Daily Investment Interpretations

October 1, 2008

2008-10-1  The markets basically treaded water again today. A somewhat-improved bailout has passed the Senate tonight by a vote of 74 to 25. A follow-on vote in the House is expected on Friday. Warren Buffett will state on TV tonight that the U. S. economy is suffering cardiac arrest and is flat on the floor. Today, Toyota reported a 38% drop in truck sales and a 9.3% decline in Prius sales. The economy is still declining, and the U. S. is generally conceded to be in recession. Oil ended the day at $98.53, while gold jumped $6.50 an ounce to $887.30.
    The general consensus is that we haven't hit bottom yet in this worst economic crisis since the Depression... one that could possibly eclipse the Depression of the 30's before it's over.
    The Nasdaq fell 22.48 points to 2,069.40, the Dow lost 19.59 points to 10,831.70, while the S&P 500 gave up 3.68 points to close at 1,161.96. The market is holding its breath to see how the bailout comes out.
    The VIX closed at 39.81, or about where it was last night.
    I'm looking for strategies for making money, or at least avoiding further losses going forward.
    One strategy that seems to me to be a losing proposition is buying and taking delivery of gold. The problem seems to me to lie not in buying the gold at the going rate, but in selling it again without taking a loss. The dilemma is: once you take possession of your gold, how will you verify its authenticity to a potential buyer? How will a buyer assure himself or herself that your gold isn't counterfeit? Gold-plated copper? When you buy gold from a reputable dealer, you'll probably be willing to take on faith the claim that the gold you're buying is pure gold, but buying from a private citizen would be a less-certain move, and might require testing of your gold, limiting potential customers to vendors with the equipment to conduct such tests. Also, a potential buyer may only be willing to offer you a fraction of the purchase price of your gold. No store could take gold as legal tender because they also would have no ready way of verifying its authenticity. Of course, if true hyperinflation develops, then physical gold might return as a default medium of exchange, but right now, it seems to me that it's not practical. I'm looking at gold mining stocks and the gold ETF, GLD, which buys and stores actual gold.
Update: I've just read that there's a run on gold ingots and gold coins. 
    This may well be centered in countries that don't have the equivalent of Federal Deposit Insurance Corporation insurance on their bank deposits, so the fact that this is occurring in some countries around the world doesn't necessarily mean that we in the U. S. would be well-advised to follow suit.
    One problem is that all our money is stored in the form of paper records and magnetic traces. FDIC insurance has convinced us (me included) that U. S. bank deposits are secure. Most of us have never experienced the loss of savings through bank failures--a common occurrence in the early 1930's, but I don't expect this to happen in any currently-likely scenario.
    One other problem concerns the amount of gold that's available for purchase. Around 500 tonnes (metric tons) or around 13,000,000 Troy ounces of gold are produced worldwide each year for investment purposes. At $1,000 an ounce, that would amount to about $13 billion. By contrast, the estimated value of all U. S. money market funds is $3.1 trillion, corresponding to about 3.1 billion Troy ounces of gold, or about 238 times the amount of gold available globally for investing each year, and that doesn't include bank deposits and CD's. Consequently, unless I'm missing something, the price of gold would have to increase many-fold to back the world's currency.
    The graph below shows the price of gold over the past 40 years. The upper curve gives the inflation-adjusted price of gold, while the lower curve delineates its price in absolute dollars. The price peak in the early 80's was a reflection of the double-digit inflation that was occurring then. As confidence rose that inflation was coming under control, the price of gold dropped to a minimum in April, 2001. Note the steep rise in the price of gold after President Nixon took the U. S. off the gold standard in 1972. 
Image:Historical price of gold.png