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Guest Post: A “Braided Basket” Trade On The Apocalypse

Tyler Durden's picture




 

Submitted by JM

A “Braided Basket” Trade on the Apocalypse

So we all know that gold prices and UST 10Y yields are as high, and low, respectively, as they have ever been.  This is nothing more or less than human adrenaline overriding reason and logic, driving return expectations to the distribution of max entropy.  It’ll pass.

Sometimes it makes sense to fight the crazy impulses of greed and fear.  But often this gets you creamed in the center.  Sometimes it doesn’t.  For those times, the prices of straightforward hedges like 10Y Ts and gold make them very unhedge-worthy.  There is no sense in jumping on trades that already have the risk premium baked in.

The alternative is to ride the apocalypse with an eye on the relative mispricing of extremal points.  I’m creating what I call a braided basket to do this.  I’ll take two pair trades and go short the rapier points of the apocalypse and long something correlated, but underperforming it.  In this way I’ll catch some hedge on tail risks on my core book due to the darkening outlook.  At the same time, I’ll catch some cover when people come back to their senses.  Why braided?  Check out the charts, and see how the pairs interweave. 

Note that the point is close correlations.  Actually, the point is coupling.  Coupling is a technique where two dependent copies (Xn, Yn) of a random process where Xn is stationary and Yn starts from a fixed arbitrary state—and they have the property that they coincide with higher and higher probability as time evolves.  So for example, the underlying random processes are negative real interest rates and credit risk spikes.
The endgame is minimizing the total variation distance between two probability measures p and q over all subsets A of G.  This is what the coupling method does:  it determines the time T is the smallest n such that Xn and Yn coincide.  The total variation distance between the law p(n) of Yn and the stationary law q of Xn can be bounded by Sup|p(n) – q| ? Prob(T > n).  The construction of a good coupling that estimates Prob(T > n) is the decisive issue for this technique.  Construction of a good coupling means finding pairs that exploit relative mispricing (measured by the total variation distance) of two assets. 

Remember that this is a hedge position on the irrationality that fear brings to the table, and the short is only there to cover pullbacks.  Core holdings should always go to buying what is cheap.  Here we can only say we are buying a relatively cheap alternative and shorting a way-too- expensive alternative.  It would of course be far better to buy cheap “just in case” hedges rather that these “just in time” hedges that are necessarily more complicated, but it is way too late for that now.  You need to balance it and not be equal weight short and equal weight long in either pair.  Not sure that cointegration helps here to determine the weights, because illiquidity implies non-stationarity, at least in a local sense of the term. 

Negative Real Interest Rates Leg:  Gold is fighting a lot of history here.

Long Platinum, Short Gold

Credit Risk Explosion Leg:  For this leg, it makes sense to go with more term risk, so I’m looking at 20Y nominal Ts and 20Y General Obligation Muni bonds.  This is really a play on my vision that credit risk and interest rate risk will become an expression of the same phenomenon going into the future.

Short 20Y, long 20Y GO Munis

Of course this assumes that basic recurrence, which is a very general notion of mean reversion, holds.  It may not, or mean reversion could be to zero, in the “naked I came into this world, naked I go out” kind of way.
 

 

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Fri, 08/19/2011 - 15:26 | 1578503 baby_BLYTHE
baby_BLYTHE's picture

Gold could hit $2,000 next week yet miners are only priced for gold some $1200, WTF!?

Fri, 08/19/2011 - 15:28 | 1578519 JW n FL
JW n FL's picture

Miners NEVER! EVER!! EVER!!! Pay shareholders when prices go up.. if you are not a principle you will realize no gain other than some retail / institutional bump in share price.. which is FUCKING STUPID!

Fri, 08/19/2011 - 15:35 | 1578549 Vic Vinegar
Vic Vinegar's picture

Passionate.

Fri, 08/19/2011 - 15:40 | 1578572 ReactionToClose...
ReactionToClosedMinds's picture

guess you are right ..... if hyperinflation dynamic perceived then miners will follow; if deflationary, credit collapse/liquidity/biz viability implosion apocalypse .... then miners offer nothing .... except some residual asset value

Fri, 08/19/2011 - 16:01 | 1578651 Banjo
Banjo's picture

Agree they dilute share holdings, expand inefficiently and worse of all hedge production. I'll stick with physical but each to their own :)

Fri, 08/19/2011 - 17:27 | 1579122 CPL
CPL's picture

And that is exactly why every trader worth his weight in salt is sticking to physical gold and silver right now.  :)

Sat, 08/20/2011 - 04:26 | 1580490 global
global's picture

You have got to be kidding.  Buying physical gold and burying it in your back yard for fear of confiscation is not trading, its called "buy and hold", but for some reason this term is only considered derogatory when applied to equities. 

This is the result of not knowing a better use for your money and being scared.  Any trader worth his/her salt is using the volatility you are creating to outperform simplistic buy and hold strategies...thats what trading is.

Sat, 08/20/2011 - 07:46 | 1580647 ATM
ATM's picture

When everything in the world is going down in relation to gold what do you call the trade where you sell paper and buy gold?

Sat, 08/20/2011 - 09:26 | 1580753 living on the edge
living on the edge's picture

I call that smart.

Sat, 08/20/2011 - 12:53 | 1581274 mkkby
mkkby's picture

And how is it a trade when you have a 10% spread to get in and out, and it takes up to weeks to do so?

Belive me, I can see a rising trend just like anyone else.  But who wants the wide spread, the storage and security issues, and the time it takes to find and ship to a buyer?  It's terribly flawed.  And let's not forget the high cap gains tax.  And let's not forget TPTB will never allow it to become currency again.

Try stopping out on gold when everyone decides it's done.

Fri, 08/19/2011 - 18:01 | 1579242 Panache for the...
Panache for the Crash's picture

So even if the gummint confinscates gold or somehow prevents you from buying more Au, you will never! ever! ever! get exposure via miners? That's what happen in the US back in the 30's.  People bought miners because they could not get physical.

 Oh, this time its different, you will always be permitted to buy gold.  You will always be permitted to sell your gold.  Oh yeah you can always sell your gold in Canada or Chile. 

For the most part you are right though - principles have little interest in shareholders.  They should be paying shareholders.    

