That gold and silver had a tepid response to Wednesday’s FOMC report wasn’t surprising. This one was little more than a carbon copy of February’s – wait and see with a hint of further easing.
Thursday’s bullish performance on Wall Street was likewise not much of a shock. We have come to expect that sort of response to the slightest hint of more free money. But what’s going on with gold and silver prices? Certainly kicking them upstairs was the last thing Bernanke intended to do.
A post by Avi Gilburt in Seeking Alpha poses an interesting explanation for the odd behavior of the markets lately. Picking up on Alan Greenspan’s notion that “human nature’s propensity to sway from fear to euphoria and back” is the root cause of market undulations, Gilburt suggests that it is “the common perception of what [the Fed’s] actions could do” that is driving gold and silver prices.
There is a subtle difference between that and the markets being driven by the actions themselves, but it makes a huge difference in how investors process information. When acting on perceptions investors use subjective reasoning, which brings feelings and emotions into play. When acting solely on the facts, they use objective, or purely analytical, reasoning. In other words, if there is no substance in the lines, they read between them and construct a new reality from that.
Facts, of course, are still subject to interpretation and spin, but the overwhelming majority of influential economists are of the same school. They analyze data according to shared dogma and therefore come to the same general conclusions. That’s what used to drive the markets.
The problem is that their dogma is built on false hypotheses. The moment the economy stopped playing by their rules they were dumbstruck. As conjecture ran rampant, the markets were left to march without a drummer. Nobody even considered questioning the dogma. Instead they keep coming up with ever more wildly convoluted explanations to make reality conform to their beliefs.
None-the-less, gold and silver are the lynchpins of the real world. In the long run, it’s only the real world that drives gold and silver prices.