patrick.net

Thanks astrid, tsusiat,

here is a brief graph on wiki (gees, they have everything).
http://en.wikipedia.org/wiki/Canadian_dollar

Disregard anything prior to 1970 because it was not floated. So throughout the 1970-1976, it was a more valuable currency than USD, then fell in 1976 against USD. However, oil, the prime index of commodity, didn't start it meteoric rise until late 1970s and peaked in 1980.

We are already at 0.9 right now, how much more can CAD rise against USD?

let me know if you guys want any country facts OTHER than exchange rates :)

astrid,

if you can still get access to your school library, what will really interesting to find is the historical rate of "synthetic Euros". Since Euro came into being in 1999, so prior rates were computed by the economists as a derivative of a basket of primarily DM, FF, and even a bit of Sterling prior to 1992. It is also called XEU.

Going bcak to the last commodity run of around 1970-1980 may also give us some kind of idea how Euro will likely do in this commodity bull period.

I originally wanted to use AUD as an proxy, since Australia is the world's largest quarry and soon-to-be largest gold mine. Unfortunately, their currency was not floated until 1983, which happened to be past the prime.

http://en.wikipedia.org/wiki/XEU

It looks like I won't be able to find the XEU for the period, but I'll see what I can dig up individually. I'll search the academic papers first and see if someone's done work in this area.

http://www.eia.doe.gov/oiaf/ieo/pdf/tbl8.pdf

Russia and Iran has the top two shares of the world's reserve of natural gas, accounting for 27.8% and 15.6% respectively. US has only 3.1%.

Owner Occupier -

the commodities are running again, but the difference this time is not just the US, Europe and Japan are buying. Since the american economy is in a shambles if you consider the trade deficit and 8 trillion dollar debt, things might be considered much worse comparative to anything that was happening back in the 70s 80s.

Regardles of what investment bankers are pulling down as compensation these days ;>

Look for commodities to weaken as the US dollar takes a hit

tsusiat,

I agree with you on all your points, but, as far as CAD is concerned, US accounts for 85% of Canadian trade. Now how much of that is inelastic demand (like oil sands), and how much of that is elastic demand (like Blackberry) I don't know. But I do expect all trading parties of the US to be adversely affected to a certain extent if the American consumers go on strike.

So I am not sure if I can expect a 2x return on CAD if one gets in now. But I think the worst thing is of course staying in USD, just my opinion.

astrid,

just in case that you ever need to call your grandmothers telling them to buy gold, don't buy in the gold stores in Shanghai, you pay through your nose for the craftsmanship which doesn't keep its value. You can get gold bullion or small gold bars at Bank of China in Hong Kong for a smaller markup than we pay here. It is about HKD 150-200 ($20-30) per bullion or gold bar.

O.O., that is incorrect. In 2004, I asked a friend to check out coin prices in Shanghai when he went back to visit. According to him, there was almost zero markup when one bought official gold coins (Panda) from the banks. I was thinking of opening an on-line coin store. Then I found better things to do.

GC,

the markup is in the price itself already. Why do you think so many Chinese go to Hong Kong for shopping, especially at the jewlery stores?

The gold bars at Bank of China in Hong Kong is sold at spot price * ounce + HKD 150 (or 200, I can't remember) processing fee.

Also, at that time there was a limit as to how many coins an individual could buy. But you could get around the system, of course. I gave up because the insurance and shipping cost from Shanghai to my US customers will be high enough to eat up 1/2-3/4 of my margin.

Real coin dealers get their coins way below spot prices. Many got their coins from widows who, under grievance, unwittingly sold the deceased men's boxes of coins for obscenely low-ball prices. Someone once commented that the coin dealers are in the undertaker's business.

This european central bank paper isn't on quite point, but it might be interesting for you hardcore econ guys

http://www.ecb.int/pub/pdf/scpwps/ecbwp365.pdf

This ECB paper may be on point

http://www.ecb.int/pub/pdf/scpwps/ecbwp452.pdf

Here's CEPR's dataset page. I'm not educated enough to know if there's anything useful. The CEPR appears to have produced several quite on point papers, but they're not free.

