Smarty_Pants

The Next Leg of the Crisis: Unavoidable Catastrophe

With apologies to the spirit of Rudyard Kipling, a sampling of one of his poems regarding man's tendency to repeat the same mistakes again and again:

Excerpts from "Gods of the Copybook Headings" (1919)

...
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.
...
In the Great Moderation of Greenspan we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four—
And the Gods of the Copybook Headings limped up to explain it once more.
...
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will bum,
The Gods of the Copybook Headings with terror and slaughter return!


There is indeed nothing new under the sun. Our banking crisis is simply a distant cousin of past events.

Why You Shouldn't Buy Gold Stocks

The author's prior question: "What happened to the thesis that gold stocks are a levered play on the price of gold?", was answered via response to his previous post.

seekingalpha.com/artic...

During 2009 gold stocks dropped 2x the amount gold dropped. During the rebound, gold stocks increased 3x the amount gold increased.

The gold stocks are STILL a leveraged play on the price of gold and they don't have an expiration date like the options he proposes as a 'better' leveraged play.

So is the conclusion we are supposed to draw that we should be buying gold options?

Why then does the author conclude:

"...gold stocks are trading vehicles ... For longer term investors, their risk-reward characteristics are bound to disappoint."?

Does the author mean to imply by the article that options are a preferred long term trading vehicle? That's great if your timing is faultless, but if not, you are left with nothing but an unfulfilled hope.

Every financial asset is a trading vehicle in one form or another.

The Increasing Velocity of Modern Financial Crises

What's with the "Meme" meme? You could just as well have said "Part Deux".

ECRI Forecasts a Smooth Recovery

"A weekly index of future U.S. economic growth ticked up to levels reached early last year in the latest week" - ECRI

The federal debt is much larger too. Mere coincidence?

Gold Bugs Are Warned, Again

"What happened to the thesis that gold stocks are a levered play on the price of gold?"

OK. Let's look at the numbers from your first two charts. By squinting I 'guestimated' these prices. Not exact, but close enough for a back of the envelope calculation.

Peak near March of 2008:
Gold: $1020
$HUI: $510

Bottom near November of 2008:
Gold: $720
$HUI: $170

Recent Peak:
Gold: $1220
$HUI: $500

So the percentage drop from March 2008 to November 2008:
$Gold: ~30% loss
$HUI: ~67% loss

And the percentage gain from November 2008 to today:
$Gold: ~69% gain
$HUI: ~194% gain

So to summarize, gold stocks lost at 2x the rate of bullion in the downleg and gained at 3x the rate of bullion in the recovery leg.

If that's not leveraged to the price of gold, then I'm a monkey's uncle. Sure, the stocks aren't making new highs like bullion is, but there is still plenty of "bonus" leverage in the miners for those who are looking for it.

Anybody care to try an experiment? Start with an account balance of $1,000 and put half in cash, half in $HUI. Rebalance to a 50:50 ratio at the closing price every Friday from March 2008 to today and let everyone know what the balance is now. For a vehicle that's still down in price over that interval we'll probably be surprised how much larger the balance is now.

All That Is Gold Does Not Shine

"I prefer to invest in productive assets." - searcher

A sensible stance. Putting savings to work and having them earn a good return is the cornerstone of building wealth. Just be thorough enough to consider the true state of your assets.

Owning a small, profitable, local business under your control may be preferable to owning a share traded on the big board or nasdaq. The local business will probably generate a much higher return on your money in the form of regular cash payouts, but it will take up a great deal of your time.

The idea of owning productive assets is great, just make sure that you fully understand what risks that business is taking to generate those returns if you aren't involved in running the business.

Lehman Brothers generated profits and grew as a privately held business for over a century before they went belly-up (which I'll note was shortly after they started trading as an independent stock on the public market in 1994).

Both paths can build your net worth, but don't be lulled into a false sense of security thinking stock in an S&P 500 company requires no effort to earn a secure return.

All That Is Gold Does Not Shine

What if you invested in Lehman Brothers?

Or Fannie Mae/Freddy Mac?

Your starting point also happens to nearly coincide to a local peak in the price of gold and a local minimum in the stock market. Re-run your numbers starting in 2000 and see how they change.

A one point observation is hardly a rigorous examination of any issue.

Gold Bugs Are Warned, Again

If you can get the timing right options are great. If we accept that the stocks provide roughly the same leverage, then the infinite 'expiration' date of a share might be preferable to a wasting asset like an option, which will eventually expire.

