Adam Katz

U.S. Dollar Strength and Implications for Gold

Thanks for pointing that out tb1975. My apoligies to everyone.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Just to clarify to everyone, I am referring to the trading of gold here, not the physical ownership. Over the next few months I will feel more comfortable trading gold bullishly against exporting currencies. The US has not produced anything for a while, so when we see extreme trade deflation, those countries which have been producing get hit hardest. When economic numbers come out over the next few months, we will see more evidence of trade deflation and job losses as a result. These exporting economies will purposely devalue their currency long before the USD will crash. That being said, in an absolute sense the USD is weakening from the Fed action, but other currencies are weakening MORE - thus on a relative basis the USD is strengthening and will likely continue to do so against exporting currencies.

From TradeTheNews:

Treasury nominee Geithner reaffirmed the US Goverment's opposition to currency manipulation, and view that trading partners should operate flexible currencies, under the Obama Adminstration

Gold as an Investment? Think Again

Dividends are not reflected in the total return of the dow.

You are referring to the adjustments made in the dow divisor which keeps the value of the index constant. If ABC is trading at $30 and they pay out a dividend of $0.50 (company value now is $29.50 + $0.50 dividend), then the divisor adjusts because the index is price weighted and it's value shouldn't go down because the company paid out a dividend and is now worth $29.50.

To think about it another way, the dividend comes out and the DJIA doesn't assume that it gets reinvested. If all companies retained 100% of earnings then this wouldn't be an issue because reinvestment would be assumed. Because of the exponential effects of the time value of money, it actually makes a substantial difference in the long run.

Reference: siepr.stanford.edu/pap...

Go back 10 years and you just see more volatility and another gold bubble.

Thanks for your input.

Gold as an Investment? Think Again

Just a quick response for that lovely previous comment. Run a regression analysis on gold and inflation. Even using CPI, which you would likely feel underestimates inflation, gold STILL hasn't kept up with that low measure.

Also if it truly tracks inflation, why then would gold crash after the inflation of the 70's? Dollars had been debased, and we obviously know prices continued to rise after that, albeit at a lower rate, why wouldn't gold have leaped up and then slowly staggered up continuously. In fact, there's inflation every day as the printing presses are almost always running and the Fed is almost always active, so why wouldn't gold just move up continuously on a daily basis?

Mr financial advisor, HUI is an index of gold producers not of gold itself (i hope you make this distinction to your clients). Producers fill my yield producing profile and will have better returns than gold itself in the long run. If gold crashed, the producers would still make money.

Lastly, check out the COT reports. Not only are producers historically short gold, but the public is historically long (excluding ETFs). If you include ETF's then the public is definitely heavily invested in gold. But I guess your world of 100 people in the same socio-economic environment is a better indicator than the CFTC's reporting mechanism.

Gold as an Investment? Think Again

1) Deekay, there's no way you are up 400%. That would mean you got in at $200 and out at $1000. Also if you kept it all in a safe in your house then you were taking risks that you weren't compensated for. Your entire wealth could've been destroyed in one night had you been robbed. If you paid to get it stored, then your returns are even lower than you implied.

And with regards to the time frame, you proved my point. How can you compare gold today to when it was fixed? How can you compare the returns of buying gold while its fixed and selling it many years after free-floating? Moving forward the environment's characteristics will be more similar to the past 30 year period than the past 100 year period. If i was really trying to manipulate the data I could've gone back to the 70's and shown 0 return if you bought in the 800's.

2) Yellowstone - Gold bugs tend to make arguments that their predecessors made and that they feel are unchanged. You call gold transportable, yet in today's day and age currency is incredibly far more transportable. Gold held significance because it was small and light yet still valuable. Nowadays it's a hassle. There's also more risk in transporting gold across the world than sending a money order or a cheque.

Ironically people are accusing me of selecting a particular time-frame (which I believe I have defended well), and now I will do the same to yellowstone. Dotcom shares did tremendously leading up to the bust. Nothing did better than housing derivatives up until a year ago, and now nothing is doing better than gold. It may even continue to outperform in the short term. My argument is the long term opportunity cost of capital.

3) As stated in the article, my main focus is on those who have most of their money in gold. Those who's portfolio movement is explained largely by the movement in gold price. As stated in the article, a small holding can be a good insurance, but it's insurance, there's a premium to be paid. That premium comes in the form of lower returns when the market is functioning normally and the insurance comes into play when we have a run of crisis' like we've seen in the past 7 years. If they continue to compound on each other, gold will rise, but regardless of if you bought into gold or not, your standard of living will decrease substantially.

So to the gold bugs, keep praying for a nuclear war, I'm sure you won't be singing and dancing in the streets when it happens.

Gold as an Investment? Think Again

1) brewtul I compared nominal gold returns to nominal dow returns. Gold has significantly underperformed inflation. To take that further, on an inflation adjusted basis, you would have preserved far more purchasing power holding equities than gold. Also, the gold chart doesn't reflect cash outflows for insurance and storage, just how the dow chart doesn't reflect for dividends.

2) The past 30 years are actually more appropriate than the all time movement of gold. In the 70's, it was the USD or gold, you weren't exactly running to stick your money into Chinese Yuan. Looking further back than that, gold was fixed, and before that, gold was very important in trade as a form of money. So now we have stable alternatives. My argument is that escaping the USD will be absorbed through the variety of alternatives instead of a concentrated blow on one asset, which has historically been gold.

3) YES! The USD is being debased, look at the USD index! Yes gold may rise in USD terms to $1500 or $2000. My argument is that because of the relative benefits of being in a currency like the Euro, a 100% rise in gold from USD weakness will be met with a 100% rise or more in the Euro. REMEMBER: You can't just look at the chart. You have to remove storage and insurance costs from gold returns and add in interest received from Euro deposits. You are more beneficial being in a yielding asset where the capital has mobility and is being used constructively.

4) The lead thing got a little out of hand. I'm not talking on a supply and demand basis, theres no in depth financial analysis here. It's simply a commentary that if things got that bad you wouldn't be sitting in monte-carlo! You would be huddled in a cave somewhere, if you're lucky to be alive. You could have a stack of gold behind you, but at that point you would trade all that gold for a gun and some food to protect your family.