Wednesday, April 24, 2013

Which economic theory allows the demand to increase while the price falls?


In which version of Economic Theory does the demand of a commodity increase, while both the supply and price drop? In classical economic theory this is considered impossible. (See below for answer). That is because classical economic theory is at best incomplete and it does not adequately account for presence of force, fraud and coercion in supposedly "free market" systems. Someone actually made a theory about this a long long time ago which fits perfectly the times we are in. The theory is called "Gresham's Law" and is embraced by those (like myself) who follow the Von Mises or Austrian Economic Philosophy. According to Wikipedia Gresham's Law encompasses the following:

"Gresham's law is an economic principle that states: 'When a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.' It is commonly stated as: 'Bad money drives out good'.

This law applies specifically when there are two forms of commodity money in circulation which are required by legal-tender laws to be accepted as having similar face values for economic transactions. The artificially overvalued money tends to drive an artificially undervalued money out of circulation and is a consequence of price control."

In other words, by de-coupling gold and silver from the US $, which ocurred in the 1960's, governments actually encouraged the hoarding of physical gold and silver and the spending of US $. Since then for the most part, the gold just sat around in vaults while people traded gold and silver notes instead instead of moving the actual physical commodity around and thus there was little "demand" for paper gold, which were just promissory notes to deliver the actual goods - only recently have institutional investors become interested in these paper IOU's. But when people no longer believe those notes are backed up by the real goods, as is the case now, what happens? The price of paper gold plummets as people try to cash in their Gold Notes for the underlying physical en masse which depletes the supply and decreases the "price" in a seeming act of gravity defiance. In a more philosophical sense, Gresham's Law has also been taken to mean that "fake" investors drive out real investors, ponzi schemes drive out genuine wealth creation. It took a long time for this process to grow to where it is today. Today what we have is a market rigged by the Central Banks attempting to short-sell gold and silver PAPER to drive the price down artifically through the act of "naked short selling" (please educate yourself on what this means and how it impacts the market - good video here:

I have been reading many articles on the big drop in "gold" (aka GLD) and "silver" (aka SLV) prices which are really just the paper representation of the underlying asset. Most of us "gold bugs" and "silver bugs" have been saying for a long time that the paper price has become unhinged from the underlying asset price as the supply of both physical gold and silver plummets which means the central banks are selling massive "naked short" positions (i.e. "IOU's" or promises to deliver physical gold/silver). All indicators suggest that the demand has actually increased exponentially for the underlying physical assets of Gold and Silver which means the price should be sky-rocketing when in fact it is plummeting. This is actually a bad sign which is explained in the following article:

10 Signs The Takedown Of Paper Gold Has Unleashed An Unprecedented Global Run On Physical Gold And Silver

"According to today's data from the US Mint, a record 63,500 ounces, or a whopping 2 tons, of gold were reported sold on April 17th alone, bringing the total sales for the month to a whopping 147,000 ounces or more than the previous two months combined with just half of the month gone.....

In the U.S., all of the dealers I talk to are reporting huge demand and brisk buying. Silver in any form is quite hard to come by unless you want to pay premiums of 20%+ per ounce above spot price. Delivery times are 5 to 6 weeks out now – that's an unusual situation.  If this recent slam was designed to scare people away from gold, it did not have that desired outcome; in fact, just the opposite."

In fact I have been getting emails from Gold and Silver Dealers I have worked with in the past (hint hint) that they are running out of inventory. That is because we have entered the final phase of "Gresham's Law" or "Gresham Dynamics" where by paper currencies are being devalued and inflated. The bad money is driving out the good. The fake investors are driving out the real ones. The signs are everywhere. The stock market will see a short lived burst followed by huge losses in the coming months and years. Even the large institutional investors like Warren Buffet are getting out. Yesterday's "flash crash" in the Dow as a result of the hacked Associated Press Article that falsely claimed the US White House had been attacked sent the market plummeting briefly until it was corrected. At that point precisely supply and demand did not meet as bids and asking prices separated and the market froze up - that's  because the market trade is almost 70% algorithmic or robotic high frequency trading or "wash trades" which is basically a giant game of hot potato that makes it look like trading volume is high when in reality it's mostly algorithmic hedge fund front running brief price spikes as these programs instantaneously scan headlines for pessimistic or optimistic news. Sounds crazy I know but it's entirely real. I can not go into detail to explain how all of this works to you folks but it is VITALLY important you understand that it exists and does not work in your best interests as an investor.

My advice on Gold and Silver began several years ago when it was dismissed as paranoia and quackery. The Mainstream US Media continues to promote their idiocy in spite of mountains of evidence to the opposite and now seems complicit with the Central Banks in their effort to smash the price in order to increase confidence in the US $ which is on the verge of being dumped globally (Euro will go first, then US $). US companies are not hiring in spite of the labor stats being presented - the net number of labor participants in the work force has barely changed since 2001 - how is that possible if unemployment is decreasing? It's because people are just plain giving up and leaving the work force so they don't get counted - what a farce. Personally I am tired of this game of cat and mouse.

I am preparing for the largest market collapse in our lifetime this year and I would suggest others prepare for the same....


  1. don't know a lot about finance, i think it is kept opaque deliberately, the better to lie and cheat us, oh dear...............
    but what you say about gold and silver paper could just as well be applied to credit default swaps, worthless paper honored as if it were money.
    really, from the cheap seats it looks like counterfeiting, but then..................
    probably i'm just not sophisticated enough.

  2. Heretick -

    We are in perfect agreement. The system is designed to be opaque and to legalize theft for those crafty enough to work through the legalese.

    My only point is that this is all "Gresham's Law" and "Gresham Dynamics" repeating itself. All it really means is the substitution of the real for the fake. Those "in the know" hold on to that which is of real value (assets, land, commodities, energy, etc.) but constantly peddle out and sell worthless paper and bits and bytes on a computer in return. For instance if you were to find some really valuable land at this point in history, full of clean water, natural resources, away from people but not impossible to get to, you would be better to hold on to it than to sell if for any amount in US $ because whatever you sell it for, its probably going to be worth more than that someday so why bother? And so real wealth is hoarded accordingly while everyone plays with their monopoly money pretending its of much higher value - that's the gist of it....