Wednesday, April 26, 2006
What Does the Rise in the Gold Price Mean?
Interesting article that looks at whether the rising price of gold is a signal of future inflation. Especially interesting is the comparison of the price of gold to that of other metals. Industrial metals make gold look cheap! No crash yet - but the stock market remains weak. Today I added I took a slightly more bearish stance by buying more QQQQ puts with the cash in my Roth IRA account - doubling the number of contracts. I like to buy in the money options and pay a minimum of time premium. Buying at the money or out of the money options really does seem like gambling. The options have no current "intrinsic value" and unless the stock price moves in your direction by the expiry date you lose all your money... Deep in the money options are closer to futures contracts or heavily leveraged stock positions and are definitely more my "cup of tea" :)
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11 comments:
Moom: You may think indexing is old fashioned but it has worked for me. What you are doing sounds cutting edge. Looks by your networth the results are very impressive. What type of returns have you been getting? Time to start a hedge fund. I have a very small holding in gold but think it could go higher when high oil prices start causing more price increases. I not so sure on the bear market but I will be happy to buy more at lower prices.
Indexing worked well in the 1980s and 1990s. But over the last decade the return might be disappointing? Of course, someone who is saving and dollar cost averaging in will be doing better than someone who just held a given portfolio over that time frame. I don't have anything against any investment style in particular - everyone should do what suits them, but I find Vanguard and those constantly pumping the same line rather annoying... My performance has improved over time as shown in my posting about alpha and beta. In the last three years I have done well, though 2005 wasn't that great but for the last 12 months. Currently for the last 12 months I have made 20% (pre-tax) - but the MSCI World Index has done 24%. Over the last three years the total cumulative return is 139% against the MSCI at 79%. Since I started investing in 1996 my average return has been a little below the MSCI index, but as I said above the trend seems to be improving.
I am actually someone who doesn't think there is going to be higher inflation and that the commodity price shock instead will translate to recession. Still I have some gold, and lots of Australian Dollars.
The article seems interesting. I am currently in the last chapters of "The coming collapse of the Dollar bad how to profit from it" the books authors make an even more compelling argument on gold and the USD which seems to fly against what the article sighted is saying. Given that the authors wrote the book in 2004 and the scenario painted seems to be right on track. I wonder which of the two analyses is correct.
While I do not agree with their view of the total collapse of the worlds "fiat currencies" if for no other reason that I cannot see all those smart people world over letting this happen without redefining the laws as we see them. I do think that their argument on the steady/stealth devaluation of the USD seems to make sense. If you must pay someone you owe why not devalue and pay them less than you actually borrowed.
Do you ever use LEAPS in your portfolio? I once dabbled in options a long time ago and had some good trades, more luck than skill though. So am still slowly trying to understand what part they should play in my rather miniscule portfolio. But it does seems like a reasonable way to use options especially in conjunction with technical analysis.
BTW I really enjoy your writing, insightful and thoughtful.
Now if only stealthbucks would start posting again, life in my blogosphere would be back on track.
Last
Just curious on an easy way to hedge the dollar as you have done with the Australian Dollar. I feel the dollar will continue to drop with the increasing buildup of US debt. What are your thoughts? Currently I have been trying to buy foreign stocks as a way to hedge. Recently sold GGB and still hold ING, DSWL, SFL and PTF. I am holding some other high yield dividend stocks to produce some extra income. I checked and Vanguard has personal rate of return of 21% for 1 yr and 23% for 3 ys and 10% for 5 yrs. I actively manage my index funds. Recently reduced Emerging Mkts to 10% of portfolio and added 10% bonds.
OK - well actively managing the funds buying bonds etc. is a more sophisticated strategy. Gold could be hedge and obviously buying ETFs invested in foreign markets contains also a hedge value. But it is also a bet on the foreign stock market. If I wanted to be long stocks in general and only had a US account I would definitely spread the bets across countries by buying ETFs, stocks, and closed end funds from different countries listed on US exchanges. Mutual funds often might be hedged back into the US dollar and defeat the purpose. A lot of Aussie international mutual funds are hedged into the Australian Dollar.
The ultimate hedging is either using a foreign account like me, using futures, or other currency trading.
My Mom has an account with Citibank in London in which she has funds denominated in different currencies (mainly USD, Pound, and Euro) and across economies - US, Europe, Japan, global etc. and alternative investments as well as stocks and bonds.
Stealthbucks might have some good ideas?
Hi Last1in - Thanks for the compliments! Well there are two basic doom and gloom scenarios out there regarding economic developments in the next few years - the inflationary scenario and the deflationary one. A the moment the inflationary one seems more popular. My thinking though is that the deflationary one is more likely. The inflationary scenario people keep going on about the US Fed printing money, etc. But in fact the fact is that in the last year or so the M1 money supply has been pretty much constant. Holding money supply constant in the face of an inflationary shock like rising commodity prices seems likely to cause a recession rather than inflation... Additionally what I see in the data and my reading is that US firms are having a hard time passing on increased costs due to international competition. So far they have managed to increase profits by productivity improvements. Eventually rising prices of inputs and falling demand due to high energy prices and interest rates seems set to reduce profits. At the moment the stock market seems to me to be too backward looking at profits in past quarters and just projecting that forward. But maybe I am wrong...
PS: Options - I mainly use put options where I can't short - IRA and in Australia. I also use call options occasionally - in Aus it saves on brokerage fees on short-term trades which are proportional to the size of the trade. I nearly always use in the money options where there is as little time premium as I can get away with. Mostly I am buying a contract a couple of months out. In the past I also sold options in Aus, but mostly it seems a lot of hassle or risk (if not hedged) for the return...
moom: Thanks for your help. Which currencies and markets do you like at this time. My thoughts are Europe and Japan. I am worried by the long run of above average returns for the emerging markets. Stealthbucks: I don't think you have to be crazy to become wealthy but it does seem most extremely wealthy people are driven by some abnormal fear or preception. What are your thoughs on which currencies and markets you like. What about high yielding dividend stocks?
I have an investment in this Australian Fund that actively manage their currency exposure:
http://www.platinum.com.au/reports/arc-pcl.htm
Check their recent reports. They are pretty much split between Euro, Yen, and Aussie, and short the USD. No guarantee that USD will continue to fall though - though in the short-term it looks that way, or that the resource economies (Canada, Aus, South Africa) will continue to have rising currencies. Yen and Euro look more beaten down, but prices aren't cheap in those countries. Not like they were in Aus when the Aussie Dollar was at its low.
Unfortunately it is hard to bet directly on the Yuan - there are a couple of China ETFs (FXI is one) but mostly they are invested in Hong Kong listed stocks.
moom: I like the Platinum International Fund, looks like a international hedge fund, but it is not available to US Investors. I also took a look at Yen and Euro Bond ylds but they are much lower than what I am looking for. I am going to look for high yield Canadian and European stocks. Thanks for the insight and I enjoy your blog.
Reading about their strategy and commentary could be interesting to get ideas even if you can't invest with them. PMC.AX is effectively an exchange listed hedge fund.
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