John Embry Suggests Munger is Not Rational

[omagh]

Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure.  I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized.  These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.

 

Buffett made the point recently about how much value could be purchased with the total sum of the available gold.  If you read his point closely, he says at the end -- which is going to produce more value?  The rhetorical point being that gold will debase relative to wealth-producing assets.

"Look…You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

 

Munger had a great one-liner about the general population and math:  "Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.”

 

-O

 

But at some point we started talking currencies and whether gold is in a bubble stage and I was just saying that over time the paper currencies trend toward debasement and worthlessness, and gold doesn't.

[Guest broxburnboy]

Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure.  I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized.  These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.

 

 

The currency in Germany never stabilized... it disappeared.. your wager would be lost.

 

"regardless of the base currency measurement."

Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.

 

If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.

 

Sorry to be so disagreeable.

 

[omagh]

BB...no, the shares were still worth a fractional ownership of Siemens or Hoechst.  Once the currency regime stabilized (i.e. new currency was introduced), the intrinsic value of the shares would have stayed constant.  Cost inputs were probably ridiculous at certain points, but in the end, both companies survived.

 

As for the point about BRK underperforming gold in the last 10 years, it's a matter of choosing start point and end point for comparison. Going back 30 years provides a different story.  As we go forward, I'm sure that the story will also change as the speculation in gold runs its course.  Grantham and Montier have lots to say about mean reversion.

 

-O

Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure.  I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized.  These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.

 

 

The currency in Germany never stabilized... it disappeared.. your wager would be lost.

 

"regardless of the base currency measurement."

Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.

 

If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.

 

Sorry to be so disagreeable.

 

[Guest broxburnboy]

BB...no, the shares were still worth a fractional ownership of Siemens or Hoechst.  Once the currency regime stabilized (i.e. new currency was introduced), the intrinsic value of the shares would have stayed constant.  Cost inputs were probably ridiculous at certain points, but in the end, both companies survived.

 

As for the point about BRK underperforming gold in the last 10 years, it's a matter of choosing start point and end point for comparison. Going back 30 years provides a different story.  As we go forward, I'm sure that the story will also change as the speculation in gold runs its course.  Grantham and Montier have lots to say about mean reversion.

 

-O

Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure.  I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized.  These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.

 

 

The currency in Germany never stabilized... it disappeared.. your wager would be lost.

 

"regardless of the base currency measurement."

Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.

 

If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.

 

Sorry to be so disagreeable.

 

 

The value of fractional ownership of a company ultimately is derived from the profitability of the whole enterprise. This is the gap between it's real input costs and its income. If at any point an accumulated deficit in profitability eats up its existing real capital, the enterprise is bankrupt and needs to be either recapitalized or liquidated. The value of the existing shares goes to zero in any measure.

 

This profitability gap can be measured in USDollars, deutchmarks, Zimbabwian dollars, bananas or any other currency. The problem with these yardsticks are that they themselves are not a constant store of "real" value, they too are subject to their own changing profitability dynamics. Gold alone or currencies convertible to gold at a fixed ratio are the best measures of real value of all the alternatives.. for they are universally and historically accepted as money, have a constant virtually uninflatable value and is virtually indestructable.

 

If Seimens was a profitable concern in real terms during the Weimar inflation, it would be so afterward as long as its real costs and real income remained intact. These would also be the same if measured in gold currency, but totally skewed if measured in Weimar marks.

 

What you perceive to be a bubble in the USD price of gold (and by extension in copper, coffee, sugar, oil, the whole commodity complex) is simply a tit-for-tat price adjustment between a commodity whose purchasing power is being dilluted and one which remains constant.

 

BRK of course was wildly more wealth creating in its early years but less so in the last decade. A performance more accurately measured in ozs of gold than USdollars.

[oldye]

Investors should not be focused on the dollar value of the house and condo that they own but rather on the number of houses and condos that they possess

 

or

 

Investors should not be focused on the dollar value of the tulips that they own but rather on the number and rarity of the tulips that they possess

 

;D

 

[omagh]

BB...now that the assumptions are on the table, we agree for the most part.  I would question your assumption about gold being an invariant store of value -- it's hardly inelastic and is prone to some tulip bulb moments (hat tip to oldye).

