Trace Mayer

Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

123, I simply disagree with you on this issue so long as we define the spot price as the price for immediate delivery of a commodity. The reason I disagree is because there can be and are multiple markets of varying sizes throughout the world. Markets include the 1/10th ounce coin sold by dealers and the 400oz LBMA bars. The settlement price in a transaction is the gold price. A market price is usually computed and accepted by current market participants based on an aggregation of settlement prices. Because there are so many settlements and because the standard deviation of those settlement prices is widening therefore macro 'gold prices', such as either COMEX or London Fix, are losing their correlation with micro settlement prices. But even the macro prices have variations; this is how markets function. Therefore, there is no single gold price and what functions as 'the gold price', COMEX or London Fix, etc., is really a fuzzy number. In other words, the spot is the spot but the spot changes in every transaction and there are numerous transactions at once.

I also disagree with the Efficient Market Hypothesis. Because of inefficiencies arbitrage is possible. Dealers like Apmex are profiting from these inefficiencies to fulfill market demand. The spreads can actually make it much more difficult on dealers to remain profitable though; if you know anything about the coin business. The commission, bid/ask spread and shipping are only additional 'spot costs' when viewed as getting the commodity immediately delivered. When the COMEX fails then 'the gold price' determinant will shift. I wonder where?


On Feb 15 10:20 PM 123 wrote:

> I disagree with one aspect of your comment (copied and pasted below).
> The spot is the spot, anywhere in the world, for anyone.

Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

@123, I think the tulips is a perfectly legitimate example because they are a tangible asset. Under the Austrian school value is an individual decision based on human action and determined by personal utility preferences and with in aggregate the market determines price.

Tangible assets, like gold, silver or tulips, are subject only to exchange-rate risk whereas fiat currency illusions or money substitutes are subject to both counter-party and exchange-rate risk.

Therefore, in essence and hopefully without being too circular, when performing the pricing mechanism it can be stated that the intrinsic value of 1oz of gold is 1oz of gold or 1 tulip is 1 tulip. Exchange-rate risk is then present when 1 tulip costs 1oz of gold versus .5 oz gold. Bubbles do develop and currently I think fiat currency illusions, with US Treasuries, are the biggest bubble of all. Gold will get expensive one of these days.

These questions get at the point I think you are attempting to make: Do I think it merely possible that our fiat dollar illusion will someday collapse? If yes, then I should own gold as the safest and most liquid asset; as cash. How much? As much as I can comfortably rationalize, perhaps using some sort of calculation of the gravity of the harm -- i.e., financial wipeout -- discounted by my sense of the probability of its occurrence. Do I think it inevitable that our fiat dollar will suffer the fate of all paper currencies throughout history? If yes, then it is one’s dollar exposure, not gold “investment,” that must rationalized.

But to reiterate my statement at the beginning of the post “The primary purpose of these posts is to educate on monetary science and basic economic law and not to provide valuation opinions”. In other words, I have no idea whether one derives the utility and value from owning gold to rationalize to themselves the price. Whether one should buy gold is a *completely separate issue* from whether one should use gold to perform mental calculations of value. The use of gold as a mental calculation of value allows one to determine whether gold is expensive or cheap.



On Feb 04 10:13 AM 123 wrote:

> To Trace:
>
> I've been thinking about this and would appreciate your opinion:
>
>
> How does one know what the intrinsic value of an ounce (or whatever
> mass) of gold is? Isn't gold just as prone to a bubble as any other
> asset?
>
> For example, say gold goes to $2,000 an ounce. How does one know
> whether that is the proper price for the metal, or whether it is
> the result of lots of money pushing up the price? If asset inflation
> that pushes prices past reality (i.e. real estate, stocks), why can't
> this happen to gold or metals as well?
>
> I mean, two hundred years ago, or whatever, tulips were considered
> a good store of value for a short period of time. That's an extreme
> example, but still.
>
>
>

Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

@GeminiAtlas, no, one thousand ounces of silver is the correct forecast. Given the degree of amplified misallocation of capital due to the Federal Reserve I would not be surprised if it were less than five hundred ounces.

For comparison and based on the Case-Shiller the price of homes in silver:
1915 – appx 9,000 ounces
1922 – appx 4,000 ounces
1933 – appx 22,000 ounces
1935 - appx 8,000 ounces
1971 – appx 15,000 ounces
1980 – appx 800 ounces
2002 – appx 38,000 ounces

Please note these are approximations as I do not have the spreadsheet handy so please mind the immaterial differences as I think it gets the point across for a comment. Perhaps I should write an article with the appropriate research on this topic?



On Feb 04 09:15 AM GeminiAtlas wrote:

> If I did my math right, you say to buy real estate when it is worth
> $12,000 (~at current silver price). Did I miss a zero somewhere,
> or is it at 10,000oz. silver? Or is it in value/area? If it is
> 1000oz per house, that is a ridiculously cheap house, or silver is
> ridiculously undervalued.

Railroads Are Getting Cheaper (vs. Gold and Silver, at Any Rate)

Yes, that is a correction for the typo. Hope the typo did not confuse unnecessarily. Thanks makou.


On Feb 03 11:01 PM makou wrote:

> The statement earlier above "For comparison purposes on 8 Dec 2008
> gold closed at $767.25 and is trading around $900 on 2 Feb 2008"
> I believe the author wants to say
> 2 Feb 2009 instead of 2 Feb 2008.