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Trading Lessons

Gold’s Toxic Noose Is Untied: Next Crude Oil $150

Commodities / Crude Oil Nov 04, 2010 - 12:34 PM GMT

By: Andrew_Butter

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleEven a Gold Sceptic can go along with the idea that Ron Paul could buy a smart outfit with one ounce of gold in 1920 (including shoes), and that’s how much he would need in 2010.

Although by that marker he would have needed four ounces in 2007, given that the sort of tailors that Ron frequents have slashed their prices in half; and the price of gold has doubled. But that’s just splitting hairs…Big Picture, it’s not a bad storyline, and the message is that gold holds value, regardless of how insane governments get.


And by all accounts the recent bunch were as insane as Edward II (and ought to have got what he got too (look it up – they do it to Tigers when they want to stuff them)).

What’s hard to understand is why gold prices have gone up so much in a time of very low inflation in the biggest economies in the world which, depending of course on your point of reference, might have included a touch of the dreaded deflation. Although no one wants to talk about that; anymore than they want to talk about the insanity of owner’s equivalent of rent.

Traditionally a good benchmark for the price of gold was the price of oil, which makes sense; oil is an essential, the world stops without it.

Go back to the time gold was set free by Richard Nixon and that explains 74% of the changes in the price of gold year on year. But by that marker, with oil averaging say $80 gold ought to be about $1,000; so according to that logic now gold at $1,360 is a bubble.

Of course another way to look at that is that Gold is correctly priced and oil, these days, ought to be $150.

Put that in your Stetson and chew it!!

In theory in the “modern world” oil ought to mean more to people than gold, but there again, the price of oil is not exactly something that is market driven.

On one hand there is a cartel, which ought to push prices higher, plus there is all that talk about “peak oil”. On the other hand there are incentives for despots like Saddam Hussein and Nigerian generals (etc) to pump out their country’s birthright as fast as they can and stash it out of reach of the grubby fingers of their subjects, by buying “protection”, in return for discounts.

So how do you figure out ultimate value, right now, in real time? Try this:

The white line explains 96% of changes in the price of gold on a year on year basis since 1996. Cute correlation Eh! That’s much better than oil prices as an explanatory variable.

So where does that come from…got to be spurious right?

Like some sort of random once in a lifetime constellation of completely uncorrelated events, like a Black Swan for example. We all know about Black Swans, the place has been swarming with them recently.

Maybe not! Try adding the US current account deficit (a negative number since 1996) to the amount of toxic assets that USA sold to dumb foreigners; then cumulate those numbers.

That’s not exactly some random numbers, and it’s not often you can get to 96% R-Squared from two lines of data compared to something that for all intensive purposes is independent. Who would have thought there might be a link? Like in

Σ (US Trade Deficit+ US Toxic Asset Sales)1996-i = φ +  λ Gold Price
          
By the way I could have written “B” and “C” (like in “a constant”) instead of φ and λ but I figured this is “economics” and I’ve noticed they like using those funny hieroglyphics, and I do like to “conform”.

Economics (whatever that is), or not, that’s not some random Black Swan; perhaps there is logic in there somewhere?

By the way also (sorry to keep changing the subject), I couldn’t help noticing how looking at that chart it seems broadly that the propensity of USA to spend more buying “stuff” from foreigners that the “stuff” it sold to foreigners (the current account deficit), got balanced out by sales of toxic assets (the official name for those is “US Securities Other than Treasuries”, (you can find them on Line 66 of  the “US International Transactions” on the BEA website):

http://www.bea.gov/international/index.htm#bop

So Americans hocked their houses so they could drive SUV’s with cheap imported gasoline, and (for example) they happily paid three times the price anyone else does to get that last shot of morphine that takes the pain to another place before you check out.

Sorry for the “dark” analogy, but you realise two things holding someone’s hand when they do that (a) it’s darn expensive in USA, and (b) in the end it often ends up as just a negotiation with the doctors about the settings on the morphine pump.

Here’s a tip by the way on dying in the modern world, make sure you got someone standing-by to negotiate that deal, and watch out for “euthanasia by de-hydration” which is a real favourite of the medical profession these days (they disconnect the drip and you die of thirst – it’s legal…make sure you have someone who won’t let them do that).

I got two points there (a) people die, they really do, and so do countries; and (b) 19% of GDP in USA is to pay for “medical”; if they paid market prices that would be less than 7%; that’s a cartel to die for (no pun intended).

The real point is did you ever wonder how come America managed to run such a huge current account deficit for so long without the dollar going to nothing?

