Chaotic Fingers Of Instability

Posted 05 Oct 2009

The world economy is incredibly intertwined.  For example, a butterfly flapped its wings in the Amazon resulting in typhoon after typhoon hitting the Philippines.  This has interrupted the work flow for RunToGold because one of my wonderful assistants located there has had his village decimated, been flooded out of his house and therefore been unable to complete several projects.

 As a result, thousands of people are not able to consume information that may affect the decisions they make.  Often when we are in the moment we do not fully comprehend the gravity of the situation until it is fully upon us.



Chaos theory is a branch of mathematics which studies the behavior of certain dynamical systems that may be highly sensitive to initial conditions. This sensitivity is popularly referred to as the butterfly effect. As a result of this sensitivity, which manifests itself as an exponential growth of error, the behavior of chaotic systems appears to be random.

That is, tiny differences in the starting state of the system can lead to enormous differences in the final state of the system even over fairly small timescales. This gives the impression that the system is behaving randomly. This happens even though these systems are deterministic, meaning that their future dynamics are fully determined by their initial conditions with no random elements involved. This behavior is known as deterministic chaos, or simply chaos.

Chaotic behavior is also observed in natural systems, such as weather with typhoons pummeling the Phillipines. This may be explained by analysis of a chaotic mathematical model which represents such a system.  Quantum chaos investigates the relationship between chaos and quantum mechanics.


While we like to think that human action is largely individual and unique, and it is, the branch of statistics allows us to make incredibly accurate predictions regarding populations.  In economics this is perhaps the chief competing premise between the Austrian school of economics and others:  starting with the individual and deriving the macro or vice versa.

The problem with starting somewhere besides the individual is that there is always a previous history to that choice; every individual has their own story.  To discount the individual is to discount their humanity; their ability to choose.  And it is that humanity which will often lead to choices which do not always conform with game theory or 'rational behavior'.

That is not to say an individual cannot build mighty towers with and through other people.  The issue is whether he will view them as bricks or stones (Genesis 11:3).  The problem with individuals as bricks, or in other words human livestock, is that it is immoral and the immoral policy will always fail.  While the behavior of the chaotic system may appear random it is deterministic.  Mankind will be what he was born to be:  free and independent.


John Mauldin wrote a great piece Another Finger Of Instability:

Imagine, Buchanan says, dropping one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it builds on itself and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found that there is no typical number. "Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur."

The piles were indeed completely chaotic in their unpredictability. Now, let's read this next paragraph from Buchanan slowly. It is important, as it creates a mental image that helps me understand the organization of the financial markets and the world economy.

"To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red. What do you see?

They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions. But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable.

It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."


Often I get questions such as when is the dollar is going to collapse, when is the DOW going to crash, etc.  Now I like to profit from trading just as much as the next guy and have made a few recommendations that have made tidy returns for diligent readers.  But I try to look at all possible events, assess the probability of an outcome occurring and then acting in accordance with that assessment.

Is it possible that a CIA employee will be charged or indited for detainee abuse charges before December 31, 2010?  Yes.  Is it probable?  Well, Intrade puts the probability at 25%.  I think it is even lower; criminal gangs costumed in government regalia do not like to prosecute those in their fraternal brotherhood.

Many people seem to think that the evaporation of the world's reserve currency is something that can be played for profit.  When we are in the moment and bursting with confidence of greenshoots we seem to ignore out better judgment and ski down the slope.  But to the 3rd party observer it looks all too predictable and probable.  This likely will not be a period of history easily played for profit; at least not for those lacking a costume or cohorts with one.

I recommend being more concerned with principles of provident living and prepare for survivalism in the suburbs.  Will they be necessary?  We hope not but The Black Swan now the norm it is wise to be prepared.


While the world is in commotion the bull market for gold is in forward motion like never before.  The 24 day moving average is above $1,000 per ounce with the 50 day moving average above $970.

The Gold Wars have been waged for centuries.  The latest incarnation is the US government and central banks engaging in a gold price suppression scheme.  The US government has gone 'all in' and they are losing.  And that is primarily driving the demand for the ancient metal of kings.  But this is deterministic of the chaotic system's future dynamics.  Empires rise; empires fall and always for economic reasons.

Sure, many think that gold has effectively been demonetized.  But Information Age technologies like GoldMoney allow for gold, silver and platinum to easily circulate as currency in ordinary daily transactions.  The King is dead!  The King is dead!  Long live the King!  Gold has only begun to stir from its long slumber.  The prime form of money's price will only continue to rise as its value does from increased daily use among individuals as currency.


When you own an unencumbered ounce of gold your wealth is sovereign.  Hoard it.  Whether buried under an avalanche or on the bottom of the ocean in one of the most corrosive environments on earth; gold will have value one, ten or hundreds of years later.  Every empire that has fought gold has lost.

 Those who own the bullion are riding in the helicopter safely away from the ruinous effects of the Kondratieff Winter's avalanche.

Humanity’s gold lust has been dormant for nearly a century and when it awakens it will be extremely vehement and go viral. Those who own gold know of what I speak.  The yellow metal seems to call out to the inner conscience and resonate with our DNA.  And that is perhaps the most bullish aspect of this bull market.

 Gold has been the only safe haven and how much of the general public has actually touched a gold coin let alone owns one?  The result will be that the pitiful garrets of the central banks will be overrun as The Great Credit Contraction continues.  These chaotic fingers of instability will shake these giant welfare states until they implode.

Disclosures:  Long physical gold, silver and platinum with no positions in the problematic GLD or SLV ETFs, S&P 500 or DOW.