patrick.net

Notsomuch “contrarian” as doomsday

You'd be better off with that 1000lbs rice-equivalent. Best case, you can eat it. If Bird flu or worse event hit, it'd be a lot more valuable than 1 oz of shiny stuff. Those knives aren't a bad idea either.

It's all game-theory. You can prepare for total worldly disaster and if you're wrong, you've wasted a lot of money. On the small chance that you're right, you've got lots of other problems as well. What's the table payoff?

That being said, definitely go out an buy your 72+ hour earthquake kit. Don't forget the dog/cat food. That will happen.

SQT: And you may be right, there might not be a gold bubble in the making. I only speculate that there is because of all the talk going on. It seems as if it could be the new “hot thing” in the making.

I had IB friends in NYC calling Gold in 2000. I wish I'd listened.

Normalize gold by dollar inflation and its return doesn’t justify these spikes.

This is exactly the problem with gold as a portfolio variable. The volatility is too high to justify the expected returns.

Of course, if you're wanting to patiently accumulate gold over a very long period of time as a personal hedge, that is reasonable in my opinion...so long as you have no credit card debt, no variable home equity debt, and no other "free money" obligations (like student loans or 0.9% auto financing).

Randy H: This is exactly the problem with gold as a portfolio variable. The volatility is too high to justify the expected returns.

Phew. Now that the Amazing Randy has backed my stance, I can relax and get back to work. ;-)

So far it looks like the board is roughly evenly divided on the Gold bubble issue:

--pro-Gold--
George
Conor
rat patrol
Owneroccupier
Astrid
re_2_au

--anti-Gold--
Randy H
Peter P
Mr. Vincent
FRIFY
nomadtoons2

The rest are (like me) not well informed enough at this point to make any big financial moves on precious metals without more understanding of these markets.

Here are some of my observations and questions:

1. Many pro-golders insist that today's valuations (against USD) while high vs. a few years ago are still historically low, with lots of upside potential. Anti-golders insist prices today are already too high, and are primed for a pull-back.

Q: As a gold-novice, how do I evaluate/reconcile these opposing positions based on empirical bias-free data?

2. There seems to be some confusion in terms of buying gold/metals to use as a capital/savings preserving HEDGE against Fed inflation vs. SPECULATION to make a quick killing and cash out. Big difference. I think most pro-golders here are being unfairly accused of being speculators, when they are hedgers just trying to guard their savings against the ravages of off-the-books inflation.

3. Anti-golders insist metals have little value outside their industrial/commercial use (jewelry, speculation, etc.) and could --theoretically-- fall to a fraction of today's prices. Pro-golders insist that much gold production is already for commercial/industrial use, and that any decline in gold's value is inherently limited, due to practical limits on physical extraction/mining.

Q: Who's right? What % of annual gold production is used for commercial/industrial purpose vs. jewelry or speculation? How can we go about determining a bias-free "fair market" or "fundamental" value of gold & other precious metals? Is there some kind of P-E or Rent-PITI ratio for metals?

too bad gold is too soft for knife making...maybe I should invest in a platinum knife...

According to my old National Geographic, gold pans make a superb omelet.

George,

What you're referring to was known as the era of the "Strong Dollar Policy". It's generally acknowledged now that the effects of that policy were to essentially wreck the US as a manufacturing base. Remember, strong USD = weak US exports. This is exactly why the Chinese keep buying (and will continue to keep buying) USD, to keep the RMB cheap enough for us to buy their stuff.

A weakening of the USD can have very strategically positive effects. The ZIRP guys aren't morons, just radical in their proposal. Mind you, I'm against any kind of dollar policy, weak or strong. That said, a weak dollar would eventually cause a huge rebalancing in the US trade deficit, capital flows, and current account balance. Moreover, it would force the host of nations that peg, fix and tie their currencies to the USD to either (a) subsidize us heavily, which politically won't cause anyone here to lose any tears given that the US consumer has essentially built their nations, not to mention the lost US labor and service jobs; or (b) break from the USD and pay the full price of inflation themselves; they're now essentially free riders on the back of US inflation.

Maybe I'm too much of a contrarian, but I'm not all so desperate and negative about the future of this country. Someone earlier said we make nothing here anymore. This is categorically false, even though it is the popular perception. US manufacturing is extremely capital efficient, productive and flexible compared to the Asian Tigers. Compare US mfg productivity to Korea, for example. US agriculture is unparalleled. The US is still creating (yes creating) more engineering and info-comp jobs than it is offshoring. The US is, despite the attempts by the current administration to destroy our progress, the unchallenged world leader in biotech, genetic R&D and related therapies.

The US engine of innovation is still very much alive, even if not as much so as last century. It will take a long long time for the sun to set on the US. Look, even Europe still produces things of value from time to time, and their empires have been dead for over a century now.