Now you know! They borrowed to live beyond their means, but they didn’t finance the deficit by “printing” money, they did it out the back door. No one noticed how that was destroying value and the real purchasing power of the US Dollar, thanks to the genius of financial engineering.

But Gold Noticed!

Or more precisely it noticed when the actual difference between money coming in and money going out was no longer “neutralized” by the toxins that were being drip-fed into America. That did more damage than Osama bin Laden even dreamed about.

And for an encore, is anyone in the “market” for a Toxic Asset these days? How about a nice AAA rated synthetic collateralized debt obligation lovingly crafted by Goldman Sachs, with “Made in America with Pride” stamped on its backside?

My point is that sadly, although they had a great run, and from 2000 to 2007 Toxic Assets were America’s biggest export, the only people who are up for buying that garbage these days (at a price that comes anywhere close to what people paid for them), is the Sucker of Last Resort (as in on Wall Street, “the value of something is what you can sell it for, to someone dumber than you”).

And the next Plan is QE-2!!

OK I admit it; I’ve been wagging the dog from its tail.

And actually that’s a bit of an over simplification (although it’s hard to argue a lack of cause and effect with 96% R-Squared, even if you are an economist).

And sure the explanation is that what matters in terms of determining what the REAL value of a US dollar is (like measured against gold), is the accumulation of how many dollars went “OUT” compared to how many came “IN”.

So if you plot the net current account position (goods & services) plus the net financial accounts, against gold you can get an 81% R-Squared (that’s not as “good” as 96% in case you wondered). Take out sales of Treasuries and you get up to 89% (better).

The point is that selling Treasuries to foreigners doesn’t really count, because everyone knows that Helicopter Ben (or the next guy) can just print dollars to pay those off…but that devalues dollars.

What matters is how much of America’s birthright it sold to buy those fancy Chinese goods and to swan around in the SUV? The real “value” issue there is the collateral, like how much does the foreigner own of America, in the trade?

That’s the beauty of securitization (manufacturing toxic assets), worst-case, the owner of the Toxic Asset gets to own the pound of flesh from the heart of America (the collateral).

The problem America (and to a lesser extent Europe) face now, is that they got nothing left to trade so they can finance their “dreams”. And US Treasuries sold to foreigners don’t hack it unfortunately; the sellers want “real” assets in exchange for their goods and services.

Of course the “problem” is not hard to fix:

Simple, one thing, add $5 a gallon tax on gasoline, that would pump up “inflation” which is what Ben has been trying to do for the past two year (sadly he couldn’t get it up), and after a while it would start to address the $500 billion a year, rising soon to $1,000 billion a year, that America spends buying oil.

Oil prices used to be determined by the amount the oil producers could “Milk Daisy” for, which is what Parasite Economics is all about. That’s how much blood can you suck out of your “host” before he drops down dead. But now “Daisy” is not just USA, it’s the whole world, and any oil producer with any sense (with a government that is not trying to grab the money and run), is keeping their oil in the ground.

Gold prices are not going to go down, but oil prices are going to go up (measured in dollars), as the consequences of the corrupt politicians (in USA and UK too – don’t forget Tony Blair’s psychopathic Special Relationship, plus the Freemasons and the Labour Unions), who should long ago have got the Edward II treatment…unfolds into it’s logical conclusion.

Hold on to your Stetsons!!

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jack
12 Nov 10, 06:56
Why we need to adopt Mathematically Perfected Economy immediatly

Across earlier history, it was possible at least for truly free implementations of barter to impose no imperfection upon their subjects. Free, unimpeded barter allowed people to produce to natural capacities, and to obtain for our own production whatever we deemed to be equal, undiminished measures of the production of others. These core objectives comprise the standards of any monetary "economy" which truly serves humanity, because contrary to the intended faults of imposed monetary systems, it is possible and obviously desirable to trade by universal tokens of wealth, without involuntarily sacrificing ever more to irreversible multiplication of debt by interest, and without suffering systemic collapse as an inevitable consequence of irreversible multiplication of debt.

Virtually all modern "economies" have been imposed upon the subject societies; and we know this at least because in every case it would have been impossible for the subject people to have approved veritable, justified principles, because the means of taking from them is irreversible, unjustifiable multiplication of debtin proportion to the people's means. That is, merely to maintain a vital circulation subject to interest, it is necessary to re-borrow whatever the people pay toward interest and principal obligations, which thus perpetually increases the sum of debt so much as periodic interest. Incontrovertibly then, any monetary system subject to interest imposes upon its subjects an ever escalating dispossession which inevitably culminates in collapse: because debt is multiplied in proportion to means, ultimately a sum of debt is engendered which the system can no longer afford to service.

