Speculation, Not Inflation Drives Prices Higher

Twenty years ago—in 1991—bankers at Goldman Sachs invented a new kind of investment product (i.e., a derivative) that tracked 24 raw materials, including food produce, as part of a single mathematical formula, and christened it the “Goldman Sachs Commodity Index” (or GSCI).  This was hailed as a very creative and innovative financial investment product.
 Eight years after—in 1999—the Commodities Futures Trading Commission deregulated futures markets, to allow bankers to take as large a position in grains as they pleased… previously forbidden to all except those who were actually involved in food production since the Great Depression.
 The catch is this:  Derivatives do not require physical delivery of the commodity(ies) involved.  Warehousing costs do not exist. Spoilage is a non-issue. 
 The result:  An artificial UPWARD PULL has been created on the price(s) of grain (and other commodities) futures.  Imaginarywheat now dominates the price of real wheat.  Speculators now outnumber producers and buyers FOUR-TO-ONE!
Wonder not, and expect, food prices to continue rising – fed by Bernanke’s Quantitative Easing.
Speculation—not inflation—is the culprit.
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4 Responses to “Speculation, Not Inflation Drives Prices Higher”

  1. Me says:

    The currencies have been devalued by QE. You need a greater amount of a currency to buy the same thing. Therefore we have inflation, driven by the flow of new, created money into speculation. It’s therefore prudent to buy assets that will preserve the value of your wealth against rising prices.

    The price of silver is also set by the derivatives market. That’s why its low price doesn’t reflect demand for silver as JP Morgan isn’t restrained by position limits. They can sell unlimited quantities of silver (like two years’ production in one day) to keep the price down.

  2. Tapestry says:

    Prices can be manipulated up and down at will. They wait until the mob are all lined up one way and then swing the prices the other. That happened with silver recently. It is happening with the Euro/USD now.

    There is no safe class of assets.

  3. Me says:

    No, silver derivative dropped because of huge margin increases and the forced liquidation of positions which lead to something like a 20% drop in about 30 seconds.

    That said, the spot price of the silver derivative should go to zero, or nearly, because there is little or no physical silver available for delivery.

    As an “asset” the paper silver market depends on faith in the possibility of possession of the underlying asset. Increasingly traders have realised that there is no point in the market/scam, so they are buying bullion silver.

    Thus, there is a huge shortage of bullion silver at the dealers. Months of orders stacked up. There’s enough silver in the world but supply of investment product cannot match demand at this time.

  4. Tapestry says:

    Removal of physical supply from the public is a typical manipulation, to assist rumours of a shortage.

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