Fri, 08/19/2011 - 15:33 | 1578541 mynhair
mynhair's picture

Smelters aren't buying mine concentrate, for whatever reason.

Fri, 08/19/2011 - 15:52 | 1578613 JW n FL
JW n FL's picture

thats becuase the repugnants bought it all up!

Fri, 08/19/2011 - 15:42 | 1578576 Smiddywesson
Smiddywesson's picture

Oh I don't know, unlimited naked shorting and unlimited fiat to drive them down? 

Silver and mining stocks are encased in amber like a fly until the banks stop doing what they are doing, which is buying gold.  That's your answer.  They can hold down silver and miners, but they can't hold down gold BECAUSE THEY ARE THE BUYERS.  Silver will get its day, but not until the central banks make the switch to a new monetary standard.

Fri, 08/19/2011 - 15:52 | 1578612 stateside
stateside's picture

Actually the miner are priced assuming gold is at $700.  You gotta love the long gold, short the miners trade - or maybe not.

 

stateside

Fri, 08/19/2011 - 16:39 | 1578861 IQ 145
IQ 145's picture

You've been mislead into mining stocks by internet gurus. There never was any reason to buy any mining stock. Period. the rationale for it is that it will exhibit "beta", (look it up), versus the underlying. Careful statistical research shows this is simply not true. A mining stock, is a stock; it has all the risks and problems of all other stocks. If you wish to increase your exposure to precious metals buy them on margin; this is what real traders do and it is how real large profits are made. You can own Silver on Margin at several different depositories; or simply buy one Comex contract; but you will need a $50,000 account to support the contract. Also, you'll have to become realistic enough to ignore the "if it's not in your hand, you don't own it, crap"; but then stocks are merely certificates.

Fri, 08/19/2011 - 18:02 | 1579246 I Told YOU So
I Told YOU So's picture

I respectfully disagree.......gdx.....16.50 to 61.50  less then 2 years.........

Fri, 08/19/2011 - 18:02 | 1579252 Sun Tsu
Sun Tsu's picture

+100    If you own gold and miners, then learn the difference between physical metals and paper shares in super-cycles, troubles and war.  Management, geopolitical and regulatory risks are just insanely high in mining stocks and the dividends are paltry. Patience, and research the companies you follow until it is time.

Fri, 08/19/2011 - 16:56 | 1578962 Man Bear Pig
Man Bear Pig's picture

If miners believed that gold was topping at $1200 and hedged in anticipation of a reversal, wouldn't they also have capped their profits? Could this explain it?

Fri, 08/19/2011 - 15:27 | 1578513 JW n FL
JW n FL's picture

Long Platinum since $1730's or 40's..

but I can not lie.. I am LONGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG gold too!

so much for hedging! LOL!!

Fri, 08/19/2011 - 15:37 | 1578559 SheepDog-One
SheepDog-One's picture

Only costs $5 to dig it out of the ground :D

Hey havent heard that in a long time around here, and those who used to say it are long gone in a cardboard box under a bridge by now, or the one who now sleeps in his Ferrari is gues, since his gbig gold shorts at $1,300 cant be doing very well. 

Anyway, welcome to the New World Order and have a nice weekend.

Fri, 08/19/2011 - 15:44 | 1578584 Smiddywesson
Smiddywesson's picture

Only costs $5 to dig it out of the ground :D

Yes SD1, but it costs one their life to dig it out of my ground.

Fri, 08/19/2011 - 15:50 | 1578605 JW n FL
JW n FL's picture

but can you eat the over burden? thats the real question? LOL!!

Fri, 08/19/2011 - 15:49 | 1578603 JW n FL
JW n FL's picture

I was watching Bloomberg Yesterday... they had Lehamn on.. who had nice things to say about gold.. but the Bloomberg Mouth Piece shut him down.. and said something to the effect of.. Gold Commericals are on every 30 seconds.. it was becuase Lehamn's Mother called him about Gold..

point being the Stock Junkies have to puch product to make sale(s).. to hit monthly, quarterly and so on sales numbers to earn bonus monies.. these guys have their entire lives invested in selling shit to someone.

 

The Fact that Tangible Items are moving and paper / 1's and 0's off in cbyer space are tanking (in retail / dumb money) is becuase dumb money aint so fucking dumb.

 

the shit is coming down ALL around U.S.! LOL!!

Fri, 08/19/2011 - 15:28 | 1578517 Fortunes Favor
Fortunes Favor's picture


Stock Market Strategy & Precious Metals Outlook

Gold prices hit a new high of $1,877.88 this morning and all I hear on CNBC are the top callers and naysayers. It seems obvious to everyone Gold prices are way overpriced, “At least a $200 risk premium” says the fund manager who has been wrong on Gold all the way up but somehow now can pinpoint the exact amount of Gold price appreciation attributable to risk. 

http://rosenthalcapital.com/blog/2011/08/stock-market-strategy-precious-metals-outlook/

Fri, 08/19/2011 - 15:47 | 1578596 Smiddywesson
Smiddywesson's picture

If someone could point out to me how the central bankers can find enough money to become solvent without changing the measuring stick of wealth to something they already own, then I would admit there is some risk to the gold trade.  But when I see this as their only way out, I start to feel like Soros when he trapped the bank of England.  There is only one way out of their predicament, and they will take it.

Fri, 08/19/2011 - 15:53 | 1578618 jm
jm's picture

Because as loans sour, banks have to hoard more cash or cash equivelents against the impairments.  It doesn't matter how many dollars are in existence if banks hoard them in suffieicnet quantity.

The dollar is the world's vehicle currency, so most of the world's debt is dollar denominated.  Thus in a crunch you need dollars.  When you don't need them they are floating around all over the place. 

It is not that gold is a bad idea at all.  But there are cheaper alternative precious metals.

Fri, 08/19/2011 - 17:01 | 1578869 Mad Cow
Mad Cow's picture

@Smiddy

The only risk I see in the future, would be a move to a "cashless" DIGITAL ONLY currency. If that happened, you're either in The Matrix, or you're underground. At that point, the "Masters of the Universe" would set the price of gold to whatever they choose. In that case, gold would appear to be a fairly useless barter item if you stick with the "Red Pill." Obviously this would be an endgame scenario.