I think we're undergoing a major global economic rebalancing right now. And, if that is the case, the US is not a bad place to be. This is even more true as the world very much seems to be balkanizing, if anything. The future probably holds less globalization, more trade barriers, and lots of state-controlled industries in most countries--mainly related to energy. I say, let them try. They didn't learn their lesson the last 3 times they tried that, let them have another whirl -- it'll hurt them a lot worse than us.

Randy,

That's an argument to stay out of the exporting countries, but not for staying out of commodities. Even if US is in a relatively stronger position compared to those countries, we can still see our living standards degrade or stagnate in the coming years.

Phew. Now that the Amazing Randy has backed my stance, I can relax and get back to work.

Bah! I'm wrong about lots of shit. I thought object-databases were going to take over the world and lost a lot of HaHas in the late 90s shorting ORCL & IFMX and buying VSNT and ODIS. (and I still lost covering IFMX, which was a feat in and of itself).

Just because something is logical and rational doesn't mean that it is the face of reality. Gold could go to $5,000/oz, and I'll be sitting there wondering why everyone is so insane, holding onto my little balanced commodities index.

Randy,

For shame! Never overestimate the logic center of the masses!

astrid,

Even if US is in a relatively stronger position compared to those countries, we can still see our living standards degrade or stagnate in the coming years.

Compared to what? A standard of living is not an absolute measure in economics, only a relative comparison. Perhaps we're all in for a sinking GDP per capita. If so, better to be in a country where almost 80% of GDP is internally generated.

Again, I'm not against commodities. I just insist it is not an effective or efficient hedge; it is a gut speculation. There are more efficient hedges, people just like gold because they think it will do better. This is the definition of speculation. Hedging is a cold, calculating science, with no emotion or gut to it.

Randy,

Over the last few days, I think I have been slowly converted to view the devaluation of US$ as a net long term positive. That aside, doesn't the devaluation of US$ mean we should increase exposure to investments that will perform better in this scenario ?

Devaluation and inflation will go hand in hand. Metals, commodities, foreign stocks and other currencies definitely play a part in this strategy. Each has its own peculiar risks and those cannot be ignored. But portfolio diversification requires peridoic tweaking. So with that in mind, and not considering as Get Rick Quick scheme, we should look at these options.

Even the foreign stocks - specifically Asian - have had tremendous runs. I did benefit from it. Hence I am now looking at metals and natural resources, which have been absent from my portfolio till now.

I'm not actually a gold bug. I'm just extremely pessimistic about the ability of the American people (or the world, notice how much time Owneroccupier and I spend bashing the Chinese?). I'm betting the mass psychology to form another bubble around gold. I plan to be in this time and then exit near the top for less foamy waters.

TBONTB,

I agree completely. I balance my portfolios with Black-Litterman, and then sanity check with Sharpe. I can't get gold to come on the radar because of it's very high historical sigma. Were I smart enough to try to do some macro hedge-fund thing, then I'd be all about the volatility of gold. But I'm not that smart.

If I was, I'd be so rich that I'd have an assistant do my bogging for me.

Ou, or maybe tea and biscuits are an intense health booster. I’ll live forever!

DEVONSHIRE CREAM!

SFWoman,

Yup. And I think that cost will escalate as the baby boomers retire. The prevalence of cars, lack of exercise, and the disasterous FDA food pyramid has created very unhealthy Americans, with a lot of chronic conditions that will cost a lot to maintain.

I thought object-databases were going to take over the world and lost a lot of HaHas in the late 90s shorting ORCL & IFMX and buying VSNT and ODIS.

Huh? Object databases?

The world has a taste for mathematically inelegant crap like SQL and COBOL.

I prefer creme fraiche myself...

Again, I’m not against commodities. I just insist it is not an effective or efficient hedge; it is a gut speculation.

Nothing wrong with speculation. Just be right and one will get rewarded. :)

LOL

astrid,

More power to you. Sounds like you see your position for the speculation it is, and that's great, especially when you bet right. Just remember that gold can and will correct (if it's in a bubble, or goes into a bubble) much faster than RE. There's about 0 stickiness to gold prices.

SFWoman,

I'm afraid I agree with you. The direction of standard of living is down in the US. I tend to disagree with pure economic std of living measures (gdp per capita) as it doesn't capture the value of life well. Nazi Germany had a great GDP per capita; I wouldn't say it was a great standard of living. During the early Cold War, the USSR had over 2X the US GDP/Capita; again not a great std of living.

The whole damn thing is depressing to think about. Can you prescribe a pill that will fix this for me?

I prefer creme fraiche myself…

Creme fraiche for pureed sweet pea soup.
Devonshire Cream for scones.

The whole damn thing is depressing to think about. Can you prescribe a pill that will fix this for me?

Poison pill?

I looove double Devon cream

I love that too. I use half bottle per scone.