"The Euro and the International Financial System" is quite promising based on description.

http://www.cepr.org/Data/

Here's another one, named "China and the Relationship Between the Oil Price and the Dollar"

http://www.cepii.fr/anglaisgraph/workpap/summaries/2005/wp05-16.htm

I'm still digging.

One of my simple joys in life is to go back and read the posts from the previous day that are way past my bed time. People are off work, at home and relaxed and are free to get "out of character". As I reviewed (and snickered) I thought this was indicative of "last call". Then I noticed it started right after my last post at 3:04PM! Damn! Whahappen? Me no know!

Anyway, Rich Toscano did a great piece on why we were NOT WRONG in 2003, 2004 and 2005. Just b/c housing prices continued to escalate doesn't mean it was right. He drew a great NASDAQ analogy which meant even us stock jocks/traders can understand.

Very funny and very sad piece (Another Mortgage Firm in Trouble) about former jock Scott Greenlaw and his Kirkland, WA based Merit Financial going from 12 employees and 50 mil in loan volume to 430 emp. and 2 BIL in just 4 years! 2 days after Ameriquest lets 3,800 go Merit is considering BK. I have worked for guys just like this. It's incredible. Don't you just wish you could have been there for all the rah, rah pep talks and great sports/sales analogies? Don't you wish you could have been there when they had the company party and Scott told all the brokers about the time they were 4th and goal with only 3 seconds left on the clock? Previously Scott had been with 3 RE firms in 3 years. Yeah, we all know this guy. EVERYONE is DISPOSABLE in this guys equation. The mortgage brokers (and their lives and livelihoods) certainly the back office support people and last but not least "his" clients. To guys like this, everything is "his".

Conor,

"I'd gladly take that loss"

Here, here! I have a few S+P 500 short positions as a hedge that obviously haven't panned out. Gold is at like a 2 decade high, oil at uncomfortable levels, the HB is burtsing before our very eyes and by all rights the S+P 500 is over valued. I, like you am only too happy to field a few "disgruntled" calls. No big. If George is right and this is "The Summer of It" we'll break even. If "It" never materializes this summer we'll have dodged not a bullet but a cannonball and I'll go into Labor Day feeling pretty good about myself. Happy Cinco De Mayo to all!

Just a note on the mission of the Fed:

It's not the Fed's mission to intervene in the dollar, either weak or strong. At least not explicitly. We have maintained a free-floating dollar exchange rate policy for many decades, and it has served the US incredibly well. Except for a very few exceptions, any nation that has endeavored to fix or peg their rates has suffered terrible consequences, eventually.

Some things the Fed does affect exchange rates indirectly. But, to be fair, fiscal policy traditionally has a much bigger effect than monetary policy on immediate FXR. The fiscal policy is controlled by Congress and the President, not by the Fed at all.

This will all become moot soon anyway as the Fed is moving towards an inflation target policy. All the Fed watching mysticism will be a thing of the past as the Fed's intentions will be directly interpretable from inflation data. And I may be in the minority, but I don't really think the M3 thing is a big deal at all. A lot of people are making a huge stink without really knowing the relevance of the M1, M2, M3 distinctions.

People basically don't actually make things anymore. Not in this country anymore. Wages are still at 1997 levels across the board. So what do you do if your country no longer has ligitimate ways to make money? Why you find little trinkets to invest in that hopefully someone else will. If you're lucky, that trinket will win the popularity contest, hence you win! But if some other trinket is found to be more desireable or promotable, then people might dump the old thing for the new thing, hence you might lose money. So one day it's worthless dot-coms that employ funky arty grad students. On another day it might be houses. Then it might be google, or the Chinese equivelant Baidu. Tommorow it might be gold, uranium, silver, lead, tin, or coal. All one nice big game that's powered by little rumors, theories, letters written by "experts", and economists. There are sides to take, teams to cheer and people to win over to your side.
Why? Because most Americans know they're in deep doo-doo and are scrambling like little animals trying to cover their asses. SO there they go. Someone said this metal is trading high. Some say that Austin could become the next BA, so investing in RE there is a swell idea. Others can't help but notice that Gas is going through the roof, so oil futures look ripe. buy buy buy because it MIGHT be worth a LOT of money someday. Others in Las Vegas also see a little white ball bouncing around a spinning disk. If it lands on black, 13, then they will win!
The words that sums up what every american thinks about every day , myself not excluded is A: IF and B: Greed. Simple.

