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Submitted by JM

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 | baby_BLYTHE

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

Fri, 08/19/2011 - 15:28 | JW n FL

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 | Vic Vinegar

Passionate.

Fri, 08/19/2011 - 15:40 | ReactionToClose...

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 | Banjo

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 | CPL

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 | global

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 | ATM

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 | living on the edge

I call that smart.

Sat, 08/20/2011 - 12:53 | mkkby

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 | Panache for the...

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 | mynhair

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

Fri, 08/19/2011 - 15:52 | JW n FL

thats becuase the repugnants bought it all up!

Fri, 08/19/2011 - 15:42 | Smiddywesson

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 | stateside

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 | IQ 145

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 | I Told YOU So

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

Fri, 08/19/2011 - 18:02 | Sun Tsu

+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 | Man Bear Pig

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 | JW n FL

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 | SheepDog-One

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 | Smiddywesson

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 | JW n FL

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

Fri, 08/19/2011 - 15:49 | JW n FL

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 | Fortunes Favor

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 | Smiddywesson

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 | jm

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 | Mad Cow

@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 | AustriAnnie

"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 | Mad Cow

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 | Bolweevil

Bravo Annie!

Sat, 08/20/2011 - 13:17 | mkkby

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 | AustriAnnie

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 | mkkby

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 | SilverRhino

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 | IQ 145

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 | gwar5

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 | Missiondweller

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

Fri, 08/19/2011 - 17:15 | gwar5

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

Sat, 08/20/2011 - 06:54 | Uncle Remus

eeeyooow

Fri, 08/19/2011 - 15:49 | SheepDog-One

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 | gwar5

The watch was good to 100 psi.

Fri, 08/19/2011 - 16:44 | flattrader

Precious gems travel well.

And then there's these smallish gold items-

Fri, 08/19/2011 - 17:21 | gwar5

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

Fri, 08/19/2011 - 15:30 | ReactionToClose...

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 | papaswamp

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 | ReactionToClose...

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

Fri, 08/19/2011 - 19:25 | AustriAnnie

+1

Fri, 08/19/2011 - 16:48 | IQ 145

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 | gwar5

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 | buzzsaw99

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 | slaughterer

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 | nodhannum

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

Fri, 08/19/2011 - 15:53 | slaughterer

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 | papaswamp

Fri, 08/19/2011 - 16:36 | Montecarlo

me too!

Fri, 08/19/2011 - 20:01 | Stax Edwards

I appreciate you looking out for us little guys :)

Sat, 08/20/2011 - 16:48 | I am a Man I am...

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

Fri, 08/19/2011 - 15:45 | Andy_Jackson_Jihad

Are you the shoeshine boy?

Fri, 08/19/2011 - 15:55 | slaughterer

No, a rational macro hedge fund manager.

Fri, 08/19/2011 - 16:51 | IQ 145

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

Fri, 08/19/2011 - 15:45 | Oro

Hit the nail on the head.

Fri, 08/19/2011 - 15:57 | Smiddywesson

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 | WonderDawg

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 | akak

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 | AustriAnnie

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 | mkkby

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 | navy62802

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

Fri, 08/19/2011 - 15:55 | jm

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 | Smiddywesson

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 | Gunther

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.

Fri, 08/19/2011 - 15:58 | jm

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 | Smiddywesson

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 | jm

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 | vast-dom

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 | Man Bear Pig

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 | jm

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

Fri, 08/19/2011 - 19:52 | Prometheus418

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

Fri, 08/19/2011 - 15:37 | Sophist Economicus

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 | Andy_Jackson_Jihad

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 | jm

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 | Smiddywesson

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

Fri, 08/19/2011 - 15:38 | MFL8240

Laughable article!

Fri, 08/19/2011 - 15:38 | Missiondweller

That fourth paragraph reads like a CFA exam question.

Fri, 08/19/2011 - 15:42 | Piranhanoia

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 | jm

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 | lieutenantjohnchard

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 | spartan117

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

Fri, 08/19/2011 - 15:52 | pgarner

+1

+10

+100

Fri, 08/19/2011 - 15:55 | raki_d

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

Fri, 08/19/2011 - 16:11 | Andy_Jackson_Jihad

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 | IQ 145

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 | jm

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 | Nothing To See Here

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 | Andy_Jackson_Jihad

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 | Nothing To See Here

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 | Andy_Jackson_Jihad

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 | Smiddywesson

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 | Phillips Capital

what makes you think platinum is so correllated to gold?

Fri, 08/19/2011 - 16:16 | jm

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 | Gunther

duplicate deleted

Fri, 08/19/2011 - 15:58 | Peter_Griffin

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 | Payne

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

Fri, 08/19/2011 - 16:04 | raki_d

Government gets nothing .. :)

Fri, 08/19/2011 - 16:32 | Andy_Jackson_Jihad

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

Fri, 08/19/2011 - 16:07 | Roger O. Thornhill

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 | Fred C Dobbs

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

Sat, 08/20/2011 - 13:33 | mkkby

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 | Roger O. Thornhill

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 | Andy_Jackson_Jihad

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 | mkkby

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 | Drag Racer

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

Fri, 08/19/2011 - 16:03 | Internet Tough Guy

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 | Jrsurf00

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

Fri, 08/19/2011 - 16:09 | redpill

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

Fri, 08/19/2011 - 22:59 | Bring the Gold

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

Fri, 08/19/2011 - 16:17 | Bear

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 | jm

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 | Smiddywesson

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 | jm

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 | Fred C Dobbs

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

Sat, 08/20/2011 - 09:27 | jm

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 | Invisible Hand

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 | Andy_Jackson_Jihad

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 | Fred C Dobbs

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 | MrPoopypants

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 | jm

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

Fri, 08/19/2011 - 18:15 | Stuck on Zero

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 | Jovil

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.

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

Fri, 08/19/2011 - 19:51 | John_Coltrane

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 | jm

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 | lolmao500

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

Sat, 08/20/2011 - 17:43 | Dempster

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 | jm

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 | ZeroPower

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

Mon, 08/22/2011 - 03:51 | ZeroPower

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.