lead to a run on precious metals which could send their prices skyrocketing by several hundred percent in a matter of days or weeks. How much lower can gold and silver really go? As always, now still seems to be a good time to buy, despite Kee’s reasoned analysis.

Bearish Alternatives to Gold and Silver

However, if you believe that Kee has a point, he does offer some other ideas of where to put your money. Kee says that stocks are likely to decline with gold and silver, since it has only been stimulus dollars that have propped up the market. Thus, he suggests shorting the market when it reaches its relative highs.

Another suggestion is to go long the VIX, which is a measure of market volatility. There are several ETFs that allow you to play the VIX: VXX for short-term volatility, VXZ for mid-term volatility, and TVIX for a double-leveraged play on short-term volatility.

Collapses Happen Fast

But the bottom line here, which is something that both Tom Kee and Alexander Green miss, is that collapses can happen very quickly. Ludwig von Mises predicted the inevitable fall of the Soviet Union and Communism in general back in the 1920s. He didn’t say when it would fall, only that it definitely would. And when the Soviet Union did collapse, it happened fast and with little warning. The same could happen for the increasingly socialistic United States. And when it does fall, would you rather be holding paper claims on a market volatility index, or gold and silver?