Monday, May 11, 2009

Financial Psalm 16

Financial Psalm 16

16:1 Preserve me, Gold, for in you do I take refuge.

16:2 My portfolio, you have saveth, and it sayeth: “You are my Saviour.

Apart from you, I have no good thing.”

16:3 As for the silver and oil which is in the earth,

they are also excellent ones in whom is my delight.

16:4 Their sorrows shall be multiplied who diversifyeth into other assets.

Their offerings of bonds I will not accept,

nor hold such paper on my lists.

16:5 Gold well-assayed is my preference and made-eth my cup. 

You made my lot secure.

16:6 Your prices have risen making pleasant our faces.

Yes, our offspring will have a good inheritance.

16:6.1 Beware the false prophet, paper gold, promising false profits.

16:7 Blessed be Chris Wood, who resembleth Jesus, and has given me wise counsel.

My heart instructs me to stay long during the right seasons.

16:8 I have set Gold always before other assets. Because It is is heavy in my right hand, and shall not be moved from its Swiss vault without  countersigned instructions.

16:9 Therefore my heart is glad, and my relative purchasing power rejoices.

My portfolio shall also dwelleth in safety so long as Bernanke ruleth.

16:10 For you, Gold will not leaveth my portfolio in Zimbabwe, or Weimar

neither will you allow my portfolio to become holey due to political corruption, or crony capitalism.

16:11 You, Gold, will show me the path of wealth preservation during times of inflationary woe and political uncertainty.

In your presence, I feel the joy of your security.

So that my hand can exchangeth you for pleasures forevermore.

(with apologies to Private Eye)

Reg FD: I am not a goldbug and still believe it has one more big puke before the rocket-ride (not the "gee, I printed a price and stayed there for 5 mins puke)


deracinated said...

"I am not a goldbug and still believe it has one more big puke before the rocket-ride"

That's my hunch too.

"gee, I printed a price and stayed there for 5 mins puke"

Not sure what you mean here. Could you explain?

Jim in MN said...

Right on!, amen.

Lead me not into debasement,
But deliver me from fiat.

--Jim in MN

Woland said...

Over at "The Big Picture", BR has a chart of the Dow
in ounces of gold going back to 1977. Interesting picture, peaking in 1999, in decline ever since.

"Cassandra" said...

Ritholtz is correct to log it (whereas Zerohedge's very long-term Bloomberg pic naively doesn't.

But I believe that the relationship should have a slope, and that no one has of yet convinced me as to why this should be mean reverting process. Ibbotson research decomposing equity returns suggests that while a goodly portion of the equity return is money illusion, a decent portion is growth. And while the eye and brain are attracted to infer mean-reverting process, the fact that these charts have but two or three prior data points in 100 years doesn't bode well for predictability.

So while both time series capture the money illusion in the price time-series, why shouldn't the slope between the two reflect the inherent compound growth differential afforded by equity. Even if small, it seems like it could compound up to make the next low (in log space) perhaps at 3, not 1.

I'm not saying it will, just looking for someone to play devil's advocate and persuasively justify why it should be a mean-reverting process...

Shanky said...

Elliot Wave International has gold with a 7 handle before the candle gets lit.

Anonymous said...

There has been a lot of talk about a pullback. While that alone is reason enough to doubt that it will happen, consider the most basic of fundamentals:

1. The G-# whatevers cannot possibly cease issuing new debt.

2. Iceland is not an anomaly.

3. In gold we trust.

Andrew Bissell said...

There has also been a lot of talk about gold flying through $3000. Gold should trade a bit lower for awhile as Mr. Market shepherds us toward the deflationary liquidation scenario everyone fears but no one seems to quite believe in yet.

Still, at any given time you're flirting with financial suicide if you don't own at least a *little* gold. Like Kitco's John Nadler is fond of saying, it's like insurance, you buy it and hope you never need to use it.

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Chris said...

Cassandra, you're a gold-bug now too? You were still a source of one of my favorite quotes on the metal:

"There are few human follies that are more amusing or more scandalously wasteful than the one in which man scours the world to discover gold, subsequently digging deep and moving enormous mountains of earth at great expense to remove it from the ground and refine it, then, move it to the other side of the planet (also at great expense), only to dig another great enormous hole, and bury it once again deep in the ground."

It seems to me that gold is already bought by people that think fiat currencies are going to the crapper, and that a certain expectation for inflation is built in to the price. Even if it isn't, I don't see why I should put my hard-earned money into a rock when I could invest in my neighbor's fledgling lawnmower business or a company that researches solar energy--anything that actually provides real "value" to the world. If fiat currencies are devalued, will everyone be trading in their cars for gold? Can you eat it? Can it sail you to Florida for a vacation? I don't know, something just doesn't seem right about the gold craze. The only people certain to benefit are the hawkers themselves like Kitco. Hmm, that sounds familiar, but I don't know why...