Fri, 08/19/2011 - 19:21 | 1579479 AustriAnnie
AustriAnnie's picture

"gold would appear to be a fairly useless barter item"

 

Would it?  Seems to me there would be high value in something which allows you to obtain goods on the underground market.  There are countless examples of citizens holding items for which the punishment would be death, if caught, simply because those items are of high value in exchange (BECAUSE of their illegality, not in spite of it).   Even the elite members of society who are "in" with TPTB often opt into the underground market to get certain goods.  The underground market thrives in countries today, and government officials are often taking part in the scheme.  They work both sides, and they know the value of the "cash trade".  In a world of digital currency, there is still value in buying and selling unnoticed.  Whatever currency is used in those exchanges will be highly valued.  The man who is illegally selling food on the underground market will not be accepting the most widely controlled, monitored, and manipulated form of currency, digital currency.  He will be accepting something he can feel the weight of and bury under his back porch.  

Also, if the gov't has made holding gold illegal, chances are it will have also instituted some kind of controls on commodities/gas/food/etc and the trading thereof.  If you can't legally buy or sell an essential good, you better have gold to buy it illegally.

The GREATER the control over the above-ground currency, the GREATER the value of the underground currency.   Seems to me, anyway.  


Fri, 08/19/2011 - 21:19 | 1579603 Mad Cow
Mad Cow's picture

I agree there are always cracks in any system, and no system lasts forever, but, being in a position where you rely on someone's sense of "value," and using gold as your only "currency," means that you aren't prepared as well as you should be.

I would say that self sufficiency should be the first goal one attempt to obtain if it's a hedge against a SHTF scenario, then stack the precious as a secondary, if the first is realized.

Fri, 08/19/2011 - 22:31 | 1579973 Bolweevil
Bolweevil's picture

Bravo Annie!

Sat, 08/20/2011 - 13:17 | 1581355 mkkby
mkkby's picture

I respecfully disagree.  Buying black market goods and services will not support saving your wealth in gold.  If it is illegal to trade in gold, you may be able to get small items.  You will never be able to buy real estate, major appliances, cars, business equipment, etc.

Unless you can use it to fulfill contracts legally, it will be unlikely to retain it's value.  The number of people trying to trade gold for cigs would likely bring out a lot of supply.

It is possible that gold will back a currency again.  But it is much more likely an electronic format will be used. Anyway, enough speculating on the future.  Nobody knows.

Wed, 08/24/2011 - 00:37 | 1593805 AustriAnnie
AustriAnnie's picture

Thats funny, people buy vehicles with food stamps, and thats not exactly legal either.....If it has value, its tradeable.  If it keeps its value longer than manipulated currencies, its definitely tradeable.

Think of the savings the guy who sells the property to you makes if he puts one price on paper and takes some gold on the side. Legal? No. Does it happen? Everyday.  The problem is that most people have no idea how to deal in the grey areas, they swipe their credit card and go to the bank.  A large part of the world finances businesses and real estate purchases through informal channels/networks.  Indians and Chinese for example rely heavily on private loan systems.  Most of the world knows how to deal in underground transactions because thats the only way to get by in most places.  Wonder what a farmer would sell his farm for in Zimbabwe during the worst inflation ever?  Something formal?  Or something that feeds his family?

Also, just because gold is not legal in the U.S. does not mean its illegal everywhere else.  

Sat, 08/20/2011 - 13:08 | 1581310 mkkby
mkkby's picture

Mad Cow is correct.  TPTB will never allow gold to be a currency again.  It would mean they'd lose control of their empire.  It would mean they wouldn't be able to pay for their wars and social services.  You can't believe the bankers rule the world, and believe gold will be a currency again.

Fri, 08/19/2011 - 16:06 | 1578674 SilverRhino
SilverRhino's picture

Silver's finally moving out of it's trading range.   42.86 OMG about fucking time.   .... Of course I EXPECT some kind of massive raid or rule changes that will drive it to 40 in the next 24 hours. 

Fri, 08/19/2011 - 16:45 | 1578914 IQ 145
IQ 145's picture

The price chart shows it's very overbought. It could trade at $1675 again, two months from now, and still be in a bull market. It went a "little bit exponential", kinda like being a little bit pregnant, I guess, but that's what the price chart looks like.

Fri, 08/19/2011 - 15:29 | 1578522 gwar5
gwar5's picture

 

For the Apocolypse, I'm really looking for something with smooth edges I can just swallow to get through border crossings.

 

Fri, 08/19/2011 - 15:41 | 1578574 Missiondweller
Missiondweller's picture

Then I'd recommend the Maples over Philharmonics. The serrated edges are a bit tough going down.

Fri, 08/19/2011 - 17:15 | 1579055 gwar5
gwar5's picture

Much tougher coming out too, and the diameter is a real stretch. 

Sat, 08/20/2011 - 06:54 | 1580585 Uncle Remus
Uncle Remus's picture

eeeyooow

Fri, 08/19/2011 - 15:49 | 1578580 SheepDog-One
SheepDog-One's picture

Gold suppositories? For years, I wore this uncomfortable chunk of metal....up my ass...in a POW camp...for you.

Pulp Fiction- The Watch - YouTube

Fri, 08/19/2011 - 17:13 | 1579049 gwar5
gwar5's picture

The watch was good to 100 psi.

Fri, 08/19/2011 - 16:44 | 1578908 flattrader
flattrader's picture

Precious gems travel well.

And then there's these smallish gold items-

http://www.apmex.com/Category/1216/Gold_Gift_Items_Under_an_OunceBars__R...

 

Fri, 08/19/2011 - 17:21 | 1579095 gwar5
gwar5's picture

Those 1 ouncers are packaged. The 100g ingots are still small enough for any safe passage.

 

 

 

Fri, 08/19/2011 - 15:30 | 1578525 ReactionToClose...
ReactionToClosedMinds's picture

First ... 'Tyler D' must be a team of 3 people .... how do you/they read so quickly, fathom then post  ... so much/so good/so relevant ... no editor, no sound boards, etc.  Observe Orient Decide Act (OODA)

Can someone frame the divergence between miners & physical ..... I can frame 5-8 reasons for some divergence of magnitude ... but nothing like this ...