Randy H,

Thanks for the affirmation and while you may be in the minority I can say with confidence that you're not alone by any means on the "M3" issue. I have friends that are bond traders and when I breathlessly confronted them about it they gave me the typical bond trader "eat sh@t and get out of my face" look. I may not fully understand every nuance in their distinctions but if they're not worried about it why should I?

I'm really torn here. On one hand I firmly believe that trading gold is the domain of gold traders. Guys that walk, talk, eat, sleep and live this stuff. Guys w/ three ex-wives and some very nasty habits. They will crush you and your position, ruin your life and then brag about it.

On the other hand, we have some extenuating circumstances here (that George describes quite well above). I understand that Warren will address the annual shareholders meeting and discuss (among other things) preparing for the future of an even weaker dollar. If these strategies are appropriate for Berkshire holders why not other mainstream investors?

NIA

SQT,

Now that you mention it I distinctly recall your questioning gold, it's relevance and the potential for it to become the next bubble. Perhaps bubble would be too strong a word. Undue attention?

Just a contrarian warning on the Chinese as a source of gold-demand. It's been known for a while, and just reconfirmed earlier this week, that the Chinese have non-performing loans in excess of their foreign reserve holdings.

Take a moment and think about that. Chinese banks are very heavily regulated to the point of directly enacting government policy. They regularly make intentional "bad" loans as part of Chinese "capital sterilization", which is how they keep capital controls in place there and prevent flight of capital. Without these controls they couldn't control both the RMB and internal inflation.

Now, it turns out, they have sterilized capital in excess of all the USD denominated debt they hold. Of course they're buying gold. And they're buying more EURs, and they're buying even more USDs in record amounts.

This doesn't automatically mean that gold will go up as a result. If the Chinese simultaneously are demanding and devaluing gold, then the results are uncertain at best.

I hear gold talk all the time, at cocktail parties, in offices, amongst neighbors. I also hear a lot of people "buying" gold from real rip-off outfits; they types that advertise on AM radio with scare-tactic ads.

I don't know if gold is in a "bubble" now, but it has been in bubbles before, and not all that long ago. Gold has a nasty tendency to be very volatile. When global economic rebalances occur, gold will reflect the expectation of those rebalances before they occur.

This is what DinOR was getting at. Commodity traders, and now hedge funds, will take into account what all the common retail investors are doing and use that to their advantage -- and not to your advantage.

I don't object to putting a little gold into your portfolio, if it makes you feel good. I'm a quant-driven portfolio investor. It's pretty damn hard to get a portfolio that hits the efficient frontier with more than a trivial gold position. In fact this is true of most commodities.

If you believe gold will go up, then buy some.

But know your actions for what they are: speculation. And, as a speculator you can lose as easily as you win; probably more so if you don't know what you're doing. Otherwise you're just as well off betting on something you know more about, like maybe horses or your favorite team. Seriously ask yourself: "why do I think gold will go up; do I really understand the global macroeconomic factors and microeconomic cyclical industry factors that drive gold price and volatility?" If you're going solely off of "gold-standard", "M3", "fiat-money" arguments, then all I can say is good luck.

Conor,

Whoa! I'm not in any way taking a cheap shot at your position. And I don't have anything in particular against "gold bugs". Investing, hoarding,trading or otherwise. The metals bring balance and are a great "foil" (no pun intended) for paper currencies. The reason that so many WWII shipwrecks were scoured was b/c at the time currencies were fluctuating wildly and gold was a means to pay for fuel as it was universally recognized. I have been long gold, and I've shorted gold but always under the careful guidance of someone that did it for a living. I'll further agree that when we look at the market in 2003 in spite of the champagne corks a poppin' the devaluation of our own currency actually made it a down year. So I do hear ya.

Randy,

just consider the bad loans in China as a matter of massive internal debt in Japan, they are essentially the same thing. These bad loans are typically tied up in inefficient state-owned enterprises, investment in infrastructure and real estate. Most of the parties involved are all Chinese.