 

-O

BB...no, the shares were still worth a fractional ownership of Siemens or Hoechst.  Once the currency regime stabilized (i.e. new currency was introduced), the intrinsic value of the shares would have stayed constant.  Cost inputs were probably ridiculous at certain points, but in the end, both companies survived.

 

As for the point about BRK underperforming gold in the last 10 years, it's a matter of choosing start point and end point for comparison. Going back 30 years provides a different story.  As we go forward, I'm sure that the story will also change as the speculation in gold runs its course.  Grantham and Montier have lots to say about mean reversion.

 

-O

Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure.  I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized.  These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.

 

 

The currency in Germany never stabilized... it disappeared.. your wager would be lost.

 

"regardless of the base currency measurement."

Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.

 

If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.

 

Sorry to be so disagreeable.

 

 

The value of fractional ownership of a company ultimately is derived from the profitability of the whole enterprise. This is the gap between it's real input costs and its income. If at any point an accumulated deficit in profitability eats up its existing real capital, the enterprise is bankrupt and needs to be either recapitalized or liquidated. The value of the existing shares goes to zero in any measure.

 

This profitability gap can be measured in USDollars, deutchmarks, Zimbabwian dollars, bananas or any other currency. The problem with these yardsticks are that they themselves are not a constant store of "real" value, they too are subject to their own changing profitability dynamics. Gold alone or currencies convertible to gold at a fixed ratio are the best measures of real value of all the alternatives.. for they are universally and historically accepted as money, have a constant virtually uninflatable value and is virtually indestructable.

 

If Seimens was a profitable concern in real terms during the Weimar inflation, it would be so afterward as long as its real costs and real income remained intact. These would also be the same if measured in gold currency, but totally skewed if measured in Weimar marks.

 

What you perceive to be a bubble in the USD price of gold (and by extension in copper, coffee, sugar, oil, the whole commodity complex) is simply a tit-for-tat price adjustment between a commodity whose purchasing power is being dilluted and one which remains constant.

 

BRK of course was wildly more wealth creating in its early years but less so in the last decade. A performance more accurately measured in ozs of gold than USdollars.

[Guest broxburnboy]

BB...now that the assumptions are on the table, we agree for the most part.  I would question your assumption about gold being an invariant store of value -- it's hardly inelastic and is prone to some tulip bulb moments (hat tip to oldye).

 

 

The only tulip bulb moment in the last 80 years (1980) was precisely at the same time of the opposite tulip bulb moment in US debt.. rates went to 22% at one point. The driver that popped the bubble was intervention by the Fed (Paul Volcker) to freeze velocity and induce a global margin call....the opposite of the conditions that exist today...The Fed has frozen interest rates low, flooded the market with liquidity, with no end in sight... one would expect that gold would once again go parabolic until such time as liquidity is reigned in, government budgets are balanced (monetizing debt is now the main source of fresh US dollars) and interest rates are high.

 

The inflation conditions in the late 1970's were again caused by the losses incurred from the Vietnam war... a recurring theme in the history of fiat currency. Governments and/or monarchs are forced to monetize promises of victory to finance massive war losses.

Last century we saw German currency collapse twice, British currency lose its global reserve status, the Russian ruble collapse, the US debase its currency (from 35/0z in 1972 to1400/oz today) for this very reason. This trend is now accelerating as the debts from the most expensive wars in history continue to be monetized. Ignore this trend at your financial peril.

[merkhet]

 

The inflation conditions in the late 1970's were again caused by the losses incurred from the Vietnam war... a recurring theme in the history of fiat currency. Governments and/or monarchs are forced to monetize promises of victory to finance massive war losses.

 

 

Niall Ferguson touches on this a couple of times in The Ascent of Money.  Highly recommended reading if anyone here hasn't picked it up before.