Fri, 08/19/2011 - 15:54 | 1578625 papaswamp
papaswamp's picture

The first rule about TD is you do not talk about TD.

The second rule about TD is you DO NOT talk about TD.

Fri, 08/19/2011 - 16:11 | 1578698 ReactionToClose...
ReactionToClosedMinds's picture

apologies for the 'compliment' ..... strike the above

Fri, 08/19/2011 - 19:25 | 1579494 AustriAnnie
AustriAnnie's picture

+1

Fri, 08/19/2011 - 16:48 | 1578921 IQ 145
IQ 145's picture

Just consider this your education; you're not supposed to own any mining stocks. mining stocks are stocks; that's the basic problem. precious metal people own the precious; not stocks.

Fri, 08/19/2011 - 17:29 | 1579130 gwar5
gwar5's picture

What the other guys said...

but supposedly, the miners are primarily depressed because they've hedged their future gold production and they're not getting this ride. GATA.org has recent guests explaining the miners and their prospects for turnaround.

 

 

Fri, 08/19/2011 - 15:30 | 1578527 buzzsaw99
buzzsaw99's picture

If one were to short a bond TPS might be the way to go (right before the August CPI is announced next month). [/not advice]

Fri, 08/19/2011 - 15:32 | 1578531 slaughterer
slaughterer's picture

You know what, FUCK everyone who sees risk in GOLD.  They have ben wrong and will remain wrong.  I fully expect $2505 by year's end, and perhaps a blow-out top at $16,800 ext year.

Fri, 08/19/2011 - 15:38 | 1578565 nodhannum
nodhannum's picture

I do miss the gold chain on your ex avatar slaughterer :-)

Fri, 08/19/2011 - 15:53 | 1578620 slaughterer
slaughterer's picture

I felt sorry for the drone bee workers who complained they could not read ZH at work without getting fired for viewing porn (guess they do not work for the SEC or Fed(.  So I took my tits off.  Eating my peas.    

Fri, 08/19/2011 - 15:55 | 1578632 papaswamp
papaswamp's picture

I miss your tits...

Fri, 08/19/2011 - 16:36 | 1578835 Montecarlo
Montecarlo's picture

me too!

Fri, 08/19/2011 - 20:01 | 1579608 Stax Edwards
Stax Edwards's picture

I appreciate you looking out for us little guys :)

Sat, 08/20/2011 - 16:48 | 1581937 I am a Man I am...
I am a Man I am Forty's picture

bring the tits back, too fucking bad for them, they need to grow a spine anyway

Fri, 08/19/2011 - 15:45 | 1578590 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Are you the shoeshine boy?

Fri, 08/19/2011 - 15:55 | 1578627 slaughterer
slaughterer's picture

No, a rational macro hedge fund manager.  

Fri, 08/19/2011 - 16:51 | 1578935 IQ 145
IQ 145's picture

"rational macro hedge fund manager"----next month he'll be the parking lot guy.

Fri, 08/19/2011 - 15:45 | 1578592 Oro
Oro's picture

Hit the nail on the head.

Fri, 08/19/2011 - 15:57 | 1578635 Smiddywesson
Smiddywesson's picture

Exactly.  When the Chairsatan stops buying, I will listen to someone about the risk of falling gold prices. 

When someone tells me how central banks all over the world buying, at the same time, after decades of selling, is bad for gold prices, I will listen.

When someone tells me why the banks would plough liquidity into tradition when they desperately need it to survive, then I will listen.

When someone tells me that the banks, after decades of holding down gold prices, cannot raise them and thereby raise the value of their gold holdings, I will listen.

When someone tells me that making gold the measuring stick of wealth, and raising the value of their gold, thereby making themselves solvent, won't instantly cut the value of everything I own, i will listen.

Until then, I see this as a risk free trade.  I view the margin increases as evidence of their impotence, not their strength.  If they could stop this, gold would still be at $300, and it certainly wouldn't be earning 1% or more a day.   

Fri, 08/19/2011 - 16:10 | 1578696 WonderDawg
WonderDawg's picture

The only thing I'll say is that central banks have a history of buying gold at the top and selling at the bottom. For whatever that's worth.

Fri, 08/19/2011 - 19:02 | 1579407 akak
akak's picture

And that "history" involves just how many central banks exactly (1? 2?), and just how many years (12, maybe 20 or so max)?

Like most hopelessly short-sighted and blinkered Americans, you need to take a longer and broader perspective.

Fri, 08/19/2011 - 19:33 | 1579525 AustriAnnie
AustriAnnie's picture

Everyone thought Jim Sinclair was crazy with his $1650 then $3000 call.  How people LAUGHED at him for saying there would be QE to infinity.  No way would that happen!, they said.  No way would there be bailouts and massive QE!

They aren't laughing at him so much now.

In this world I'm of the "anything is possible" school of thought.  Nothing is surprising anymore.  $16,800 looks crazy, but then again, the whole world is crazy.  A few more rounds of QE and $16,800 will buy you a cup of coffee.

Sat, 08/20/2011 - 13:23 | 1581380 mkkby
mkkby's picture

Hey, Slaughter -- You know what, FUCK everyone who sees risk in internet stocks.  They were wrong and will remain wrong.  I fully expect Nasdaq 6000 by years end, and perhaps a blow-out top at 16,800 ext year.

Ebay and Pets.com at $10,000 bitchez!!!

Fri, 08/19/2011 - 15:33 | 1578540 navy62802
navy62802's picture

Simple is the path to profit. Complicated is the path to moderate profit.

Fri, 08/19/2011 - 15:55 | 1578630 jm
jm's picture

Buying what is cheap is the path to profit.  Complicated is always second best.  But when you are locked in, sometimes it is unavoidable.

Fri, 08/19/2011 - 15:59 | 1578645 Smiddywesson
Smiddywesson's picture

Jesse Livermore would disagree.  He said stocks were never too expensive to buy or cheap to sell.  In the case of gold, I would doubly agree because we are not looking at a trend caused by mere speculation.

Fri, 08/19/2011 - 15:34 | 1578544 Gunther
Gunther's picture

 

The fancy math does not cut it without much more detail. Moreover, since when can a correlation that might be for a reason or it might be a nonsense-correlation be extrapolated into the future?