The Destruction of the Dollar: It's Nearly Inevitable

"the ... toilet paper that I bought for $0.24 cents a roll now cost $1.15 per roll " - Mark Anthony

He he. The joke's on you, I think. Eventually toilet paper will cost more than $1 a sheet and everyone can switch over to using dollar bills instead. As a bonus savings, they are durable enough to wash and re-use.

;-)

Is There a Case for Active Equity ETFs?

"I would have liked to see the author explain to those who don't make a living off creating etf's why an etf is better than a mutual fund" - Thomas J Gordon

Liquidity concerns might be one reason.

Mutual fund prices generally change at the end of the day*, where all trades take place at one price. ETFs are openly traded all day wherever the bid/ask numbers roam.

When Joe Q. Investor/Trader buys/sells a mutual fund the transaction takes place at the end of the day, buy/sell an ETF at the market and your trade is filled in seconds.

*I believe there are some mutual funds that trade more than once a day, but they are the minority and they are still at a fixed price and a given time of day for that price.

It's All About Gold

Gee, a whole 15% over the 50 DMA? And that's "overbought"?

How about the Nasdaq in 2000?

NDX topped out around 4800. At the time, the 50 DMA for NDX was around 2800. By my figuring, that's more than 70% above the 50 DMA for a market that was truly overbought in the grand sense of the word.

Gold ETF's are hardly in nosebleed territory. It wouldn't be surprising to see a consolidation period after the recent run up, but that will provide buying opportunities for those with patience and an eye for the long run.

An Alternative View on the Rising Price of Gold

"Gold has to keep rising if current buyers are to get any return." - David Pauly's article

When holders of dollars eventually get nothing for them, how do they calculate their "return"? See Weirmar Germany as a case study.

The primary rule of investing is: "Return OF capital before return ON capital." What good was high interest payments on WaMu bonds when they became worthless? Earn 10% for two years and then lose 100% in year 3. I could think of better investments.

Gold 'investors' simply realize that the odds of having NO return on the dollar are rising at a dizzying pace and they are taking steps to make sure that at least one of their assets, gold, will have value in the future, as it has throughout the entirety of man's recorded history.

After all, as the article points out, governments and central banks around the world continue to pay a lot of money to store and safeguard tonnes of gold despite the fact that it is earning nothing, yet nobody complains about how foolish they are to do so.

Why is it foolish for John Q. Public to do the very same thing on a smaller scale?

Thanks for reviewing Mr. Pauly's article. He would be well advised to 1) study history and 2) recall Ben Franklin's adage:

“The only thing more expensive than education is ignorance.”

Gold Gets Hammered on Jobs Data

Wow. Gold dropped all the way down to a price level first hit two weeks ago and already the nay-sayers are claiming the bubble has popped.

Are these the same people who continued to claim that the stock market was only in a 'correction' last March at 50% down?

Funny how the old rose colored glasses makes everything look different, eh?

The Gold Market Fights Back

"Oil stocks are a far better way to play the inflation scenario."
- Paul H. M.

Good point, or gold stocks. I've done very well with GDX this year and used last week's drop to buy a significant position in the new GDXJ at a good price.

Even this option comes with risk. Everyone knows that stocks are riskier than bonds, and we all know what a great deal the bondholders of WaMu and GM got once the gub'mint got involved. Ditto for shareholders of Lehman or Bear Stearns.

Any stock purchase carries with it the chance of your broker and/or their bank going under and you getting nothing back. Not likely under "normal" circumstances, but circumstances these days are hardly normal.

The Gold Market Fights Back

"Embracing a monetary mechanism that is going to fail with the next financial crisis or war is just pointless, in my view." - Angel Martin

Agreed. However, the current monetary mechanism is forced upon us via Legal Tender laws, so using the word "embraced" is only true because it's preferable to the other option of sitting in jail.

"Some gov't created gold standard or central bank is not going to guarantee the stable purchasing power of your savings. Like everything else in this world, you are going to have to do it for yourself, sorry." - Angel Martin

My personal opinion is that the real problem stems from the restriction on using only the gub'mint system. I think we'd all be better off if the choice of "money" was left to free market agreements between individuals.

You use paper if you prefer, I'll use gold or silver, and maybe others will use coffee, salt, or toilet paper. That way everyone knows where (and by whom) more of their medium of exchange gets created. That way everyone is happy, except the central bankers and politicians who will lose their controlling grip over our lives.