Silver Market Update & Life After Monetary Catastrophe

By: Yi-Chang Wang | Tue, Oct 12, 2004
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"Is this it?"

That seems to be the question that many silver investors, yours truly included, are asking after silver spot price closed at $7.26 for the week ending October 8th, above the $7.00 resistance discussed by a few technicians.

One (potentially?) significant development after the last week's close is the silver-gold price ratio chart. The Point-and-Figure version of this chart quite clearly shows that the ratio's uptrend beginning around January of this year remains intact:

And despite of the relatively severe decline in silver price that began in April, not only that the uptrend remains intact, the trend remains parabolicaly upward!

The silver-gold ratio may become increasingly more significant, as we are near the end of credit inflation and fiat money becoming a less important measure of precious metals' intrinsic worth.

I also think that the ratio has three added benefits of reducing the distortions created by financial markets manipulation, rampant credit inflation, and fabricated macroeconomic statistics.

For the next few weeks, it's of great interest for silver investors to see if the ratio can break through the 0.017 resistance. If the resistance is quickly taken out and the upward parabolic trend remains intact, we may see the value of silver and silver stocks expanding rapidly in the next up-leg of precious metals complex!

One reader has sent me an e-mail after reading my last article "The Lapse of Time." He expressed his concern with regard to bearish prognostications: "The very long lasting "stability" of prices for stocks (flat), housing (rising), and gold (flat) are frustrating to those of us who see the foundation of the money system crumbling. On the other hand, I hope you and I are mistaken Cassandras because if we are correct, there is a very bad storm coming upon the whole world. In our present circumstance, while it is disappointing to be wrong, it will be a catastrophe for everyone if we are not wrong. May God's faithfulness continue to be seen by His children."

This got me into meditation. I really admire the compassionate attitude this reader expresses. And in fact, I had been thinking for sometime about writing an article on how to deal with life after "monetary catastrophe." While I feel pretty powerless in the coming financial storm, I feel that I owe it to our global society to suggest something constructive in how to deal with the life after the crisis.

However, upon examining further into this topic, I found that before making suggestions in dealing with the post-crisis world, there is an even more basic question: "Is there life after 'monetary catastrophe?'" After research, I am inclined to reply: "Yes, Virginia, there is life after monetary catastrophe." With abundance of bearish news and analysis in this and other websites, it's very challenging to have an optimistic outlook. In doing so, it's easy to overlook some positive developments that may result from the coming financial storm. I hope that by the end of this article, you would agree with me in one positive change. This also implies that our current society has lots of problems. I will use the work of Juliet B. Schor, a sociology professor at Boston College as the diagnosis of the current pathological state of the world. Although her book, The Overspent American, focuses mainly on the American society, it happens so that over the 1990's (known as the "American decade") the US had tremendous influences over the rest of the world that the spending patterns of many countries followed (and still follow) that of the US.

Professor Schor cited a huge amount of research articles on consumer behavior in her book. Her central thesis of the spending problem can be summarized as: The changes in consumer reference group from horizontal to vertical resulted in a phenomenon called "upscale competitive consumption."

In the old days, a consumer compares his goodies mainly to his neighbors. With the advent of communication and shifting work environments, we are now comparing our ownership of things to a wider world. When one compares to his neighbors, there is a large possibility that the comparison involves individuals from similar socio-economic status. But comparison to people in our working community may include individuals from different (and sometimes very different) economic and income level. As Schor puts it:

"When a person who earns $75,000 a year compares herself to someone earning $90,000, the comparison is [economically] sustainable&When poet-waiters earning $18,000 a year, teachers earning $30,000, and editors and publishers earning six-figure incomes all aspire to be part of one urban literary referent group, which exerts pressure to drink the same brand of bottled water and wine, wear similar urban literary clothes, and appoint apartments with urban literary furniture, those at the lower economic end of the reference group find themselves in an untenable situation." [page 4]

Today's media and modern communication technology (such as internet) only exacerbate this problem by widening the reference group(s):

"Advertising and the media have played an important part in stretching out reference groups vertically. When twenty-somethings can't afford much more than a utilitarian studio but think they should have a New York apartment to match the ones they se on Friends, they are setting unattainable consumption goals for themselves, with dissatisfaction as a predictable result. When the children of affluent suburban and impoverished inner-city households both want the same Tommy Hilfiger logo emblazoned on their chests and the top-of-the-line Swoosh on their feet, it's a potential disaster." [page 5]

One way to see how serious this problem (and therefore understanding how sick our society is) is from the statistics that Schor had cited from 1997 Council of Economic Advisers: The rise in consumer debt among households earning $50,000 to $100,000 is the highest through the 1990s, even higher than the low-income households. This is the American middle and upper middle classes! It simply is not healthy for this segment, literally the backbone, of the American society to emulate upper class spending, or upscale their spending in competition to their kindred in the middle or upper-middle class. That's why it's called "upscale competitive spending." The decadence in consumption discipline in this socio-economic level should not be taken lightly since they are also the backbone of American economy.

Moreover, this "upscale competitive spending" is being exported to the rest of the world. Other developed nations are being encouraged to consume. And the faster a developing nation's economy progress, the greater the speed of that nation's consumers seem to Americanize and start the process of upscale competitive spending. The entire Greater China region is an apt example. I'm constantly bombarded with reporting in Chinese newspapers about stories of conspicuous, wasteful consumption and corruption. We are seeing the entire world's social and economic backbone, the middle and the upper-middle classes, in rapid decay!

Fortunately, all this will end. As Cornell University founder, Andrew Dickson White had argued, fiat currency will result in "obliteration of thrift." Bob Landis also described, succinctly, the social affects of paper fiat: "Savers are chumps. The smart guys are those who spend it all and go into debt to consume, the more conspicuously the better. Moreover, fiat money always results in massive corruption. The new pools of paper-based wealth are never shy about buying protection for their privileges." While there may be a few years of painful adjustments after the global fiat money go into the self-destruction, in the long-run, corruption will be reduced and the world's middle class will restore its virtue of thrift. In this sense, calling the coming event as a "catastrophe" or "storm" may be incomplete, simply because such words are full of negative connotations. I prefer to call it wealth redistribution.

Yes, Virginia, there is life after wealth redistribution. But it's also time to reduce our dependency on materialism. If humanity were to have future, we should learn to enjoy a simple life.


Author: Yi-Chang Wang

Yi-Chang Wang

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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