 

Way simpler, the monetary metal gold is in a bull market while the commodity platinum moves sideways.

Good luck with this trade.

Fri, 08/19/2011 - 15:58 | 1578638 jm
jm's picture

All we have is history and imagination.  When gold is more expensive than platinum, history is not on gold's side.

As for imagination, there is something real to it, but winning that way is called luck.

Thx for the best wishes.

Fri, 08/19/2011 - 16:28 | 1578771 Smiddywesson
Smiddywesson's picture

All we have is history and imagination.  When gold is more expensive than platinum, history is not on gold's side.

When the US economy is rapidly resembling the Weimar Republic, history is on gold's side.  This isn't the 70s, so that history is out the window.

Central banks are buying gold, not platinum or silver.  Therefore, they are unable to control gold prices, but have been fairly successful with the other two.  When central banks stack "tradition" and kick the can, history is on the side of the gold trader.

Fri, 08/19/2011 - 16:40 | 1578868 jm
jm's picture

From a Weimar perspective:

I need a store of wealth that is portable and resistent to dilution until the dust settles and you can move into productive assets.  Gold isn't the only game in town for this.  Why not take something that is relatively cheaper for the purpose.

Also, a major reason why gold is skying is because people increasingly anticipate some game-changing upheaval and pricing it in.  What if this doens't happen?   

Honestly, while I think there are going to be major changing in the future, people will adpat and it will look more evolutionary than revolutionary. 

 

Fri, 08/19/2011 - 17:17 | 1578998 vast-dom
vast-dom's picture

did you price in Israel bombing Iran in Sept, latest Oct?

if you did, then your braid trade is shit. but i still wish you luck, sincerely.

 

and i could be wrong too.

Fri, 08/19/2011 - 17:08 | 1579020 Man Bear Pig
Man Bear Pig's picture

I need a store of wealth that is portable and resistent to dilution until the dust settles and you can move into productive assets.  Gold isn't the only game in town for this.  Why not take something that is relatively cheaper for the purpose.

Because gold is the only MONETARY game in town. The game-changing upheaval is the final admission that, yes, in fact gold IS money. Kind of like if everyone currently thought a $100 bill was only a piece of paper, and are slowly figuring out that it can actually be traded for goods and services worth far more than a mere piece of paper.

Fri, 08/19/2011 - 18:00 | 1579238 jm
jm's picture

Where are all the silver people?  Should be jumping your ass.

Fri, 08/19/2011 - 19:52 | 1579573 Prometheus418
Prometheus418's picture

It's unseemly to gloat when you made %5.56 in a single day. 

 

Fri, 08/19/2011 - 15:37 | 1578558 Sophist Economicus
Sophist Economicus's picture

This trade may have worked in the past, but, like all neat charts that look backward, it misses the 'rationale' for parity and beyond.    There is no way that shorting gold, right here and now, has any KNOW risk/reward metric.    We are in uncharted waters....

 

 

Fri, 08/19/2011 - 15:51 | 1578608 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Sort of all goes back to effecient markets discounting things correctly (and who's to say they aren't just because risk of helladepression2 is priced high and doesn't happen to occur?)

Its pretty simple to explain why the two data sets presented would break correlation now.  Platinum and gold?  One is a monetary metal used by central banks, the other an industrial one used to make stuff.  UST vs. GO bonds?  One can print money and never default(nominally), the other is the opposite.

You may as well just say "If fear has taken over irrationally buy any risk asset".  I'm not even a financial guy, just a pissed off ghost of a grizzled old bastard politician and I know that. 

Fri, 08/19/2011 - 16:01 | 1578650 jm
jm's picture

That's really what it comes down to.  If gold is demanded because it is money, or if it has stable demand resistant to douchebaggery.

If the latter then platinum is just as good IMHO.

 

Fri, 08/19/2011 - 16:30 | 1578790 Smiddywesson
Smiddywesson's picture

I wish I had said that, but that is the case with most of your posts.

Fri, 08/19/2011 - 15:38 | 1578561 MFL8240
MFL8240's picture

Laughable article!

Fri, 08/19/2011 - 15:38 | 1578562 Missiondweller
Missiondweller's picture

That fourth paragraph reads like a CFA exam question.

Fri, 08/19/2011 - 15:42 | 1578578 Piranhanoia
Piranhanoia's picture

The assumption that one can ride an apocalypse then a cheery xmas card don't fit.  Like a famous line from a film goes;  "I do not think it means what you think it means"(Inigo Montoya)  The idea that you will get anything of value back post apocalypse through the telephone or by contacting customer service online isn't built in to your premise. Those things that you use to talk to your wealth will be gone, as will your assumed wealth. 

Fri, 08/19/2011 - 16:03 | 1578664 jm
jm's picture

Well, I actually don't think there is going to be any sort of an apocalypse, but that doesn't stop markets from pricing it in anyway.  If one didn't think the market was wrong, one should never trade.

Fri, 08/19/2011 - 15:44 | 1578579 lieutenantjohnchard
lieutenantjohnchard's picture

why is it that gold is fighting history and not platinum? it reminds me of folks saying that gold is expensive rather than saying that the dollar is collapsing.

Fri, 08/19/2011 - 15:45 | 1578591 spartan117
spartan117's picture

Who the hell is "JM", and why should I care what he/she thinks?

Fri, 08/19/2011 - 15:52 | 1578609 pgarner
pgarner's picture

+1

+10

+100

Fri, 08/19/2011 - 15:55 | 1578598 raki_d
raki_d's picture

But..isnt it true that "physical"-gold is money & physical-platinum just a commodity-metal ???

Fri, 08/19/2011 - 16:11 | 1578701 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Depends on if you think the same powers that be will emerge from this clusterfuck or if we have madmax anarchy.

For as much as all the central bankers say gold is a relic, they all have a bunch of it.  They know the historic score with fiat.  When this try at it reaches the same historical conclusion one metal will be used by central banks, the other for industrial production ( which will likely be in the shitter).