 

I've come to a similar conclusion as other individuals that gold is either money or has enough money-like characteristics to be viewed as money.  The problem with which I am struggling right now is that there is no way to find the intrinsic value of money.  For instance, if I handed a person a dollar, and I asked them how much it is worth, they would respond that it is worth a dollar.  (A true mathematician's response.  It is absolutely correct and essentially useless.)  However, if you're given a dollar and a loonie, you can look up the foreign exchange rate and provide some commentary on relative value based on relative strengths of the countries.  (Fiscal strength, fiscal responsibility, etc.)

 

I think that with gold, you can make a cogent argument that it stays roughy constant such that when a currency is compared to it, you are examining the weakness of the issuing country's finances vs. the constancy of gold.

 

However, that relative comparison does not really give way to an easy reference point to gold's value.

 

Perhaps the way to view it, and how I've been using it, is roughly the way that you sit on cash when you can't find anything of value.  It's just that your cash is now denominated in another "currency" than U.S. dollars.  It's a slightly more volatile currency, but I don't see how it's necessarily any different than denominating your cash in Swiss francs.

[Guest broxburnboy]

 

The inflation conditions in the late 1970's were again caused by the losses incurred from the Vietnam war... a recurring theme in the history of fiat currency. Governments and/or monarchs are forced to monetize promises of victory to finance massive war losses.

 

 

Niall Ferguson touches on this a couple of times in The Ascent of Money.  Highly recommended reading if anyone here hasn't picked it up before.

 

I've come to a similar conclusion as other individuals that gold is either money or has enough money-like characteristics to be viewed as money.  The problem with which I am struggling right now is that there is no way to find the intrinsic value of money.  For instance, if I handed a person a dollar, and I asked them how much it is worth, they would respond that it is worth a dollar.  (A true mathematician's response.  It is absolutely correct and essentially useless.)  However, if you're given a dollar and a loonie, you can look up the foreign exchange rate and provide some commentary on relative value based on relative strengths of the countries.  (Fiscal strength, fiscal responsibility, etc.)

 

I think that with gold, you can make a cogent argument that it stays roughy constant such that when a currency is compared to it, you are examining the weakness of the issuing country's finances vs. the constancy of gold.

 

However, that relative comparison does not really give way to an easy reference point to gold's value.

 

Perhaps the way to view it, and how I've been using it, is roughly the way that you sit on cash when you can't find anything of value.  It's just that your cash is now denominated in another "currency" than U.S. dollars.  It's a slightly more volatile currency, but I don't see how it's necessarily any different than denominating your cash in Swiss francs.

 

If you sit on your Swiss Francs, US dollars, British Pound, rubles etc. long enough they will have zero purchasing power even though they have not been physically reduced...they are a promise to pay something unquantified. Throughout history if you use one oz of gold as your store of value and sit on it, it is still an oz of gold and historically barterable for other commodities at a more or less constant rate (the fine suit observation)... unlike any fiat currency. Currencies tied in whole or in part to gold such as the modern Swiss Franc or USdollar (The Fed after all jealously hordes gold as backing of its currency) ultimately in liquidation will be settled in ounces of gold. It is an observable and well established historical reality that when fiat currencies are inflated (debased, depegged from gold etc.), their purchasing power decreases. Your supposition that the fiat currency tail wags the gold dog is demonstratably false. This time it's not different.

[merkhet]

 

If you sit on your Swiss Francs, US dollars, British Pound, rubles etc. long enough they will have zero purchasing power even though they have not been physically reduced...they are a promise to pay something unquantified. Throughout history if you use one oz of gold as your store of value and sit on it, it is still an oz of gold and historically barterable for other commodities at a more or less constant rate (the fine suit observation)... unlike any fiat currency. Currencies tied in whole or in part to gold such as the modern Swiss Franc or USdollar (The Fed after all jealously hordes gold as backing of its currency) ultimately in liquidation will be settled in ounces of gold. It is an observable and well established historical reality that when fiat currencies are inflated (debased, depegged from gold etc.), their purchasing power decreases. Your supposition that the fiat currency tail wags the gold dog is demonstratably false. This time it's not different.

