where are the gold threads?

[haha]

Quantitative easing was recently reduced. And look how the stock markets have behaved since.

Perhaps even more telling, the ECB has stepped into quantitative easing in a big way and in spite of this stimulus their market is not exactly going wild.

(I'm not planning to remain this vulnerable, I'm trying to design a diversified portfolio, but am not ready to buy equity at this time - I hear the Bogleheas go "boo hiss!" and do understand that I may be foolish to try to somewhat time my entry point; value investors on the other hand maybe would agree that entering at a lower PE10 wouldn't hurt, provided such a lower PE10 presents itself)

Your looking for value doesn't seem foolish to me, quite the contrary. In my practice the foolish thing is to not pay attention to valid measures of valuation of whatever a person may buy. And realistically, all investing when one gets beyond insured savings and high quality short duration bonds is speculating. Some things are smart speculations, many more things are dumb speculations. I am long gone from gold, though I have invested in gold and gold miners on and off for close to 40 years. Gold may be getting ready to go to the moon, but it is starting from a high enough perch that a big fall could be very harmful. I tend to be very aware of risk in any investment, and my experience has been that risk goes up with price, even if this might be contrary to some academic's theory. In fact, I usually take comfort if my practice is contrary to Professor Ivory's research.

Ha

 

[endthefed]

I am a European citizen living in the US, so I can relate to this. From 2001 to 2007, I have seen the dollar lose about half of its value relative to the Euro (and even more relative to gold). Yet I saw no change to my lifestyle (my own personal inflation rate is close to zero over the 2004-2009 period) because the majority of my wealth was denominated in the same currency as my spending (US$) so the exchange rate was of little importance as long as I did not have to spend money in Euros (or in gold). Of course, had I moved back to Europe in 2007 or had my supermarket decided to require payment in gold bullions, my wealth would have taken a huge hit.

Edit: Lately I have started to denominate my finances in onces of gold as an exercise. I found that, between 2004 and 2009, my net worth (in oz of gold) managed to increase about 20% despite the big increase in gold prices vs. the US $. It was still disappointing given how aggressively I have contributed to my portfolio between 2004 and 2009. But imagine my surprise when I found out that, in the mean time, my expenses (in oz of gold) have plummeted about 60%! So I am in fact much better off today with the once of gold near $1,200 (NW = 23 x expenses) than I was in 2004 when the once of gold was near $400 (NW = 8 x expenses), despite the fact that the vast majority of my assets were denominated in US dollars all the while.

fascinating analysis. it's a unique way to show gold's gains against paper and things priced in paper.

the dow/gold ratio is down to ~ 8 to 1. i think it will go to 4 or 5 to 1 before gold's domination is over (10+ years and counting so far..).

 

[brewer12345]

Perhaps even more telling, the ECB has stepped into quantitative easing in a big way and in spite of this stimulus their market is not exactly going wild.

Ha

I have not followed it closely, but I was under the impression that the ECB was sterilizing its purchases of sovereign debt, no?

 

[haha]

I have not followed it closely, but I was under the impression that the ECB was sterilizing its purchases of sovereign debt, no?

I have read this, and if it is being fully implemented I guess this might explain the lack of market response. There could also be another issue. If the ECB is actually sterilizing these purchases of troubled assets, they are effectively destroying their balance sheet by replaced good assets with troubles ones. As an investor, I would have doubts about this too.

I have another question I hope you will address, Brewer- in your description of merger arb funds you gave the bulldozer analogy. Thinking about this, how exposed they are depends on how highly correlated the closings of their separate merger bets might become in times of crisis. I can see these closings today as more or less independent events. What was the experience during the credit crisis?

They may be good investments in any case, but this is the gotcha factor that I wonder about.

Ha

 

[brewer12345]

I have another question I hope you will address, Brewer- in your description of merger arb funds you gave the bulldozer analogy. Thinking about this, how exposed they are depends on how highly correlated the closings of their separate merger bets might become in times of crisis. I can see these closings today as more or less independent events. What was the experience during the credit crisis?

They may be good investments in any case, but this is the gotcha factor that I wonder about.

Ha

You are welcome to analyze to your heart's content, as the funds I invest in are registered retail mutual funds. I own both of the two merger arb funds that I know of, MERFX and ARBFX. MERFX has a longer track record and slightly lower expenses, but is bigger and therefore slightly less nimble. As I imagine you will have no trouble believing, there are plenty of hedge funds doing this stuff, ranging from specialists to just occasionally dabbling.

MERFX looks to have had two negative years in the last 20, down 5.7% in 2002 and 2.3% in 2008. Details: MERFX: Performance Overview for MERGER FUND (THE) - Yahoo! Finance

ARBFX looks to have had two down years in the last 10, down .2% in 2005 and .6% in 2008. Details: http://finance.yahoo.com/q/pm?s=arbfx

Note the expense ratios and the lack of tax efficiency.

 

[haha]

Thanks Brewer. Can you say how you see the risk I mentioned?