Fri, 08/19/2011 - 17:06 | 1579010 IQ 145
IQ 145's picture

Hey there's a fly crawling around on your avatar; I tried three times to wipe it off my flat screen. Far out. LOL! With regard to your post; t he word TRUE; is very problematical. In this case we would have to examine the market price behavior of the two metals in order to form a probability analysis. The answer would come out something like; nowadays Gold is more of a moneyish metal, and platinum in more of a expensive/tech. industry metal. The real failure with the discussion is that the platinum market is very very small and it has the holy snot manipulated out of it periodically; sophisticated metals traders just leave it alone; it's strictly for amateurs and commercial users.

Fri, 08/19/2011 - 18:03 | 1579256 jm
jm's picture

I think it's a smaller market because supply is tighter.  But anyhow, look at the picture.  It says more about platinum than any other retort. 

Fri, 08/19/2011 - 15:49 | 1578602 Nothing To See Here
Nothing To See Here's picture

I see no downside to gold. It allows you to ride the speculation effects of those going in without a real understanding of monetary debasement, and it provides you an insurance against tail risks at the same time. Win or win.

If SHTF, even the most clueless people like Paul Krugman and his readers will want to buy gold, even though they will not understand why they buy it. And before SHTF, monetary debasement can only drive gold up. I see no reason to own anything else but PMs.

Fri, 08/19/2011 - 16:04 | 1578669 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

because you can't eat gold?  Err... mmm..... I mean what if the world leaders decide to get their sovereign shit together or nano robots make productivity 200% better overnight?  Then you lose with gold. 

But in all seriousness, there is a downside to gold in the lack of interest or dividends.  Its just that everything else has so much other risk involved right now but that won't always be the case.

In terms of S&P priced in Gold we're a lot closer to the historical lows than the insane peak in 2000.  Don't forget that Gold is meant as a way to pull your wealth from a corrupt system temporarily so you can redeploy it.  Well, maybe you should forget that so I have a bigger sucker to sell my stash to when the end comes in the next few years.

Fri, 08/19/2011 - 16:11 | 1578700 Nothing To See Here
Nothing To See Here's picture

Can you eat interest or dividends paid in paper money?

Once the world gets rid of the State and of crony capitalism, then gold will become useless, except of course for the fact that the only good money in a free society will then be universally recognized as being gold.

Fri, 08/19/2011 - 16:30 | 1578782 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

One can eat interest and dividends in paper as much as one can in Gold.  That is, as much as others are willing to accept it.  You are assuming there will be no paper currency accepted anywhere for anything.  There is not much historical precendent for that view as far as reserve currencies go.  They will be devalued greatly but not gone all together.  Think British Pound in the 19th century instead of various latin american pesos.

Furthermore, as an owner in shares of stock I'll get a portion of whatever the earnings are priced in.  Doesn't have to be dollars.  If S&P Companies accept cigarettes and handjob vouchers thats fine with me if I get dividends on those.

The point is that there is a time where some new currency will take hold that will allow one to reap the benefit of productive capital and that will outweigh the risks of said currency for several decades until that whole system crumbles again.  There will be a time when your gold's purchasing power for real stuff and productive assets is maximized and then there will be a downside to gold.  Historically it will be about parity with the DOW or single digit multiples of the S&P.  Then I will trade mine for handjob vouchers to trade for shares of blue-chip companies or copper or handjobs.

Fri, 08/19/2011 - 16:42 | 1578895 Smiddywesson
Smiddywesson's picture

I see no downside to gold.

Trading anything but PMs now is just gambling, even if you trade the short side.  I agree, gold has no downside and no price target.  When the manipulators let go, the price will pop.  Then when they actually join the buying frenzy they will manipulate prices higher, not lower. 

Putting yourself in their shoes, the only restraint they will have is creating outrageous inflation due to people cashing out their gold at outrageous prices.  Any way you figure it, the medicine the world economy is going to take to dig the banks out of insolvency is going to require astronomical gold prices

Fri, 08/19/2011 - 15:51 | 1578606 Phillips Capital
Phillips Capital's picture

what makes you think platinum is so correllated to gold? 

Fri, 08/19/2011 - 16:16 | 1578724 jm
jm's picture

Correlation isn't as big an issue as when gold trades at par (or near) to platinum.  At that point, there are poeple who will trade into platinum as a substitute thus the correlation is strong at these levels.

  

Fri, 08/19/2011 - 15:53 | 1578610 Gunther
Gunther's picture

duplicate deleted

Fri, 08/19/2011 - 15:58 | 1578636 Peter_Griffin
Peter_Griffin's picture

Dow and US dollar down, gold up.  It's a flock to safety, I sure wouldn't short gold until the charts say otherwise.

Fri, 08/19/2011 - 15:58 | 1578641 Payne
Payne's picture

What happens to PM prices when the Government declares 50% capital gains tax?

Fri, 08/19/2011 - 16:04 | 1578668 raki_d
raki_d's picture

Government gets nothing .. :)

Fri, 08/19/2011 - 16:32 | 1578806 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

reverse alchemistry....the gold they come for gets turned to lead.

Fri, 08/19/2011 - 16:07 | 1578676 Roger O. Thornhill
Roger O. Thornhill's picture

If that happens gold will flee these shore like a scalded cat and more capital will reside off-shore. Not good for capital formation, which we will need to save this government made disaster. A worse scenario would be a black market - which always happens when government thinks they can control an economy.

Then you get more gangs and crime. Although with the stupidity I have seen it wouldn't surprise me.

Sat, 08/20/2011 - 06:59 | 1580591 Fred C Dobbs
Fred C Dobbs's picture

There might be capital controls preventing one from taking gold out of the country.  

Sat, 08/20/2011 - 13:33 | 1581420 mkkby
mkkby's picture

Thornie, I'm lol.  When gold was made illegal in the 30's, was there a big black market?  Did it all fee the country?  Nice imagination you have, though.

For all you doomers... in the 30's -- did everyone starve, riot and go feral like in a mad max movie?  You really need to stop listening to gurus and religious nuts.  They deceive just as much as gov and corps.

Fri, 08/19/2011 - 16:02 | 1578654 Roger O. Thornhill
Roger O. Thornhill's picture

Thinking the same thing - platinum is more like a commodity at this juncture.

