Next Topic - Poll result

Here is the result of the poll for our next topic:

Is it safe to invest in Gold?

After the recent poll, I have understood that the two main questions my readers would like me to address are: "Is it safe to invest in Gold?" and "What is the Economic Outlook for 2010?". I will try to answer here the first question. I will explain why investing in Gold is safe and why it may be not.

Next Topic - Poll Result

The Winner of the Poll question is " Is it safe to invest in Gold?" with 55% of the responses.

When making a decision, Consider your "Confirmation Bias"

Have you ever wandered why you do  what you do? Or why after your brother in-law tells you about buying stock X suddenly all the information around you point out to : X is a good buy? Well, a recent study shows that we are twice as likely to seek information that confirms what we believe rather than to consider evidence that contradicts those believes. This is called the the "confirmation bias". It is one of the most famous cognitive biases. My top list is as follow: Framing, Anchoring, Attribution error, Self-serving bias, and confirmation bias. Here after is a short article for Jason Zweig about the confirmation bias.

Results of the Poll on Gold Price at New Year's Eve

Readers were asked to give their best estimate for Gold Price at the End of the year 2009. Here are the results:

Less than $ 950:     6  %
$950 to $1,000:     12%
$1,000 to $1,050:  6  %
$1,050 to $1,100:  24%
More than $1,100: 52%

Expected value is ..... (roulement de tambour) ....$1,118.

The actual value as of 11/10/09 is $1,104.
The actual value as of 11/17/09 is $1,140.
The actual value as of 12/03/09 is $1,200.
The actual value as of 12/10/09 is $1,130.
The actual value as of 01/05/2010 is $1,121.50

Crossing the Chasm of the World Economy - The conundum of Consumption/Production

New York, New York, Brooklyn Bridge

Published by the IMF, the World Economy Outlook Oct. 2009  provides some quick facts about our economy and the possibility of a recovery.

According to these forecasts, the current rebound will be sluggish, credit constrained, and, for quite some time, jobless. Global growth is projected to reach about 3 percent in 2010, following a contraction in activity of about 1 percent in 2009. During 2010–14, global growth is forecast to average just above 4 percent, appreciably less than the 5 percent growth rates in the years just ahead of the crisis. Financial and corporate restructuring will continue to exert considerable downward pressure on activity, and wide output gaps will help keep inflation at low levels. Demand is likely to be dampened by the need in many advanced economies to rebuild savings. Downside risks to growth are receding gradually but remain a concern.

There is also a glimpse about balancing the global demand between countries who consumes more than they save while other countries save much more than they consume.

Achieving sustained healthy growth over the medium term also depends critically on rebalancing the pattern of global demand. Specifically, many current account surplus economies that have followed export-led growth strategies will need to rely more on domestic demand growth to offset likely subdued domestic demand in deficit economies that have undergone asset price (stock and housing) busts. By the same token, many external deficit countries will need to rely less on domestic demand and more on external demand. This will require significant structural reforms, many of which are also necessary to boost potential output, which has taken a hit as a result of the crisis. Key are measures to repair financial systems, improve corporate governance and financial intermediation, support public investment, and improve social safety nets.

Obvsiouly the reports does not say much about those structural reforms and which appearance they migth take.

Gold to Dow Ratio, an open window to ...

Sunset Beach

Adam Brochter speaks about the Gold to Dow ratio (GDR). His blog and approach revolves around the idea that the GDR tends to unity on the long run.  If you are not familiar with the GDR, start with this link for background information.

In Brochter's opinion the GDR is a good indicator of the value of the dollar and, as he mentions, allows to pin point inflationist and deflationist periods. He also advocates for people to get in charge of their own retirement plan by balancing their portfolio between Gold and stocks by basing his analysis on charting the GDR.

Brochter forecasts the Gold to Dow Ratio to increase over the next years from a value close to 0.1 to a parity value. He recommends therefore to sell stocks today, buy gold, hold 5 years and buy stock again.

However Brochter warns also against the current situation of the Gold bull market that will suffer corrections the coming years.

"When one thinks in terms of Gold versus Dow, the inflation versus deflation debate becomes much less meaningful in a practical sense. We have reached the stage where Gold is doing well because of loss of confidence in Wall Street and government policies. This loss of confidence, which will reach critical mass during the next leg down in the stock market, is what will continue to fuel the Gold bull market."