 

 

broxburnboy, I actually don't think we're in disagreement here, but it seems like you think we are.

 

I don't believe I made any such supposition that "the fiat currency tail wags the gold dog," but I'm happy to be shown evidence that I did.

 

My statement that "I don't see how it's necessarily any different than denominating your cash in Swiss francs" was meant to provide a framework with which to think about holding gold as investors would normally hold "cash" (U.S. dollars) when they can't find anything else worth investing in.  It was not meant to say that gold does not have benefits when compared to fiat money.

 

So I guess I'm still a little confused on why you think that I don't believe that fiat money purchasing power decreases in response to national fiscal mismanagement, etc...

[Guest broxburnboy]

Herein lies the rub:

 

"I think that with gold, you can make a cogent argument that it stays roughy constant such that when a currency is compared to it, you are examining the weakness of the issuing country's finances vs. the constancy of gold.

 

However, that relative comparison does not really give way to an easy reference point to gold's value.

 

Perhaps the way to view it, and how I've been using it, is roughly the way that you sit on cash when you can't find anything of value.  It's just that your cash is now denominated in another "currency" than U.S. dollars.  It's a slightly more volatile currency, but I don't see how it's necessarily any different than denominating your cash in Swiss francs."

 

All modern and most historical fiat currencies are tied to gold, some at a fixed rate or percentage of fixed rate (like the modern Swiss Franc) or at a market rate like the USD. The point is that they are ALL fixed to gold, not the other way around. i.e. any volatility in the purchasing power of a fiat currency depends firstly on the rate of monetary deflation/inflation of that currency. That's not to say that the exchange rate of an oz of gold to 100 bushels of wheat, or 100 shares of Seimean's is written in stone... but if the supply and demand fundamentals of either of those two commodities remain intact...they will almost always be best reflected by measuring their current value in gold ozs..

 

This may appear to be splitting hairs..but it essential to see that gold is not just another floating monetary currency...it ultimately is THE

single monetary unit against which all others are measured. Real time observation confirms that this is in fact the case. Ultimately accounts between central banks, each other and the IMF are settled in physical Tons of gold. Recent gold flows between central banks confirm what we already know... wealth is flowing from the developed world to the emerging, from individuals to government. USdollars (debt) are flowing the other way. Gold on the micro level is flowing from those teetering on bankruptcy to TV hucksters. Dollars the other way.

[merkhet]

 

All modern and most historical fiat currencies are tied to gold, some at a fixed rate or percentage of fixed rate (like the modern Swiss Franc) or at a market rate like the USD. The point is that they are ALL fixed to gold, not the other way around. i.e. any volatility in the purchasing power of a fiat currency depends firstly on the rate of monetary deflation/inflation of that currency.

 

 

As you say, we might be splitting hairs at this point, but in the interest of lazy Sundays....

 

I understand your point, but I do not believe you understand mine.  It's possible that you read through my initial post and somehow gleaned that I believe the price of gold should be fixed to fiat currency, and now it's tough to see that I actually didn't make that claim.  (See "...stays roughly constant such that when a currency is compared TO [GOLD]" and not when gold is compared TO A CURRENCY.  A distinction with a difference, in this case.)  It's much like that visual illusion of the old woman and the young lady -- once you've fixed on one, you might be able to see the other, but it's likely that you'll come back to the initial view.  (Confirmation and/or status quo bias.)  Happens to all of us.

 

Crucially, we are making the same point!  In exactly the same way!

 

I really don't know how else to show this to be true...

 

 

That's not to say that the exchange rate of an oz of gold to 100 bushels of wheat, or 100 shares of Seimean's is written in stone... but if the supply and demand fundamentals of either of those two commodities remain intact...they will almost always be best reflected by measuring their current value in gold ozs..

