The Year in Gold: 2011

2011 was a volatile, roller coaster ride for gold. It saw a price spike up to $1,900/oz, followed by a crash into the end of the year, finishing at $1,566/oz. The price change for the year was +10%. Despite the year end crash, gold outperformed all global stock markets by a wide margin, and beat the S&P 500 for the 11th year in a row. The S&P was essentially flat for the year, the FTSE was down over 5% and the Nikkei down 17%.

Gold vs. Money Supply

From the early 1980s until 2001, the monetary base grew faster than the gold price. That trend reversed when the gold bull market started in 2001 and continued until the US financial crises in 2008. After 2008, the monetary base grew at an even faster rate, but then leveled off in 2009. I find the comparison to the monetary base interesting because in the original Federal Reserve Act, the monetary base was limited by the amount of gold held by the Treasury. That legislative link was broken in 1971. The gold price has fared better against M1 and M2, nearly reaching their peak ratios from 1980 before easing back.

Gold vs. US Debt

I started modeling the gold price against US debt with surprisingly good results. The longest model I have is one going back to 1971 when the official link of the dollar to gold was broken by President Nixon. At that time, the official price was $35/oz.

Using a linear regression of the data back to 1971 (above), I get these predictions:
Two sigma below is $813.24
One sigma below is $1,035.33
The best fit price is $1,247.82
One sigma above is $1,460.30
Two sigma above is $1,682.40

These prices may be the best long term guides IF the United States can get control of its fiscal situation again, which requires control of its political situation again. Unending trillion dollar deficits is not the path to a stable currency and fiscal situation.

The more recent model that coincides with the gold bull market since 2001 has a higher correlation, for now. Using a linear regression of the data back to 2001 (above), I get these predictions:
Two sigma below is $1,423.85
One sigma below is $1,508.73
The best fit price is $1,592.00
One sigma above is $1,675.28
Two sigma above is $1,760.16

These numbers add some perspective to the $1,900 price seen in August, 2011. Of course, markets pay no attention to statistics or models in the short run or even the medium term. Humans don't work that way. I speak from experience. YMMV.

Gold: No More Love

Gold prices, since peaking in August, have been dropping like a burst bubble, and maybe that is what is happening. I am still on the fence about that. After the momentous rise and crash, I was unsure of what was unfolding so I sold half at $1,654. This morning, we bounced off $1,530 again, the spike low from the initial crash.

My debt vs. gold model predicts a best fit gold price of $1,578. This is the first time since early 2009 that the spot price has been below my model price. One standard deviation below would be $1,409. I am content to sit in my physical position for now, until and unless it becomes clear that interest rates are rising and central bank money printing is over. Neither of those conditions is true today. What is true is that speculators have been destroyed and sentiment is in the toilet. Gold gets No More Love...

The Fickle Nickel

More nickel weirdness at Kitco. Here is the Nickel chart I downloaded showing another 33% drop in the price of Nickel. I tried to confirm it at the London Metal Exchange, but the pricing there was showing roughly $8/lb.

I am puzzled about what is going on at Kitco with base metals. Is there a problem with Kitco, a problem with commodity futures markets, or both? A nickel in hand is worth 3/4 in the futures? I am able to make less of "markets" now than ever before. At least I have documented proof of my madness. I think there is an Edgar Allen Poe poem about this affliction.

A Dream within a Dream

I stand amid the roar
Of a surf-tormented shore,
And I hold within my hand
Grains of the golden sand-
How few! yet how they creep
Through my fingers to the deep,
While I weep- while I weep!
O God! can I not grasp
Them with a tighter clasp?
O God! can I not save
One from the pitiless [elliot] wave?
Is all that we see or seem
But a dream within a dream?

UPDATE: Nickel rockets up 55%!!!
More wild gyrations. What's up Kitco?

Land of the Rising Debt

The spectacle of Japanese government debt continues to dazzle. Projections are for debt-to-GDP to reach 230% in 2012. The numbers just make me scratch my head. Japan will borrow half of all budget expenditures. With an average interest rate of around 1% on issued debt, they will still spend roughly half of all tax revenue on interest on their debt. Their debt will pass one quadrillion yen this year.
Here are some recent articles on the Japanese debt situation...
Japan Seeks to Market Record 145 Trillion Yen Bonds in 2012; Kicking the Can Japanese Style
The Endgame: Japan Makes Another Move

Last April, I tried to make some guesses about how the Japanese might make needed adjustments. I have no idea how it will resolve itself. Maybe Japanese debt, unlike Eurozone debt, can grow to the sky without limits. Maybe they can support a debt-to-GDP ratio of 1,000% or more without any problems. After all, yen are just electronic numbers, right?

I can't stop looking at Japanese debt with both a mix of both awe and terror.

UPDATE: another article on Japanese debt, one that has the same title as my blog entry!
Check the post dates, though, and you will see that mine was published first. My title was completely original, which doesn't mean the other guy didn't also have the same original thought. Or did he?!?? Haha.

In a Pickle with Nickels

There is a distinct smell in the air. The pungent odor of deflation and a poorly timed trade.

In April, I suggested loading up on nickels since the metal value at that time exceeded the face value and I expected more QE interventions from the Fed to devalue the dollar even further. Since then, the prices of copper and nickel have plunged in a frightening way. This morning, nickel opened down about 35% and has lost more than 50% since my original article. I am still looking for news that would explain the 1/3 haircut in a single day, so far without success.

The good news is that there was almost no down side risk to hoarding nickels. Even though the metal value has dropped well below face value, they are still worth face value and there is no transaction cost to depositing them back into a bank or credit union.

I am still prepared to wait 10-15 years for a pay off, but I might trade some of them in for I-bonds or silver and to free up storage space. In the short run, it is clear that I was way off base on base metals. Doh!

UPDATE: FLASH CRASH! According to Kitco, the price of nickel is now back to pre-crash levels at $8.38/pound. The price anomaly lasted a good few hours, but has now been erased from existence. I should have taken a screenshot. While prices are still way down from a year ago, the puzzling 35% drop from this morning is gone without a trace. That explains the lack of news but raises a question about what happened to the price reporting.

Jonathon Livingston Siegel

inspired by this post: Siegel's Island

From Wikipedia:
Jonathan Livingston Seagull, written by Richard Bach, is a fable in novella form about a seagull learning about life and flight, and a homily about self-perfection. The book tells the story of Jonathan Livingston Seagull, a seagull who is bored with the daily squabbles over food. Seized by a passion for flight, he pushes himself, learning everything he can about flying, until finally his unwillingness to conform results in his expulsion from his flock.

From Wharton:
Jonathon Livingston Siegel, is a story about a professor learning about life and stock markets, and a homily about the perception of self-perfection. The good professor is bored with the daily squabbles over bank consulting bonuses and tenure. Seized by a passion for equities, he pushes himself, misunderstanding everything he can about investing for the long run, until finally his unwillingness to conform to reality results in his expulsion from his flock.

Turns out, sometimes stocks are for the birds.

November, 2011 Employment situation internals

Here are few internals from the BLS Employment Situation Report for October, 2011.

AVERAGE HOURLY EARNINGS: $23.18, -0.1% MoM

AVERAGE WEEKLY HOURS: 34.3 unchanged

PROFESSIONAL AND BUSINESS SERVICES
TEMPORARY HELP SERVICES
Oct 2011 15,800
Nov 2011 22,300

Go go Huntsman

Simon Johnson covers the Huntsman approach to TBTF and is the only one ready to face them and make them smaller. He is the only candidate for President that seems to be saying rational things about the economy.