In 1999, there was a bank run in the rural area that was never reported in western press. I happened to be in China witnessing this whole event. What happened was, the government decided to get rid of some rural banks (co-ops, thrifts) so as to ensure a better monetary control because there was a big underground banking system going on. The way to do it was to "forgive" all oustanding loans in the shut-down process. You can imagine what kind of reaction it stirred up among the depositors. Well, let's say they dealt with it the Chinese way, lots of persuasion, one-on-one talks, and lots of lined up troops ready to be deployed. Somehow these depositors were resigned to the fact that they would be losing their lifetime savings. It may sound very strange to anyone growing up here, but I can tell you I am not surprised to see such a reaction.

Tracing back, the current Chinese government confiscated all land ownership in China, so what can a bit of loan obligation to its own citizen bother them? The only problem going forward is, if they don't loosen up their exchange rate, they won't be able to afford importing raw materials any longer. Only loan obligations involving Non-Chinese will matter.

One of my best friends is the head in Hong Kong managing a top international private bank outift serving HNIs. The average account size is north of $5M, although the minimum requirement for entry is only $1M. Most of their clients are based in mainland China. These accounts have been aggressively buying gold since late 2005, not trading, but hoarding, buying without selling. Whether this is indicative of a general sentiment or not, there is no conclusive answer at this point. He also says it is very likely that the Chinese government could acquire gold itself through private operations so as not to attract unncessary attention.

If I was to invest in metals, I would have gone with Copper which at least has some use.

Copper, zinc, molybdenum and such are easier to deal with because they are driven much more by micro economic factors, which means you can take industry forecasts and such into account. Gold suffers from being a speculative carry for all kinds of shenanigans.

That said, hedge funds are doing a pretty good job of mucking up copper and zinc these days.

SQT,

Oh and I do hear you. Yes I have been at "social functions" where gold was mentioned more than once. I, like you (and your husband I'm sure) have gotten a little threadbare about trading one bubble for the next. Let's do this instead, gold traders, you go play nice amongst yourselfs, brick kickers go do your real estate thing and get back to some semblance of sanity vice huge waves of people chasing the next big thing already!

Just put it simply, people who are hoarding gold are treating it as if it were the true USD as our founding fathers would have liked it.

It is just a store of value of keeping scores. How do I know that after years of work, I am eventually richer than my neighbor? THe original way would be measuring my wealth by counting Hahas. Now that the Fed is polluting my Hahas by manufacturing too much Hahas, making mine less valuable, I need to find a better way to store the fruit of my hard work.

If the Fed at any time is showing me with their action that they are restoring the credibility of USD, I am very happy to store my fruit in USD. Until then, I am relying on gold to keep the purchasing power of my already-earned money.

Mr. Vincent,

Phelps Dodge is a great way to work the "copper play". Someone once told me that a one cent uptick in the price of copper translates to 18 cents in earnings for PD.

NIA

Conor,

I wasn't directly implicating you. I'm reflecting a lot of what gets discussed on this blog vis-a-vis gold. I've heard it all: fiat money causing doomsday due to M3 manipulation and the evil Fed cabal of global central bankers seeking to enslave the masses with electronic currency and the mark of the beast.

I don't mind people speculating. I just like to call out the fact they're speculating.

Holding things denominated in dollars is not speculating, except in some philosophical sense. Holding dollars in the bank (in excess of consumption needs) is simply part of a portfolio decision. You'll probably want some there in case you're wrong about the future; for example deflation (as unlikely as it is).

By the way, a few months ago there were at least a half dozen people in here arguing quite passionately that we were on the edge of global deflation and depression. They used the exact same gold arguments to support that conclusion. I find this interesting given that these two lines of argument are contradictory yet always result in "buy gold".

And, just for clarity, gold is not a currency. It is a vehicle by which you can carry speculation on currencies. Even during most of the "gold standard" era, gold was not a currency, it was just an exchange-rate base mechanism. They regularly revalued exchange rates to correct for gold price movements. It was mostly the same as the system we have today, just a whole lot less efficient and prone to massive manipulations by central bankers.

Stock market bubble, housing bubble, or the commodity bubble, are all product of ONE reason, there is too DAMN MANY US dollars floating around!