Cream and butter are delicious, but I like the tanginess of creme fraiche and sour cream. Plus, I'm not a huge scone eater...I'm more a bake my own yeast bread kind of person.

Randy,

Some people think Prozac is the legendary SOMA. You can ask skibum about it.

Cream and butter are delicious, but I like the tanginess of creme fraiche and sour cream. Plus, I’m not a huge scone eater…I’m more a bake my own yeast bread kind of person.

I am not a huge scone eater either, it is just a condiment to my Devonshire Cream. :)

BTW, for all of you who thought I was going to accumulate $20K in knife related CC debt, here's what I ended up getting.

From Lee Valley,

http://www.leevalley.com/garden/page.aspx?c=2&p=52770&cat=2,40733,40738&ap=1

http://www.leevalley.com/wood/page.aspx?c=2&p=31079&cat=1,130,43332,43393&ap=1

totaled up to be about $30 plus shipping

The MAC was very tempting, but at $60-70, it can wait.

Conor,

My concern with going long on gold is that it is simply too scarce to be useful as a common currency and has limited industrial uses. If I was going long, I'd rather it would be something tied to energy production or agricultural produces. The value there is a lot more obvious.

I guess there's a small chance of actually going back to the gold standard, that would cause unfathomable deflation issues, but yeah, then $5000 or even $50K per oz might not be excessive. I don't see how any sane government would allow it happen though.

The traditional measure of value was in gold and agricultural land, however, both have significantly declined as a proportion of the total GDP in the 19th and 20th century. I don't see how they can return unless we go back to essentially the 18th century.

Randy H's PA,

Who's gonna be publishing Randy's dark, distopian novel? Or is it gonna be about the happy shiny plastic people now?

I think anyone who uses the phrase "fiat currency" is treated somewhat warily for good reason. The collapse of a currency is generally a Bad Thing and goes hand in hand with collapse of governments. In such cases, being Someplace Else is always better than having gold.

If my last name were St. Germain, or Root, I would consider storing a larger portion of my assets in gold. Most people do not need to preserve wealth over such time scales, and should be able to reposition in time if necessary.

Randy H's PA,

Also, is Mrs. H looking for a personal assistant? I kind of wanted your job :P

Conor,

How much is uranium? Is there anyway to get in on that?

Conor,

Thanks for the link. I'm an interested layman so I can't really evaluate it properly.

However, I did vaguely consider that possibility and that was one of the reasons why I think buying into gold at $670 is a pretty decent bet. If I hold gold, then I have a chance to either sell or hold, if the situation gets dire.

I come from a country that's survived through 200 years of just about every kind of chaotic event there is, so I don't underestimate the possibility for the worst case scenario to come about. However, I think the much more likely scenario is that the fed will be able to control the credit bubble fallout, albeit in a manner that would leave the US significantly poorer.

Back to the health thread: When I was travelling abroad -- I used to do this a few times a year -- I always felt, well, healthier afterwards. The food was better, the ambience conducive to a carefree spirit, and one did more walking just like everyone else.

I think it's all psychological. There is too much of a rat race at all levels in the US society. It even penetrates off-work social life. Since there isn't an explicit codification of class boundaries, most people (if not all) are compelled to jostle for ranks in even the minutest matter. It's so fucking disgusting. China is becoming the same.

Have more cakes. It's just hard to find well-made cakes. Life is good. I regularly, well, almost daily, drink half a bottle of red a night. Sometimes a bottle. Sometimes half a bottle of good Sake. According to that study someone just quoted, I won't die early from drinking.

The best investment one can make right now is paying down his or her debt.

I think most of us here aren't in debt which is why there's so much angst about inflation eating away our hard earned savings. Forget gold, the best investment in Cali in inflationary times is a house. You tax rate stays fixed and you pay back your ridiculous loan with cheaper and cheaper dollars.

If you feel that strongly about inflation, buy a house instead of gold. If you think the tightening cycle will run for a while and perhaps overshoot, hang tight and pray.

Wasn't all that wine drinking protecting the French from the consequences of their cigarette smoking?

FRIFY,

Even if I believe housing was the best long term investment, there will still be much opportunity ahead to pick up bargains from FBs. A little patience may pay off big dividends.

The best investment one can make right now is paying down his or her debt.

Why pay down debt with good fixed interest rate if inflation is on the rise?

possible.

I always contemplate how one can profit from high inflation. The best strategy for a working man (practically every one) is to load up as many houses as possible with a fixed-rate mortgage and pray that he won't get laid off.

The report came out this morning that the college hiring scene is becoming hot again.

Conor,

Good advice. The other part is to maintain a low overhead until the storm blows over. Living close to work and drive efficient vehicles. Live in small and energy efficient quarters. Put off long term charity commitments.

astrid,

thanks a lot for the data, definitely more than what I desire. I've gotta quit blogging over the weekend to munch on the data for a bit.