Basically two things can happend from four different reasons: GDR increases or stays low.
On one hand, if the GDR increases it can be because, ceteris paribus, the value of Gold increases, or that the Dow  value decreases. On the other hand the GDR could stay low which means that the Gold and the Dow changes in the same proportion. But is the Dow or the Gold good indicators of the Economy of the U.S?
Is the Dow a legitimate proxy for the capital market? Is gold a good proxy for the value of money? What is GDR telling us about? Doesn't it also tells the story about gross domestic product growth ? What are the consequences of a low GDR?


PS:  Some Critics about the Dow:

"The Dow is criticized for being a price-weighted average, which gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components. For example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the lower-priced stock experienced a larger percentage change. In addition, a $1 move in the smallest component of the Dow has the same effect as a $1 move in the largest component of the average. As of September 2009, IBM and Chevron are among the highest priced stocks in the average and therefore have the greatest influence on it. Alternatively, Alcoa and Pfizer are among the lowest priced stocks in the average and have the least amount of sway in the price movement. Many critics of the Dow recommend the float-adjusted market-value weighted S&P 500 or the Wilshire 5000, the latter of which includes all U.S. equity securities, as better indicators of the U.S. stock market."

The most expensive market?

A brief look at the Operating Earning / Price ratio  (the data can be dowloaded here SP500 Report) let me astonished of how high the market is valued.
Here is a graph to illustrate my point.

Not only the operating earnings are low but the price of SP500 has been rising along with optimistic forecast about economy recovery. Alarmist and deflationists anticipates a drop in the SP500 value in the coming weeks or months that will revert the SP500 value to its 12 month average mean, but it may not happen ...or may be it will. The question is, can the investors do better than a random walk?

Gold spicked, Oil Increased, Stocks climbed and the Dollar slumped

Gold reached the value of $1,045 an ounce, which is in line with the fact that the value of the dollar decreased and that price of stocks spiked. Analysts believe that Australia increase in interest rates explains the weakness of the dollar. But, is it the reason? Is it the only reason?

The loss of value of the dollar points towards an inflationary area that may start this quarter. But is it true? Is the socioeconomic environment ready for an inflationary and growth period? Are we not looking at indicators of a deflationary period?

I engage my reader to think about inflation and deflation, and invite him to read some authors - Prechter, Schiff, Chandler, Holmes-  that have taken a clear position about inflation or deflation, and to understand their arguments.

Ghandi's Birthday - India the Emerging Giant

Today it was Mohandas Karamchand Gandhi Birthday, a man of great importance, integrity and who had reached a spiritual understanding of mankind that made him a leader for India during the Indian independence.

For me, it was also the opportunity to research and read about Indian Economy. I went through the reading of India: the Emerging giant. I am really impressed by the growth and the governance of India in terms of its economy and the measures taken in Education, Agriculture modernization. However, I believe India still has a big challenge ahead in terms of transportation and water management.

I welcome my reader who would like to share its thoughts with me to do so.

Meanwhile, have a great day of non-violence!

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Gold vs Silver ?

Why the price of gold or silver are what they are ?

As for any commodity pricing has to do with Supply and Demand, so let's look at the supply and demand of Gold and Silver.

The apparent consumption for Gold was around 3,518 MT in 2007 and Silver was around 26,242 MT. The yearly world mine production of gold was 2,500 MT in 2007 and it was 20,500 MT for Silver.

Gold and Silver are actually showing a deficit between the Mining Production and the Demand. However, this deficit is cover by recycling old silver crap or gold recovery.

Nevertheless, some people and investors have looked at the long run situation, 15 to 20 years from now, and compared the ratio of Gold:Silver Price and the ratio Gold:Silver Available quantity.

As of today, the ratio is $833/$11 = 6.43 and the quantity to be mined is
42,000 MT/ 270,000MT = 15.6% . A huge difference that might lead to think that in the future the price of silver based on its availability or scarcity and the current price of Gold would be trading at : $833*15.6% = $130 !

Another Perspective would be to say that the price of Gold might be overvalued due to the Recession Environment and the weakness of the dollar.

Present Value of Growth Opportunities -PVGO

Looking at the current stock price level, it has become clear that the market have few expectations for the Growth Opportunities perspective. Stock Price has been low due to a low capitalized value of expected earnings and due to a low PVGO.
Far from being an handicap for traditional investors, it is in reality a factor which contributes to the high volatility of the market. Any news regarding the Growth Opportunities impact immediately the stock price in the range of 5% to 10%. From PALM to Apple, or from WallMart to BestBuy, any news impacting their PVGO impact the stock price in a higher range than before because the capitalized value of expected earnings is low.