If someone doesn't turn off that tap, there will be endless bubbles to come, because if you happen to have lots of US dollars falling on your lap, what will you do after you have bought everything you want to buy and there is still plenty left?

If you leave your USD in the bank, you know it is getting inflated away. So the only choice is for you to find something to own, so hopefully as USD devalues, that thing you own will keep its value. That is the game that we have been playing for the last 10 years. It will keep going on if there are more M1, M2 M3....being dropped from the helicopter as we speak.

Grammatical Note:

If you're from the "southside" (yourselfs) is actually correct english.

"You's guys" is also acceptable.

As in accepting a gift.

Awww, you's guys should'n have!

OO,

Couldn't agree more. Stephen Roach used to talk about getting the "cost of money" right but was labeled a kill joy. Now that he's turned to the darkside I'm not so sure?

Can we get some nominations in for the most paranoid, fear mongering and exploitive "gold" web sites. I've been on a few that were so motivational I was ready to start digging a bunker in the backyard. Children and dogs living together!

Conor,

I hope you don't take my arguments as an attack directly on your position. I can come across heavy handed at times. I just worry that a lot of people read stuff in the blogosphere and make very risky decisions based upon what they read. I happen to think that gold is not for most people. Having said that, I have a commodity portfolio which holds a position in gold, and other metals, energy, and agriculture.

But I have a command on what my "discount rate" is. It's easy for someone to read your quite compelling, logical arguments and determine they need some gold. I just want them to be sure they've put their financial house in order first before they make such portfolio decisions. Since *most* people have nasty credit card debt, unflattering home equity loans, and other forms of high-interest, variable rate obligations, they shouldn't put a single penny (or it's true copper+zinc value) into anything other than bringing down their personal discount rate. When they get that close enough to be affected by inflation, then go ahead and figure out how much gold to put in safe keeping.

Mr. Vincent,

why is it lagging the general commodity performance so much?

By the way, we discussed the "Penny Arb" a while ago on my blog. It is currently *theoretically* possible because the value of copper + zinc in a penny is worth more than a penny. We came up with 3 problems, and 1 solution:

1) It's technically illegal to destroy official currency in the US. Perhaps you could melt the pennies in Canada or Mexico and get away with it though.

2) Production costs (as said earlier) exceed potential revenue. Again, with enough scale you could probably achieve an efficiency in excess of fixed and variable costs.

3) The US Gov't: they would almost surely use penny-arb as a reason to finally put the penny out of its misery. They' probably take all the small change out at once.

Here's the solution, as unseemly as it is:

Scrappers/salvage operations are wonderful vehicles of money laundering in the US. Copper salvage operations in places like South Chicago already "lose" money, but they do a booming business. So much so that pipe-hounds run around cutting copper pipe out of apartment building basements to sell to them. Turns out most of these operations are scrubbing money for organized crime, most likely drug trafficking related.

So, you could ostensibly run a penny-arb at a scale small enough to escape Congressional review of the penny but still making money for your arb. You'd just have to be ok with the types of guys you'd be doing business with, and the ever present risk you'll probably go to jail for a very long time eventually; and that's if you're lucky.

Btw, I am not getting the stock market any more. How can TOL trims sales forecast and then their stock shoots up 2%? Then, we have a job growth slowdown and DOW is up almost 1%.

Now I understand why I have to invest in commodities. I am too old for this new-age stock market.

Btw, I am not getting the stock market any more. How can TOL trims sales forecast and then their stock shoots up 2%? Then, we have a job growth slowdown and DOW is up almost 1%.

Because everybody looks at the Fed now? I remember strange things towards the end of the last bubble.

Now I understand why I have to invest in commodities. I am too old for this new-age stock market.

Stocks prices are too anticipatory. It is too difficult to anticipate the anticipation of the market.

1) It’s technically illegal to destroy official currency in the US. Perhaps you could melt the pennies in Canada or Mexico and get away with it though.

Are pennies exempted? Remember those machines in tourist spots that crush pennies into souvenir?

Are pennies exempted? Remember those machines in tourist spots that crush pennies into souvenir?

I don't think so. I just think it's not enforced because it doesn't hurt anything. If you were to start destroying thousands of tons of pennies a week, they might well decide to enforce those laws upon you.