 

 

The unfortunate thing is that this statement is impossible to verify.  There is no natural occurring experiment through which this can be proved.  Importantly, because there is speculative activity (both greed and fear based) in gold, commodities, and securities, there is no way to fix supply and demand fundamentals.  Additionally, because the market is a dynamic system best described in terms of a non-linear open-looped system, there are serious issues with respect to fixing not only initial conditions to an exact specificity but also with respect to nonlinear effects of tiny perturbations in supply or demand that feed back on the speculative activity.

 

And that, by the way, is exactly why I said that "relative comparison does not really give way to an easy reference point to gold's value."

 

For instance, let's say 1 ounce of gold is equal to 100 bushels of wheat.  If you fix that as your reference point (Einstein's relativity, anyone?) then you can evaluate the movement of the gold/wheat ratio in the future.  However, the point that I was trying to make is -- given the inability to determine starting points in a dynamic system (and even something as seemingly simple as the gold for wheat system is a dynamic system) or determine whether subsequent movements in either the gold or wheat markets are on the basis of fundamentals or speculation or determine the effect of any given move in fundamentals or speculations (Soros' reflexivity, anyone?) -- how do you know what is the correct initial setting for gold to [insert relative comparison commodity, security, fiat currency here].  For all we know, the correct gold/wheat ratio is 1:10 and the 100 bushel ratio we used at the outset was taken at the time of great disturbance from equilibrium.  Remember also that we need to be skeptical of even a long-term historical relationship because of Bertrand Russell's Inductivist Turkey -- imbalances can stay imbalances for long enough to fool a person into believing it is equilibrium.

 

So... again, let's throw out the fact that you seem to think that I think gold is "just another floating monetary currency."  I do not.  I'm really hoping you see that now.

 

The questions that give me pause are the following:

 

Since we do not know the initial setting at time zero (i.e. the initial equilibrium rate between gold and [choice of fiat currency]), how do we figure out where we are in the dynamic system?  Is our current relative ratio at equilibrium or disequilibrium?  And how confident can we be in the accuracy of our answer?

 

broxburnboy, it seems like you've given this a lot of thought, so I really hope that we don't continue talking past one another, because I'm intensely curious as to whether you have answers to my questions above.  My answers are currently (1) do not know, (2) do not know, and (3) not applicable.

 

Cheers.

[Guest broxburnboy]

"Since we do not know the initial setting at time zero (i.e. the initial equilibrium rate between gold and [choice of fiat currency]), how do we figure out where we are in the dynamic system?  Is our current relative ratio at equilibrium or disequilibrium?  And how confident can we be in the accuracy of our answer?"

 

When the USdollar, the default world reserve currency was linked to gold at a fixed redeemable rate, in the 1930's at 35.00 dollars oz there were 35*number of gold ounces physically possessed by the US Treasury printed and subsequently lent to private banks for further credit creation. Prices of other commodities adjusted to the dollar more or less along the lines of historical relationship to other incarnations of monetary gold ozs. This is the starting point of the modern dollar/gold ratio.

In the mid 1930s the Roosevelt administration confiscated US private gold holdings - because the economy had found balance at a negative growth rate -people were hoarding their gold and gold equivalent Federal reserve dollars (a gold backed note). The US economy was trapped in a self stoking  monetary deflation and downward spiralling demand (lack of spending) which in turn made people more likely to hoard their money.

This was the Keynesian solution: Centralize the gold holdings, have government spend it on wealth creating activities like the Tennessee Valley hydro project and hence kickstart the economy. But people still tended to hoard their money... the solution: print more money than you have ozs. of gold at the fixed rate, lend it out at interest rates that would make up for the dillution while keeping up the government fiscal spending. It was subsequently discovered that if you printed even more money (inflating the money supply and further deteriorating the real gold ratio, prices began to rise by themselves creating a disincentive for people to hoard money and an incentive to spend it... Quick get your shamwow now.. we can't afford to keep prices low all day.

By Nixon's time the fiction of a 35.0oz peg was abolished since the FED/central bank needed to further inflate the currency to pay off accumulated deficits and new war debts. The USdollar was allowed to float as a commodity for world trade and the modern system of fiat currency relativism was adopted. Gold was relegated to the corner of the cellar, albeit heavily guarded and coveted by central banks. It was reviled, called names, put in peoples teeth, hung around Mr. T's neck but secretly, behind closed doors, used in bulk to settle international balances at negotiated rates to the US dollar.