Anyway, it seems to me at some point people that buy gold are just looking to trade it in...for something else with actual value someday. A big house, a boat, whatever. As opposed to stocks, which actually GENERATE value through working people and innovation.

PPM said...

Gold has a physical uniqueness that renders it an excellent medium of exchange (chemically non-reactive and relatively fixed supply). Human society has historically accepted it as a medium of exchange because of these physical properties. It isn't an accident. There are few other chemically suitable substitutes.

In acting as a medium of exchange that can not be debased, gold performs a utilitarian function, just as the printing press and paper money serve a productive purpose. So, it isn't correct to say that gold has no intrinsic value. It has a intrinsic value as a medium of exchange. This intrinsic value will vary based on the general level of distrust prevailing between economic actors.

Personally, I think that we are well along the slippery slope of geometrically compounding distrust, in the financial system, society generally and even between nations. So, the value of gold, as an incorruptible store of value should increase.

Anonymous said...

I wish I were so clever as to articulate the thought you attribute to me, but in fact they were words of Robert Triffin, a name everyone should know, if they do not already.

But to be clear, I am not a gold bug. The post is tongue-in-cheek and parodies the fervent monomania that zealots see in Gold as The Solution, or for that matter, even the best asset. I am of course saddened by the fact that The People have let it come to this point, the point where systemic confidence has ebbed so low.

The price of gold may go up. But so too did the price of tulips. And tech stocks. And there are of course many many fine assets - some fairly valued, some not. Some useful, some less so. I personally would rather have an Alembic, a press, and an orchard (in reverse order) rather than the metal that would buy the same. First, because I can trade my fruits each year, rather than diminish my savings and my patrimony with each trade. Second, because their distilled byproducts are always in demand, countercyclically even more so when gold is likely to be prized, and finally because I too, like to drink - fresh juice, and subtlety fine spirits I they would yield. The trees also produce shade, which cools pleasantly in the summer, fruits for pies, spreads and preserving, kindling and firewood for the winter, honey from the bees that pollinate them, and occasionally a nice hunk of wood with which to craft a table or useful piece of furniture. Unless one is a goldsmith, even the gold coin would under the scenarios seemingly wished for by goldbugs, be - practically speaking - useless without a means to smelt it into suffficiently small pieces to exchange.

Now, if someone would please explain precisely why the Equity Market-Gold ratio should have a slope of Zero, I would be grateful..

And next to my orchard I might place a solar array and a wind-turbine to produce energy that I can then exchange for my neighbor's gold....


Pietro Paolo Mazzini said...

Exactly. Rather than having to cart around a load of fruit, it much easier to use gold as the medium of exchange. It is much easier to carry gold from one end of the continent to another, than say your solar array.

Gold has a utility just like fruit or a press or a wind turbine. It facilitates commerce just as any currency does. Its value will increase as the number of trustworthy means of exchange diminish.

The answer to your positive slope question depends on the correlation between equity valuations and the level of trust/confidence in the world. I suspect that they are inversely related.


Anonymous said...

Surely a debit card is much more convenient. You know..."Don't leave home without it" etc.

Your blaming the medium, which has done nothing wrong. Blame the people who devalue the medium, or the entire Polity and it's constituents who encourage such devaluation through demagoguery. But electronic money, and electronic payment is fantastic. The comparison between a debit card with a chip & PIN and gold is like comparing travel betweeen lyon & paris on the TGV vs. a Donkey. Yes, they used to do it that way. Yes one could still do it. But why would one want to?!? The problem with carrying Gold around is that you need to carry a gun around too. Or at least an Elephant-Taser.

I think you are making the case for a Gold-backed currency rather than physical Gold as a medium of exchange. Not that I agree with either...

Pietro Paolo Mazzini said...

Agreed. However, whether you carry the gold in your pocket or leave it in the vault at the central bank the end result is the same: gold is vastly more important than it is today, demand will increase as a consequence of the expanded monetary role, supply is limited, and price is sky rocket.

Neither am I a gold bug. I personally have a small position as insurance, for now. I just wanted to make the point that gold has a utility, to rebut the frequent (and superficial) claim that it has no inherent worth.

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Phillip said...

Informative article on "The Real Price of Gold" in National Geographic: I do wish we (as a society) could get past the illusion that money is wealth instead of it just being a lubricant that facilitates trading. I view wealth as the energy that sustains human life, capital as accumulated wealth and money as a claim on wealth but not wealth itself.