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  • Jerry Schuitema

Losing our marbles.

How much can we still trust prices and statistics?

As pre-teen kids one of our favourite schoolyard games was marbles. We would draw a circle and each player would place some marbles in it and then take turns in pitching a bigger marble or "goon" at them. Those struck out of the circle would be claimed by the pitcher. The initial marble supply would be bought from the local “keffie”, a mining town store that sold anything from stale chicken pies to bicycles. Soon a secondary market developed in sales and swaps between players. Occasionally some kid would bring a large bag of marbles and for a brief period we enjoyed discounted prices.

Sometimes a schoolmate would borrow a few with the promise to pay back with an additional marble or two. Then he would lose all his marbles and skulk around the playground for weeks to avoid his creditors. Frequently the playground bully would raid the game, grab a handful of marbles and go play with his peers, or sell them back to his victims at inflated prices. So having spent two paragraphs on my marbles, the reflective point that needs to be made is how strongly entrenched some natural economic laws are in our human DNA. The crude marble economy has all the makings of large sophisticated markets today. Supply, demand, price, debt, interest, market manipulation, monopolies and the difference between value and price. Intuitively, perhaps even instinctively we came to understand the basic functions of a sound market economy: * freedom of choice * maximum number of suppliers * free moving prices * and optimum information by participants. Yet everywhere one looks one sees transgressions of these principles. The worst and perhaps most harmful is in price discovery: the critical tool to ensure a balance between supply and demand. The extent and depth of price manipulation is quite astounding. Virtually all of the main global markets that influence our daily lives have been contaminated: exchange rates; interest rates; bonds; equities; gold; oil and other main commodities. Each could take more than a master’s thesis to explore and even in a narrow context we often hear of supplier collusion, corruption, taxes and tariffs as well as other interventions that blunt the price mechanism. In the background are two main contributing factors: departure from the gold standard and the explosion of derivatives.

According to Investopedia citing BIS research, the total notional amounts outstanding for contracts in the derivatives market is an estimated $542.4 trillion. But the gross market value of all contracts is significantly less: approximately $12.7 trillion. In effect, it means derivatives are 40 times larger than the underlying assets. Because of the difficulty in measuring over the counter trading, the size of these markets could be as high as $1.2 quadrillion. With significant leveraging in which investors have a minimum of their own funds at risk, and the sheer size of these instruments, there can be no doubt that they have switched from being guided by underlying supply and demand fundamentals and spot prices to fixing these prices. This article by the California based Gibbs Law group, gives good examples of market manipulation.

Gold’s suppression as an anchor for the purchasing power of money and the cost of using money as reflected in interest rates has culminated in an explosion of debt that underpins Fiat currencies today. In May this year, Forbes Magazine wrote: “It’s a well-documented phenomenon, with real actors and real ramifications.” As interest rates move into unknown territory with nearly $20 trillion long term bonds having negative yields the future value of money is being destroyed. As this Moneyweb article pointed out: “Negative yields turn decades of accepted financial norms on their head, impacting how we understand matters such as the time value of money, and with serious implications for the pricing of money and thus risk in markets.”

Where to then for gold? It clearly has started to break the long bear trend, artificially maintained many believe by some major central banks determined to ensure that it does not threaten their own currencies, the global reserve status of the US dollar, and the use of interest rates in monetary policy. It is unlikely, although not impossible, for gold to skyrocket in the months ahead. More likely is that price massaging will continue but with a growing deliberate restoration of the metal as a reserve asset in the face of currency and trade wars, and de-dollarization over and above gold purchases by China, Russia, India and Turkey. Central banks themselves must be becoming increasingly jittery about their large holdings of low or negative yielding bonds, Dollars and other fiat currencies.

Countering the effect of impure pricing, economists will argue that in the longer run prices will reflect the underlying fundamental relationship between supply and demand. They point out that if this were not so there would be intolerable shortages and surpluses. That may be true but ultimately what is long term is simply the culmination of many actions in the short term and actions in the present can be severely prejudiced by illegitimate prices. And how true is it that supply and demand are fundamentally in balance when we have huge wealth disparities, and unprecedented asset inflation which has suppressed consumer price inflation? And if prices can’t be trusted, then neither can most statistics; including the questionable holy cow called GDP, or Gross Domestic product. When money loses its efficacy as an accurate means of exchange, it will create havoc in an economic system. The vehement defence of free enterprise comes mostly from either an ideological or political base. But the real enemy comes from within. Price manipulation is the greatest threat to free enterprise and many key markets have become little more than the playground for schoolyard bullies stealing our marbles.

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