In February, I wrote What Drives the Price of Gold and Silver?
If there is a credible rumor that the Fed is planning to further extend
its “Quantitative Easing”, how would you expect the monetary metals to react?
Typically, the gold price would rise and the silver price would rise even
more. The question is why.
Traders read the headlines and they know how the price “should” react to
such news, and they begin buying. For a while, the prophecy fulfills itself.
But then what happens next? It may take an hour or a month, but sooner or
later some of the new buyers begin to sell.
Most people accept the Quantity Theory of Money. In brief, if the money
supply rises then prices will rise (though often there is a caveat that not
all prices will rise uniformly).
Today, Fed Chairman Bernanke said that the ongoing increases in the quantity
of dollars will continue. The silver market reacted as it “should”: more
money = higher silver prices. Look at this annotated chart.
In about 15 minutes, the silver price rose 2.2%. I call this the “Quantity
Theory of Money Gap”. In about 15 minutes more, the price fell back to where
it had been.
Within 30 minutes, all those who had bought based on this idea were, if
not proven wrong, at least given losses by the market.
The price of the dollar as measured in gold or silver is collapsing and
the rate of collapse will accelerate. This will be reflected in much higher
prices of gold and silver when quoted in dollars. But it is not due to the
quantity of money, and certainly not due to talk of
the quantity of money.