When a large transaction takes place between banks like the Bank of India/IMF transaction of 2009 (at 1060.00/oz), that price tends to set a floor for subsequent smaller market transactions. Currently we know that the US dollar national debt has ballooned at least 15% since then, the real wealth of the nation has probably decreased and the trends are stretching out as far as the eye can see. The market thinks today that 1380.00 seems like a good number taking these trends into account. One thing is certain however...this is a long term ratio strengthening in favour of gold.

Unfortunately the calculation is so complex, with many variables known and unknown that we can only bet on the trend...gold price bullish.

[merkhet]

 

When the USdollar, the default world reserve currency was linked to gold at a fixed redeemable rate, in the 1930's at 35.00 dollars oz there were 35*number of gold ounces physically possessed by the US Treasury printed and subsequently lent to private banks for further credit creation. Prices of other commodities adjusted to the dollar more or less along the lines of historical relationship to other incarnations of monetary gold ozs. This is the starting point of the modern dollar/gold ratio.

 

 

That's sort of my point though -- how do we know that the initial rate is the correct rate?  As you state, by Nixon's time, the $35 per ounce was a fiction, but what was it that makes the 1930's $35 per ounce ratio not a fiction?

 

 

The market thinks today that 1380.00 seems like a good number taking these trends into account. One thing is certain however...this is a long term ratio strengthening in favour of gold.

 

Unfortunately the calculation is so complex, with many variables known and unknown that we can only bet on the trend...gold price bullish.

 

 

There are significant issues with determining that market prices necessarily provide the "correct" intrinsic price (to the extent that we can say that gold has an intrinsic price).  After all, it wasn't so long ago that the market believed that dot-com companies with no revenues were worth multiples of eyeballs, no?

 

I agree with you that the calculation is so complex, with so many known and unknown variables, that it's tough to come to a correct pricing for gold -- even if we can make the case that fiat currencies, by virtue of various structural issues, will continue to devalue in terms of gold.  (And we can make that case -- and it is likely a correct prediction.)

 

However, there is still a missing step between what I just wrote and saying "gold price bullish" -- since the assumption underlying "gold price bullish" necessarily requires that the current ratio of fiat currency to gold not be unduly skewed on the dollar side by speculation of some sort.  It's like when Howard Marks wrote in his last missive that he was sure currencies will depreciate against gold in the future; he was just uncertain if this was the price at which to add a position in gold.

 

In terms of another framework, it would be like saying that Facebook will likely become more valuable in the future as their network effect continues to increase based on new entrants, which is likely true.  However, it would be another thing entirely to say that a market capitalization of $56 billion (at likely a 150x+ P/E ratio) means that we should be "Facebook price bullish."

 

Having said all that, I do hold some positions that are somewhat dependent on the price of gold, since I believe, as you do, that the continued depreciation of fiat currencies against gold will provide a good backdrop against which those positions will eventually reach fair value.  I'm merely more... uneasy... than you are that the current price is within hailing range of the "correct" price.  As always, I try to be mindful of the Mark Twain quote that "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

 

Cheers!

[Guest broxburnboy]

There is no such thing as a fixed "correct" rate in comparisons between any commodity. The best we can do is say that there  is a market rate set by barter in a freely traded market. Over time a bushel of wheat would trade at a "norm" ratio to another commodity say apples, bananas, copper or the time honoured and validated, universal,  standard oz. of gold.