We are in a weird time. Confidence in paper is getting shakier and shakier. Why do we believe these pieces of paper we collect have value? Because others believe it too. Why does gold have value, same reason, belief. Right now the believers in paper are feeling 'not so confident.' And gold can't be printed, that helps too.

Ultimately the whole market/world is a confidence game. If I can make enough people believe an ant stuck on a piece of scotch tape has value they will trade me things for it. It is that simple, and ridiculous.

But gold has the historic psychological power as money. That's it's edge. Society, for all the detractors, has a gut belief in gold, and has for so long it isn't worth fighting against. I have seen it in people's eyes when they see physical gold. They stare at it like they've seen something amazing. There is no denying that.

Overall I feel those running the show have blown it - no adults left to make the tough call until it's too late. And with that they will blow confidence. Gold will hold confidence better than paper. That's my macro view on it all.

Disclosure: I hold gold - because the belief in it has a much better history.

 

Fri, 08/19/2011 - 16:37 | 1578836 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

I think its simpler than that.  Gold is shiny and rare.  To wear it at jewlery means one is a great provider.  Chicks dig that.  Men dig things that chicks dig.  Gold was historically a voucher for machismo and sex and pretty much still is.

If only I understood that when I was a young man and threw my earnings to yellow colored shineys instead of cars, clothes, drinks and other crap for getting laid.  We really are just a bunch of monkeys trying to attract mates.

Sat, 08/20/2011 - 13:36 | 1581437 mkkby
mkkby's picture

Andy Jackson -- I agree.  Tulip bulbs are shiny and rare.  To have it means one is a great provider.  Chicks dig that.  Men dig things that chicks dig.

And so on...

Fri, 08/19/2011 - 16:03 | 1578660 Drag Racer
Drag Racer's picture

where is the article on silver? it is at 42.72 and climbing fast...

Fri, 08/19/2011 - 16:03 | 1578661 Internet Tough Guy
Internet Tough Guy's picture

Looks like a loser, but don't worry I am sure your counterparty for trades of derivatives of derivatives will pay you. In dollars which are nothing more than a deriviative of...gold.

You must have an advanced education to engineer something so complicated, and ultimately, stupid.

 For everyone else there is gold.

Fri, 08/19/2011 - 16:08 | 1578684 Jrsurf00
Jrsurf00's picture

are there any new chinese reverse merger frauds out there to short?

Fri, 08/19/2011 - 16:09 | 1578691 redpill
redpill's picture

I see correlation between you shorting gold and this trade failing spectacularly.

Fri, 08/19/2011 - 22:59 | 1580050 Bring the Gold
Bring the Gold's picture

I actually feel sorry for JM on a variety of levels...but LMFAO! ZING! +1857.30

Fri, 08/19/2011 - 16:17 | 1578713 Bear
Bear's picture

Platinum is a growth and wealth play while gold is ... well gold

Munis collapse is guaranteed ... the 20Y may stay here until Nov 2012

Fri, 08/19/2011 - 16:24 | 1578757 jm
jm's picture

I disagree about munis.  If the shit really does goes down in muni space, then the Fed bail out the states.  There's not enough T issuance with the debt ceiling stuff going on anyway.  That said, munis are in pretty good shape with some exceptions.

Not saying it is right, just how I think it will be.

Ts will ultimately stop being a derisking play given enough QE anyway.  The US is not like Japan in this respect.  Ts will be as sensitive to interest rate rises as anything else.  But that looks a long way off.   

Fri, 08/19/2011 - 16:53 | 1578944 Smiddywesson
Smiddywesson's picture

Munis are finished.  All of the spending cuts proposed came at the cost of support to state and local governments.  The money isn't there anymore on the Federal level and after 4 years of this situation, the tax revenues aren't there either.  State and local government is being killed by the housing collapse. 

Fri, 08/19/2011 - 17:03 | 1578988 jm
jm's picture

Tax revenues are down, yes.  Budgets are bloated, yes.  No help form Uncle Sugar, yes.

However, pensioners, staff, and operating expenses will be cut in line with revenue.  Guaranteed.  Why people can't see this as possible amazes me.  So when they do these cuts, there is no need for more issuance. Most of the muni space won't even need to roll debt then.  But the cuts are MASSIVELY contractionary.  Most stocks and other similarly crappy stuff will whither and money will go into munis that made the painful cuts to operate within reality. 

Without QE support, that is.  You read the headlines about Cali and illinois and some other basketcases and it sure looks like the world is going to fall apart.  Benny bucks is going to need something to buy.

Sat, 08/20/2011 - 07:02 | 1580595 Fred C Dobbs
Fred C Dobbs's picture

Martin Armstrong said the Fed would not bail out states.  They only look out for their own. 

Sat, 08/20/2011 - 09:27 | 1580752 jm
jm's picture

If Martin Armstrong has reasons he can spell out, I'm open to them.  Otherwise, I couldn't care less.

I like Missouri GO bonds a lot.  And a good revenue bond is tough to beat.

 

Fri, 08/19/2011 - 16:31 | 1578798 Invisible Hand
Invisible Hand's picture

I own gold/silver/gold miners.  If gold goes down, I will buy more.

However, I think we should all just chill a little about who is right about the best investment.  My belief is that it really doesn't matter.

Gold cannot help but go up (in dollar terms) because the dollar will ultimately be replaced by a new fiat.  Same is true for other currencies.

However, owning gold will probably NOT do anyone alive today much good because it will soon be made illegal to own it.  Whether you comply and turn it in has no effect on whether it is any use to you.  If it is illegal to own gold, no one but criminals will have gold (to paraphrase).  Are you a big enough criminal to flout the law with impunity?  If so, you don't need gold.  If not, you will be crushed  You can bury it and you children or grandchildren may be able to use it.  Last time it took 40 years to make gold legal again.  Next time, who knows.

I do know that when pushed, whoever takes power will take wealth and gold is always wealth.  No matter what you own, where you invest, the thieves are going to be in charge again--soon.  That is how it has almost always been (except for very brief periods) and how it will be again soon.  If you escape with your life, consider yourself lucky.

Enjoy today.  It is all you have.  Some think we are living in 1929 US again.  I think we are living in 1939 Germany (or maybe 1861 Alabama).  The world will not end, but OUR world is ending as we watch.  You cannot negotiate with fate, you cannot out smart it (or most can't), you can only live through it as best you can.