 

[Gone4Good]

Easier still--build an extreme strawman argument and then ridicule it.

If the shoe fits . . .

 

[brewer12345]

"Middle-age spread: Long the spot, short the distant months."

Ha, not sure if you have ever tripped upon Wallace & Grommit, but they had another take on the subject of your tagline.

 

[RonBoyd]

Of course I should note that whether any of this is a good idea or even appropriate as an investment for any particular person is an exercise left up to the reader...

You're a mindreader, also.

 

[brewer12345]

Thanks Brewer. Can you say how you see the risk I mentioned?

Absolutely, I understand the risk you mention. I think that the possibility of ramping up of correlation of deal failure risks is a very real issue, although difficult to quite put my arms around. I think that the performance record of these funds through some very challenging environments ('08-'09 in particular) suggests that it is perhaps less than terrifying, though. I also suspect that in a crisis environment (when correlations gap toward 1, generally) merger arbitrageurs who are not leveraged have some innate protection in that these are frequently partially or all equity deals on both sides (i.e. company A is really offering its shares in exchange for Company B's shares), so the arb position is long the target, short the acquirer. In such cases, when everything goes into freefall both the long and the short equities drop and you are more or less market neutral.

 

[FinanceDude]

In 2008 all the forces of government were used to stop the financial collapse, with good effect. Now those forces are starting to be thrown into reverse at a time when inflation trends are still heading downward . . . Japan here we come!.

Someone has been hitting the Tiki Bar a little early for some Mai-Tais.......

 

[haha]

Absolutely, I understand the risk you mention. I think that the possibility of ramping up of correlation of deal failure risks is a very real issue, although difficult to quite put my arms around. I think that the performance record of these funds through some very challenging environments ('08-'09 in particular) suggests that it is perhaps less than terrifying, though. I also suspect that in a crisis environment (when correlations gap toward 1, generally) merger arbitrageurs who are not leveraged have some innate protection in that these are frequently partially or all equity deals on both sides (i.e. company A is really offering its shares in exchange for Company B's shares), so the arb position is long the target, short the acquirer. In such cases, when everything goes into freefall both the long and the short equities drop and you are more or less market neutral.

Thanks Brewer, I will definitely look at the funds you mentioned.

Ha

 

[Tigger]

Your looking for value doesn't seem foolish to me, quite the contrary.

Thanks!

Gold may be getting ready to go to the moon, but it is starting from a high enough perch that a big fall could be very harmful. I tend to be very aware of risk in any investment, and my experience has been that risk goes up with price, even if this might be contrary to some academic's theory. In fact, I usually take comfort if my practice is contrary to Professor Ivory's research.

That's food for thought.

Do you by any chance have a webpage or a post where you elaborate about your approach to investing or lessons learned from 40y in the market? I wanted to check out your posts, but you're eh... quite the prolific poster!

 

[brewer12345]

Thanks Brewer, I will definitely look at the funds you mentioned.

Ha

Hmm, not quite my point, but if you see anything untoward other than what I have already mentioned I would be keen to hear it.

 

[harley]

Of course we do. It's obvious to anyone willing to look at the facts. But not everyone is. And that is because many people aren't conducting an economic analysis, they are engaging in political argument disguised as economic analysis. You see, government intervention couldn't have been beneficial because government is always bad. Don't you remember Ronald Reagan "Government isn't the solution, it's the problem"? Well that is a universal truth, to some. And it is applicable in every situation, without exception. So all you need know about the current crisis is that there was a massive government intervention and then you already know the outcome . . . it's very, very, very bad. We don't need to look at the facts. We don't need to consider how the decline was arrested and how all of the worst case predictions failed to materialize. All we have to do is project future calamity 10, 15, 20 years down the road. That way we can pretend forever that "it's too soon to tell". It's far easier to do that then to admit that your world view is flawed.

You're right, the massive bailout process prevented economic collapse. I don't see how anyone can argue with that. It's like if you lose your job and all your investments, you can just put all your purchases on a charge card. Even better, on someone else's charge card. Bingo, troubles are over! It's just taxpayer money, and it doesn't have to be paid back yet. Live a little! Enjoy! There can't be anything wrong with a plan like that. And if anyone says there is, they're just full of sour grapes and trying to make a political statement. There's no reality behind it. See, look at these pretty little charts! They prove it.

These are not the droids you are looking for...you can go about your business...

 

[FinanceDude]

You're right, the massive bailout process prevented economic collapse. I don't see how anyone can argue with that. It's like if you lose your job and all your investments, you can just put all your purchases on a charge card. Even better, on someone else's charge card. Bingo, troubles are over! It's just taxpayer money, and it doesn't have to be paid back yet. Live a little! Enjoy! There can't be anything wrong with a plan like that. And if anyone says there is, they're just full of sour grapes and trying to make a political statement. There's no reality behind it. See, look at these pretty little charts! They prove it.

These are not the droids you are looking for...you can go about your business...