 

In 1935 the US Treasury used as  money, a paper note issued by the Federal reserve redeemable in ozs of gold at the rate of 35.00/oz. There were circulated exactly  35* the physical number of ounces held in reserve. The buck was 1/35 an ounce of gold...they were the same..this was the "correct" fixed ratio. The Treasury confiscated privately held physical gold and exchanged them for newly minted dollars at this rate in order to break the downward stoking deflationary depression by injecting liquidity through fiscal spending.  Eventually the dollar had to be unpegged from gold and floated in the current system of currency relativism. That's why prices of commodities over time rise when USD monetary is loose and contracts when US monetary policy is tight. Expressed in ozs. of gold however, prices do not have to be adjusted for the inherent monetary policies of fiat currencies.. gold is universally accepted and can not be inflated (or deflated)... commodity price trends expressed in ozs. of gold will be more "real" than expressed in fiat currency. Moreover, as monetary policy is in an apparent long term loosening phase, we can safely assume that the USD price of gold will continue to strengthen...i.e. that monetary inflation and debt monetization (as opposed to asset monetization) will continue to erode the real purchasing power of the USD.

[omagh]

BB...good work on the theory of relationship between gold and the value of asset classes.  There are other demand-warping factors in play at the moment which are stoking commodity prices.

http://www.hoisingtonmgt.com/pdf/InterQuarterUpdate20101209.pdf

On the effects of QE2: "Commodity loans can be financed at 1% or less.  This encourages speculative buying of commodities for inventory, thereby causing food and fuel price increases."

 

-O

 

There is no such thing as a fixed "correct" rate in comparisons between any commodity. The best we can do is say that there  is a market rate set by barter in a freely traded market. Over time a bushel of wheat would trade at a "norm" ratio to another commodity say apples, bananas, copper or the time honoured and validated, universal,  standard oz. of gold.

 

In 1935 the US Treasury used as  money, a paper note issued by the Federal reserve redeemable in ozs of gold at the rate of 35.00/oz. There were circulated exactly  35* the physical number of ounces held in reserve. The buck was 1/35 an ounce of gold...they were the same..this was the "correct" fixed ratio. The Treasury confiscated privately held physical gold and exchanged them for newly minted dollars at this rate in order to break the downward stoking deflationary depression by injecting liquidity through fiscal spending.  Eventually the dollar had to be unpegged from gold and floated in the current system of currency relativism. That's why prices of commodities over time rise when USD monetary is loose and contracts when US monetary policy is tight. Expressed in ozs. of gold however, prices do not have to be adjusted for the inherent monetary policies of fiat currencies.. gold is universally accepted and can not be inflated (or deflated)... commodity price trends expressed in ozs. of gold will be more "real" than expressed in fiat currency. Moreover, as monetary policy is in an apparent long term loosening phase, we can safely assume that the USD price of gold will continue to strengthen...i.e. that monetary inflation and debt monetization (as opposed to asset monetization) will continue to erode the real purchasing power of the USD.

[Guest broxburnboy]

In support of my previous assertion:

"Eventually the dollar had to be unpegged from gold and floated in the current system of currency relativism. That's why prices of commodities over time rise when USD monetary is loose and contracts when US monetary policy is tight."

 

To me the most interesting period here is the 1980 intervention (higher interest rates to curb inflation) only served to lessen the decline in USD purchasing power, the trend resumed (albeit on a flattened trajectory) with the Reagan Era re-inflation of the economy.

 

http://www.gracelandupdates.com/images/stories/JFM11/2011jan11usd.png

 

A bottom-up analysis of the current state of inflation and outlook for gold priced in USD:

 

http://www.theaureport.com/pub/na/8269

 

 

 

[Guest broxburnboy]

Embry hammers more gold naysayers:

 

http://www.sprott.com/Docs/InvestorsDigest/2011/MPLID_012811_pg003Emb.pdf

 

 

[omagh]

The naysayer responded: Well, perhaps “rebuttal” isn’t the best word to use because the piece – which appears in the January 28 edition of Investor’s Digest – relies more on personal attacks than persuasiveness. He refers to me as “some gold neophyte” and calls my article “egregiously awful.”

http://www.theglobeandmail.com/globe-investor/markets/markets-blog/gold-bug-gets-testy/article1884812/

 

Embry hammers more gold naysayers:

 

http://www.sprott.com/Docs/InvestorsDigest/2011/MPLID_012811_pg003Emb.pdf