Yes, I still invest.  I watch the market and watch the digits in my account balance change.  You have to do something while you wait for the apocalypse.  Just don't put off living until it is too late because you are trying to prepare for the future.  Our future cannot be prepared for.  Don't be the Jewish shop keeper that worked late every night, right up until Kristallnacht.

Fri, 08/19/2011 - 16:40 | 1578877 Andy_Jackson_Jihad
Andy_Jackson_Jihad's picture

Ok, so what you're saying is work late every night and then flee to another country, form a lobby, buy all the media companies and rule the world by proxy?  Sounds like a plan...

Sat, 08/20/2011 - 07:20 | 1580615 Fred C Dobbs
Fred C Dobbs's picture

I always wonder why people have heated arguments about how investments will go in the future.  The future always comes, all we have to do is wait.  One's opinion will not change what happens.  

I own over 200 hundred thousand dollars in mining mutual funds and ETFs.  You think they will go up because gold may be illegal again someday.  I think they will go up when investors loose faith in GLD and SLV.  If GLD is as crooked as some believe and that becomes the general consensus most of that money will be going to mining shares.  

Of course I have physical too.  My gold is outside the US because I think you may be right.    

That is what I think and how I am invested.  We will see what happens.  

Fri, 08/19/2011 - 17:48 | 1579200 MrPoopypants
MrPoopypants's picture

The short gold / long platinum spread should be short CHF / long platinum, as CHF is "gold lite" and underperforms AU. I would only place this trade as an alternative to counter trend rally plays (i.e. long ES, short VIX) when panic selling decelerates and takes a breather.

The time to sell gold is probably within a year or two, when the new world reserve currency is unveiled. But who knows, it may get chopped down before then. Don't underestimate TBTP.

Fri, 08/19/2011 - 18:06 | 1579260 jm
jm's picture

I thought about short JPY/ long platinum a little.  What do you think about that pair?

Fri, 08/19/2011 - 18:15 | 1579284 Stuck on Zero
Stuck on Zero's picture

Question:  I've been unfortunate to hold some stocks that have gone 10-20 years without more than a 20% variation in price and that do not pay dividends.  Why the hell would anyone owns shares in such POSs?

Fri, 08/19/2011 - 18:31 | 1579331 Jovil
Jovil's picture

Living through a currency devaluation and how to cope

I was managing an American subsidiary of a successful large US Company in Mexico. It had been a financial turnaround for our team. Cash flow had accumulated in our bank in Mexico and corporate didn’t want the money repatriated to the US. Although we had already paid a 35% income tax to the Mexican government, we would have to pay an additional 30% exit tax to repatriate the money. In addition, we would have to pay high fees for the peso/dollar exchange, in order to make the transfer. The company wanted to expand our successful business and so we decided to keep the money in Mexican pesos to be used for further expansion.

 

One morning, as my wife and I were on a trip driving on the highway, we heard a national message from the President of Mexico in 1976, Luis Echevarria, one of the most corrupt presidents in Mexican history. “It is a lie that we are going to devalue the peso,” he said.

Read more

http://lonerangersilver.wordpress.com/2011/08/13/living-through-a-curren...

Fri, 08/19/2011 - 19:51 | 1579571 John_Coltrane
John_Coltrane's picture

I think PJ O'rouke got the essence of capital markets and trading when he said, "after all the frenzied action i watched on the NYSE exchange, I realized its all just about trading opinions"  And like assholes, everyones got one.  Anyone who's ever put on a "sure thing" pairs trade and watched it go the other way knows this.  Making it a paired trade just makes it worse then if you just went unhedged on one leg.  That said, I'm long GLD and agriculture (CF), short financials (C, MS, HIG, AIG), industrials (GM, X, SCCO, RIG) etc.  So, you could say I'm a bit pessimistic regarding the magical "china story/myth" and global growth.  I'll change my opinion when we quit running 1.4T$ annual deficits and get GDP/debt under 50% again.  In other words, a time frame of "when pigs fly" or "hell freezes over".

Fri, 08/19/2011 - 21:31 | 1579817 jm
jm's picture

Well, if you looked at a busy restaurant kitchen it would look like the exact same kind of chaos.  There is some chaos going on and plenty of people just going through the motions. Even some people that just play around with others money.  But you also have people that take their charges very, very seriously.  They do not stop thinking about risk-adjustments and solving probelms, implementing new approaches, and are conditioned to exploit perceived adventage.

If you take risk sometimes you look like a jerk.  It's best to shrug off the failures and keep going.   

Fri, 08/19/2011 - 21:41 | 1579840 lolmao500
lolmao500's picture

If Obama could start another war... silver would skyrocket...

Sat, 08/20/2011 - 17:43 | 1582080 Dempster
Dempster's picture

I hope gold goes to $25,000 an ounce, and you know why, because as long as 'investors'  are inflating the price of gold, they won't be inflating the price of the stuff we need to live, such as food, beer, chocolate and motorbikes and other such essentials. 

I hope they push the price to some farcical high. Because if they do I'll be able to eat well drink well, and spend many happy days wandering from cafe to brew stop on my motorbike.

The more it goes up the better it is for all those who don't actually want it. 

Sat, 08/20/2011 - 20:18 | 1582404 jm
jm's picture

You make the case for the best inflation hedge being a good wine cellar...

 

When I was younger, I bought a half dozen bottles of 1976 and 1978 Chateau Lafite d'Rothschild from the recently dead Ceausescu's palace stash.  For about $10.  

Mon, 08/22/2011 - 03:52 | 1585164 ZeroPower
ZeroPower's picture

Sweet, sincerely hope you still have a few of those Lafites lying around..

Mon, 08/22/2011 - 03:51 | 1585163 ZeroPower
ZeroPower's picture

Good article JM.

So many times we see gold:dow or gold:silver ratios being brought up here, all indicating stratospheric rises for one or the other. Yet noone mentions platinum - despite seemingly enjoying a 'rear view mirror' look at PMs and their px perf.

Perhaps platinum is as unloved now as gold was at the start of the last decade... nice idea for a trade in any case.

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