Friday, April 12, 2013

Gold reversion time

With the incredible one day 5.68% drop in the gold price today, the correlation that has existed since 2001 with the growth of US debt came to an abrupt end.

The only gold related news over the last few days was the closing of a Barrick mine in Chile, and the forced sale from the Cyprus central bank. In my opinion, neither of those explained the crash today. There are many theories floating around, and I don't know what the explanation is, but I know the 2001-present correlation is over. Knowing that, I sold a significant fraction of my holdings today to extract some profits.

Even though the most recent correlation and bull market appears to be dead, let's see what the longer term correlation looks like back to 1971. Using the most recent data points through today, the R-squared of the correlation to 1971 is 0.8463, pretty good.

What does the longer term linear regression predict?
Best Fit Price: $1515.51
One sigma up: $1718.88
One sigma down: $1312.15
Two sigma up: $1931.45
Two sigma down: $1099.58

The gold price is now below the long term linear regression going back to 1971. I've heard of this weird thing called reversion to the mean. Maybe there is something to it. Taking the long view, a closing price of $1477 looks perfectly reasonable. On the other hand, there is no particular reason to view the longer term correlation with any veracity. Time will tell. For now, nothing really looks like a great investment.

Wednesday, April 3, 2013

Bitcoin Insanity

I've been following Bitcoin passively for more than a year since it came into my awareness. It is an interesting experiment with some good goals and good technology behind it. At least, the cryptography part of it is good.

I considered buying one BTC just to get familiar with the tools last year, but never bothered for two big reasons. One, there is still very little you can buy with bitcoins and two, I was always concerned about the implementation of supporting sites and services.

Giant commercial banks with large and well paid IT departments have a hard time keeping electronic theft under control. A lot of bank hacks and losses are never reported because of black eye it would give the industry. Think of the ongoing rampant identity theft problem and credit/debit card issues. It is not really getting better.

Now, compare that to a start up like Instawallet with a small staff who has to deal with an unknown number of attack vectors. None of the online wallet services or bitcoin banks seem remotely safe. It just seems like a giant disaster waiting to happen. Sure enough, Instawallet was robbed today and the service suspended indefinitely. This is not the first bitcoin wallet site to be hacked and it won't be the last.

Bitcoin is a small market and hot money can sweep in and destroy it. That also appears to be in progress as the price of a bitcoin in dollars has gone from $13.51 on January 1, 2013 to a high of $147.00 on April 3, 2013. That is a 988% increase in a little over 3 months and nothing other than out of control speculation can explain it, not even the forced Cyprus bail-in. Bitcoin price stability makes gold, oil, and almost everything else look tepid. Spikes like this usually result in a waterfall drop on the other side once the mania stalls.

It has been fun watching it play out, but I think a lot of people are going learn some hard lessons about currencies, market size, and bubbles when this ends. Protect yourself.