 

[haha]

Thanks!
I wanted to check out your posts, but you're eh... quite the prolific poster!

True, and most of them are worse than useless!

No, I don't blog about this or anything, I am not selling anything, and I find it can get tedious fast to explain complex and perhaps contentious material for free.

Hmm, not quite my point, but if you see anything untoward other than what I have already mentioned I would be keen to hear it.

haha- I understand that you are not shilling these things.

Ha

 

[RonBoyd]

Uncertainty Restores Glitter to an Old Refuge, Gold

And gold bugs, often dismissed as crackpots who hoard gold bars in the basement, are finally having their day.

To be sure, gold buyers have always been motivated by fear. What has changed is that some of the most respected investors on Wall Street are now among the fearful.

But now Mr. Arbess, a Harvard Law graduate and a generally conservative investor, is very serious about gold.

Spiraling deficits in the United States, Japan and Britain are unsustainable, he said, and could eventually hurt confidence in what are called “fiat currencies” — paper money not backed by gold, including the United States dollar.

 

[Gone4Good]

You're right, the massive bailout process prevented economic collapse. I don't see how anyone can argue with that. It's like if you lose your job and all your investments, you can just put all your purchases on a charge card. Even better, on someone else's charge card. Bingo, troubles are over! It's just taxpayer money, and it doesn't have to be paid back yet. Live a little! Enjoy! There can't be anything wrong with a plan like that. And if anyone says there is, they're just full of sour grapes and trying to make a political statement. There's no reality behind it. See, look at these pretty little charts! They prove it.

Is there an economic argument here, or merely a puritanical one?

Because if there is an economic argument, maybe you could walks us through your preferred alternative policy proscriptions and the implications.

 

[samclem]

To the gold bugs:
If things are really different this time, and we're heading into an apocalyptic collapse of "fiat currencies," what is it that makes gold an effective "store of value?" It has very limited and specific inherent usefulness/value in itself, its value is mainly founded on demand based on historical attraction and herd mentality with no underlying basis in utility. If it's really "different this time", how do you know the herd will run the same way?

I have a hard time understanding the logic which derides paper currencies as being based on nothing (and having worth only as long as people believe they do), but which doesn't acknowledge that the same is fundamentally true of gold.

 

[Nords]

To the gold bugs:
If things are really different this time, and we're heading into an apocalyptic collapse of "fiat currencies," what is it that makes gold an effective "store of value?"

Their fiat argument would have a lot more credibility if someone actually ditched the U.S. dollar.

Two years ago when the world's credit froze up, everyone scampered to the safety of the dollar.

I wonder when the Chinese are going to dump $800B of U.S. Treasuries for euros and... and... and... um, I'll think of some other currency eventually. Swiss francs? The British pound? Yen? Won?

I wonder when OPEC is going to stop calculating the value of a barrel of oil in terms of dollars. If they've given up on their plan for euros then maybe they could do it in ounces of gold!

 

[Nodak]

I had this discussion with a gold-bug friend in the late 70s. I tried to get him to understand that if civilization really did collapse, as he was sure it would within a couple of years, he would have a hard time eating all his gold. If you really expect civilization to collapse buy farmland then you can support yourself.

 

[calmloki]

Their fiat argument would have a lot more credibility if someone actually ditched the U.S. dollar.

Two years ago when the world's credit froze up, everyone scampered to the safety of the dollar.

I wonder when the Chinese are going to dump $800B of U.S. Treasuries for euros and... and... and... um, I'll think of some other currency eventually. Swiss francs? The British pound? Yen? Won?

I wonder when OPEC is going to stop calculating the value of a barrel of oil in terms of dollars. If they've given up on their plan for euros then maybe they could do it in ounces of gold!

China Wants Yuan to Replace the Dollar as Global Currency | Jutia Group

and, ahem, from the "Gold Speculator", so you know it's unbiased:

China wants new one-world currency ... IMF to save the world? - Gold Speculator

My niggling concern is that the Chinese are going to become the dominant power unless they can get all hung up in a nice expensive war that puts a sea anchor on their economy. Think they are too smart to conquer the US in a military way - just letting us defend against the attack they aren't pursuing while they build dominance in infrastructure and manufacturing. Much to be said for a unified system of government rather than a system focused on the Dems and Publicans tearing each other down and trying to hinder each other.

 

[RonBoyd]

My niggling concern is that the Chinese are going to become the dominant power unless they can get all hung up in a nice expensive war that puts a sea anchor on their economy. Think they are too smart to conquer the US in a military way - just letting us defend against the attack they aren't pursuing while they build dominance in infrastructure and manufacturing. Much to be said for a unified system of government rather than a system focused on the Dems and Publicans tearing each other down and trying to hinder each other.

My thoughts exactly.

(And just for the record: I don't own any Gold... or gold equities.)

 

[Purron]

I think I'd rather have goats than gold. I get this herb goat cheese at Trader Joe's that is to die for. Plus they mow the lawn. They're cute too.

Even the fainting ones...

YouTube - Fainting Goats