September 29, 2015
Sovereign Valley Farm, Chile
Nearly four months ago on June 2nd, something very unusual happened in Edmonton, Alberta, Canada.
The price of propane actually became negative, hitting an unbelievable -0.625 cents per gallon.
It’s hard to believe that the price of a productive commodity could become so beat down by the market that producers would practically have to pay you to take it off their hands.
Now that’s cheap. And completely nuts.
This actually happens from time to time with certain commodities. And there are a number of reasons for it.
A negative price might imply a dramatic oversupply where the cost of storing the commodity exceeds the benefit from owning it.
Sometimes even something like real estate can have a negative value—perhaps when a building is in such decrepit condition that the cost of tearing down the structure exceeds the land value.
But sometimes a negative price simply means that markets are completely broken.
The primary function of a marketplace is what’s called ‘price discovery’. This is an incredibly important role where buyers and sellers collectively determine the true value of a product, service, or asset.
Think of it like an auction: if you really want to know what that old baseball card is worth, put it on eBay and let the market tell you.
The problem is that, these days, markets are so heavily manipulated that the price discovery mechanism has been broken.
Consider that the most important ‘price’ in the world is the price of money, i.e. interest rates.
The price of money dictates, or at least heavily influences, the price of so many other major assets and commodities. Stocks. Bonds. Oil. Home prices.
And yet, rather than leave this all-important price to be set by the market, the price of money is established by an unelected committee of central bankers.
So by setting the price of money, they are effectively influencing the price of just about EVERYTHING. Including propane in Alberta.
Then of course there’s the more nefarious price manipulation, much of which is coming to light now.
There was the appalling LIBOR scandal back in 2012 when multiple banks confessed to criminal charges of conspiring to fix interest rates.
Investors in the United States have filed a number of lawsuits alleging that banks and brokers have rigged the market for US Treasury bonds.
The US Federal Energy Regulatory Commission has recently accused French oil company Total and British firm BP of manipulating natural gas prices.
And both the US Department of Justice and the Swiss Competition Commission are investigating several banks for colluding to manipulate gold and silver prices.
So in addition to markets being broken, there’s also an extraordinary amount of manipulation going on… which means that, quite often, prices mean absolutely nothing.
Consider gold and silver, two obvious long-term stores of value whose prices have been in decline.
Bear in mind these are paper prices, i.e. prices set in broken commodities markets, heavily influenced by central banks, and criminally manipulated by investment banks.
So is this price really a valid indicator of their worth? Not by a long shot.
Think about the ever-widening gulf between the ‘paper’ price of silver and the ‘physical’ price of silver… evidenced by the massive shortage in real, physical silver right now.
The paper prices of gold and silver are set (and manipulated) in financial markets through commodities exchanges.
It’s not like traders are huddled around bags of coins bidding on which one of them will haul it away.
Instead they’re dealing with contracts... pieces of paper (or electrons) passed around by traders and bankers.
In fact, the gold and silver contracts traded in commodities exchanges are designed especially for people who have no intention of ever taking physical possession of the metal.
Case in point: the paper price for silver traded in Chicago is based on a contract that is supposed to end with physical silver being delivered to the buyer.
But the contract specifications set by the exchange allow up to 10% FEWER ounces of silver to be delivered than what was specified in the contract.
And in London, the London Bullion Market Association’s “Good Delivery” rules allow silver bars to be up to 25% less than what was specified in the contract.
And it certainly raises the question-- who would possibly purchase 1,000 ounces of silver if the exchange was only required to deliver 750?
Anyone who actually wants to own real gold and silver would rather buy from a local coin dealer.
Futures contracts are for bankers and traders. Paper prices are for economists and reporters.
The current shortage of silver, particularly in North America, is a much better reflection of its value than heavily manipulated commodities markets.
All these contracts and prices truly reflect is how broken the financial system really is… which is actually precisely why you would want to own more gold and silver.
Seriously, how messed up is our financial system when asset prices across the world can be so easily rigged by the very institutions that demand our trust?
This system is pure insanity, as are its prices.
As such, I don’t let their prices guide my life. It wouldn’t bother me if the price of gold went negative, just like propane in Alberta.
After all, I’m not trading paper currency for gold, just to trade it back for more paper currency if the ‘price’ goes up.
The idea behind buying gold is to swap paper money for something real.
Banks can rig its price all they want; gold’s true value comes from its function as a long-term form of savings and a hedge against a broken financial system.
And the more ridiculous the system gets, the more valuable it becomes.