So the faults of modern purported economies are intended to take from us exceedingly and without justification; and all of us can know this with certainty from the further obvious facts that we are persistently refused representation even while mathematically perfected economy™ is demonstrated to be the only prescription for perpetual full, unimpeded, undiminished, sustainable prosperity.

WHY MATHEMATICALLY PERFECTED ECONOMY™ IS VITAL TO RESTORING REPRESENTATION

Thus representative governments have been usurped by the central banking systems of the world; and representation can only be restored by establishing mathematically perfected economy™, because mathematically perfected economy™ alone removes the usurpers and means of usurpation from the subverted political equation.

HOW MATHEMATICALLY PERFECTED ECONOMY™ SOLVES ALL ECONOMIC ISSUES

Interest is eradicated in mathematically perfected economy™. Thus there is no artificial multiplication of debt in proportion to the circulation, or inevitable collapse; and so, rather than dedicating the circulation ever moreso to servicing debt, the entire circulation is persistently available to the original purpose of sustaining intended commerce.

As all production can be financed by mathematically perfected economy™, it is not even necessary to borrow money at interest, because mathematically perfected economy™ makes interest free obligations available to sustain payment for all wealth. Contrary to debts subject to interest, the obligations of mathematically perfected economy™ simply require that we pay for the related asset as we consume of it.

Because mathematically perfected economy™ finances all wealth, and because the obligation is to pay at the rate of consumption, everyone pays for everything with whatever they deem to be an equal measure of their own production; there is no inflation or deflation; there is no multiplication of debt; there is always sufficient circulation to pay all debts; the system is perpetually sustainable; and, just as in perfected barter where the quantity and state of wealth represent the wealth, the circulation and rate of payment in mathematically perfected economy™ endow the currency with perpetually persistent value, because every unit of the circulation is always redeemable in the very state of the wealth it is intended to represent.

EXAMPLE

For example, a EURO 100,000 home with a 100-year lifespan would be paid for at the overall rate of EURO 1,000 per year or EURO 83.33 per month; and the earnings this alone would immediately free should we implement mathematically perfected economy™ immediately, reflect the degree to which we would prosper further, without any other improvement whatever.

But at the same time we would be financially enabled to develop and succeed in far more industry and employment, with far more tolerance for earnings and success. Even college students for instance could afford new homes during their education for far less than they might presently pay for far less substantial accommodations.

METHOD OF TRANSITIONING TO MATHEMATICALLY PERFECTED ECONOMY™

The general method of transitioning to mathematically perfected economy™ is re-financing all debt without interest, subject to a schedule of payment equivalent to the rate of consumption. It is possible therefore to immediately avoid economic collapse, or further economic injustice, by transitioning to mathematically perfected economy™.

HISTORY

I originally published mathematic proofs that any purported economy subject to interest inevitably terminates itself under insoluble debt, and that there is one and one only solution to 1) inflation and deflation, 2) systemic manipulation of the cost or value of money or property, and 3) inherent, irreversible multiplication of debt by interest (altogether which comprise mathematically perfected economy™) in 1979.

ALTERNATIVES CANNOT SAVE US

Many people adopt the mistaken disposition that alternatives can serve us, or that we are served by pursuing typical, incremental patterns of change. Largely, these attitudes only pave the way for persistence of the imposed systems, because one and one only proposition solves the breadth of issues, and because we need to solve them immediately.

RECOMMENDED COURSE OF ACTION

The recommended course of action is 1) to proliferate our understanding of mathematically perfected economy™; and 2) to adopt a constitutional amendment immediately transitioning to mathematically perfected economy™. We can only secure economic justice by spreading this information ambitiously, and thereupon, by asserting our right to proper, true economy.

Our necessary achievement of perfected economy therefore depends on you: It depends on your bringing everyone you can to this material; it depends on your understanding and prolific discussion of this material; and finally it depends on your asserting your right to it.

http://endtheecb.ning.com/profiles/blogs/why-we-need-to-adopt


Jack
12 Nov 10, 07:21
insoluble debt

Every interest based money system inevitably terminates itself under insoluble debt. It´s really that simple.

It´s the interest that causes inflation because debts are irreversably mulitplied by INTEREST to a point where the vital circulation no longer can service the debt, and new money needs to be borrowed, again AT INTEREST. So an interest based money system can only sustain itself by a growing money supply and therefore rising prices. Constant inflation is a fact CAUSED BY INTEREST. There is only ONE solution. Check out Mathematically Perfected Economy, by Mike Montagne.

http://endtheecb.ning.com

www.perfecteconomy.com


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