Morgan Stanley Commentators: Please Reveal Your Conflicts of Interests
By Staff News & Analysis - May 06, 2013

The Oil and Gold Booms Are Over …The wreckage caused by China's great, juddering slowdown continues to spread far beyond the country's shores. Although most commodities enjoyed a bounce on May 3, after better-than-expected U.S. employment data, the plunge in their prices over the past few months suggests the past decade's rally is truly broken. For those of us not in the mining industry, this is actually good news – one of the best signs yet that the global economy is returning to normal. – Bloomberg

Dominant Social Theme: Let's get back to paper money as soon as possible.

Free-Market Analysis: Did you know that gold and oil have similar trading characteristics? Oil has been in use about 100 years from an industrial perspective and gold for several thousand years – though some say there are gold mines in South Africa that are 100,000 years old or more.

So it is strange that a thousand-year-old mineral and 100-year-old power source should have equivalent characteristics. We should wonder about that but, of course, this Bloomberg article doesn't wonder at all.

Written by a Morgan Stanley global strategist, the article glibly conflates oil and gold as "commodities." Anyone who has read yesterday's interview on these pages with Antal Fekete – or read Murray Rothbard or even Ludwig von Mises – knows that while gold expands and contracts, its supply and demand cycle actually has little to do with energy and oil.

In other words, the price of oil can remain relatively high, while the price of gold and silver may languish and vice versa. But we don't find out anything about the differences between money metals and oil in this particular screed nor others like it. The effort, as always, is to confuse people about the reality of money metals, their usefulness and their historical cyclicality. Here's more:

China's voracious demand for every conceivable raw material – oil, steel, soybeans, gold, to name a few once seemed to spell a future of endlessly rising commodity prices and falling living standards in developed nations. This was a Malthusian vision of scarcity: Rising demand from the growing economies of the emerging world would couple with shrinking supplies to drive up the prices of natural resources. Gas prices would never come back down; gold would cost thousands of dollars an ounce.

The response, for many international investors, was to bet big on China. Because it is hard to buy directly into China, many instead bought into the commodities that were being sucked into the gaping maw of the country's economy: oil from Russia, iron ore from Australia and so on.

The China-commodity connection was born. Financial entrepreneurs started exchange-traded funds, which allowed individual investors to trade commodities, including silver and gold, as if they were stocks.

For the first time, U.S. pension funds started to allocate a share of their holdings to commodities. Even the Federal Reserve got involved, inadvertently, by printing so much money that a good portion of it wound up fueling speculative bets on China and the big emerging markets, often using commodities as a proxy.

Prices went parabolic. From 2000 to 2011, copper prices rose 450 percent, oil prices 365 percent, and gold prices more than 500 percent to a high of more than $1,900 an ounce. There was talk of oil hitting $200 a barrel, and gold reaching $10,000 an ounce. It was a wild time, all predicated on the idea that the rise of China had set off a commodity "supercycle" that could keep prices high indefinitely.

Commodity prices, such as that of gold, tend to rise when faith in the financial system is in decline and usually fall when confidence is high. In this they resemble the politician of whom Winston Churchill once said: "He has all the virtues I dislike and none of the vices I admire."

High commodity prices enrich a class whose corrupting influence is legend, and whose chief skill is the ability to secure the right political contacts. Meanwhile, high commodity prices, particularly for oil, squeeze the poor and the middle class, and act as a brake on growth in the industrial world. During the 2000s, the U.S. fretted over the rise of corrupt oil tycoons and unstable dictators in nasty petro-states, and rightly so.

That's why falling commodity prices — both gold and copper are still down more than 10 percent this year despite the latest bounce — are good news. The China-commodity connection is breaking. After three straight decades of ultrafast growth, China's inevitable slowdown has let air out of the bubble: Since the peak in April 2011, the broadest available measure of commodity prices has fallen 16 percent. In recent months, money has started flowing out of exchange-traded funds for most commodities.

Okay, had enough? Did you know when you buy gold and silver that you empower a corrupt political class? You thought you were empowering yourself and your family by buying gold and silver and taking delivery. Turns out all you are doing is supporting the Chinese hierarchy.

Let us toot our horn a bit: No one has a much better record when it comes to China than we do. We started talking about the Chinese bubble and bust as much as four years ago. At the time, it wasn't popular but we know a bubble when we see one. And we knew that a country building whole empty cities is not going to sustain that level of economic activity forever.

We also recognize questionable statements when we read them. The boom in gold and silver over the past decade had little to do fundamentally with China's development on the world scene. You know … people bought gold before the arrival of the BRICs as important powers. People, including the Chinese and India's Indians, will buy gold and silver regardless of their countries' prominence on the world stage.

There are plenty of factors influencing the price of gold and silver (in fiat dollars) but treating gold and silver as if their performance is merely an aberrant side effect of China's emergence onto the world stage is facile at best. We're not surprised this article emerged from the pen of a Morgan Stanley exec. Morgan Stanley has a vested interest in boosting fiat money power and generates massive profits from paper currency.

After Thoughts

These days writers for the financial press are supposed to reveal conflicts of interests. We await the day when Wall Street-affiliated scribes reveal their conflicts of interest when it comes to writing about gold and silver.

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