Can’t help you bchadwick - I’m with Buffett, I only invest in assets I’m happy to hold if they shut the market for five years. Gold doesn’t fall into that category.
That’s a perfectly valid way to invest, newsuper, and I get the logic of that. And as long as you or your clients are willing to wait five years through thick and thin, it’s a good way to go. But it isn’t the only way to make a trading decision.
bchadwick Wrote: ------------------------------------------------------- > In my mind, a bubble forming is substantial > overvaluation + ongoing upward momentum. > Naturally, that has to imply some way to figure > out if something is fairly valued (momentum is a > little easier to identify). > > Lots of people just like to say “it’s a bubble” > when they feel the price of something is > overvalued. But it’s got to be more than that to > be a bubble. Overvaluation does not necessarily > lead to a crash… there are other ways it can > end. Things can be overvalued and float down more > slowly. Or things can simply stop rising for a > while and wait for enough time to pass so that the > returns over the long term are in line with the > proper level of asset risk. > > The acquisition of assets to sell to greater fools > is a key characteristic of bubbles, but I’m not > sure it makes sense to make it the definition, > because it is hard to know just why it is that the > average buyer is buying. At the end of the day, > we’re just guessing about why hundreds of > thousands of people send in their orders for this > or that. Sometimes our guess has more evidence to > support it than others, but it’s still basically > guessing. > > The problem with bubbles is that you can be wrong > for a long long time waiting for them to pop. > While this is happening, everyone is telling you > that you are an idiot and don’t understand what’s > going on, and clients are withdrawing their money > from you. So trying to figure out the right > strategy is key, and in my experience, it does > seem that trend following is one of the better > ways to handle it. > > Admittedly, I’m still trying to figure out the > best sell discipline and set of rules for that. > Moving averages seem to work reasonably well, but > they often send signals so late that lots of > profits have disappeared. Stop loss and take > profit targets also seem to be helpful, but can > lead to whipsawing and larger transaction costs. > I’m better than I used to be on this stuff, but > it’s still a challenge. I’d be curious what other > people find works for their sell/exit disciplines. Often there are external events that cue as to whether something is in a bubble. The main one is that people are buying something just because it “goes up”. Housing prices appreciated far beyond the value that would be expected from cash flows from renting them, because people assumed their would always be “greater fools” coming along to unload it before their option ARMs reset. These were expected to come from a growing population, immigration, growing economy, etc. You can argue that anything that goes up a lot is a bubble but that misses the point. AAPL has gone up a lot but has cash and earnings that support the price. People own the company because it makes money not because they think someone else will buy it from them. The stock price may be too high or too low but there will always be a bid, unlike for a purely speculative asset. Another key feature is that there is a perception that the asset cannot “go down” as loss aversion is even stronger than greed. In the stock market this was the “Greenspan put” where if stock prices went down enough the Fed would intervene so a whole generation of investors was ingrained into “buy on the dips”. Similarly, with gold there is a “Beijing put” as China has a variety of incentives to own assets other than USD. Note that early this past Monday morning US time (middle of the day in Asia) the price of gold collapsed briefly to the 200 day MA, a decline of more than 20% from the peak, but then rallied. Without a large buyer stepping in the market would have crashed. China needs the Euro and gold as alternatives to the dollar to enhance their own geopolitical strength and influence. http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100000821/china-bernanke-and-the-price-of-gold/ However other central bankers (like Bernanke/Trichet) do not like this as it makes them look bad as a signal of global instability. Moreover China has its own problems - social unrest is on the rise and corruption is everywhere. The bills for the debt-financed property bing in '08/'09 are starting to come due and growth is slowing, which is bad news particularly with a regime change coming next year. They will need their reserves to sterilize the banking system rather than play games with the gold market. Central bankers crushed the Hunt brother in the late 1970s and will crush the gold bugs again, though it is not clear precisely when this will happen. Many hedge funds have exited the trade in recent months as the downside is now significantly greater than the upside. Meanwhile GLD briefly topped SPY as the largest fund by assets in the US a couple of weeks ago, and retail investors have firmly piled into the trade (the gold commercials and such) which is another signal. The lesson to be learned is that the worst thing that can happen to an asset is for it to gain status as “safe” and always appreciating. The story never ends on a happy note.
@bchad, I will never forget what my professor would say; “if an idiot is making money than it’s a bubble”. Simply put, I think a bubble occurs when there is an extended period of exaggerated rightward(positive standard deviations) decoupling between the price and intrinsic value of a commodity, stock, etc… But the tricky part about all this how to accurately determine “intrinsic” value. That being said, I think the recent pull-back suggests that gold is not yet at the point of being a bubble where people are buying and driving up the price no matter the cost.
Dwight Wrote: ------------------------------------------------------- > > Often there are external events that cue as to > whether something is in a bubble. The main one is > that people are buying something just because it > “goes up”. Housing prices appreciated far beyond > the value that would be expected from cash flows > from renting them, because people assumed their > would always be “greater fools” coming along to > unload it before their option ARMs reset. These > were expected to come from a growing population, > immigration, growing economy, etc. > I agree. I just think these are indicators, rather than the definition. I know lots of people will feel that this is academic hair splitting, but if you are trying to separate cause and effect (and therefore improve your model and predictive ability) you have to be careful to keep causes separate from definitions. > You can argue that anything that goes up a lot is > a bubble but that misses the point. AAPL has gone > up a lot but has cash and earnings that support > the price. People own the company because it > makes money not because they think someone else > will buy it from them. The stock price may be too > high or too low but there will always be a bid, > unlike for a purely speculative asset. > Do we really know why people own AAPL? Do they really have the cash flows to support it? How do we really know that the growth assumptions embedded in the price is are not just as soft as the assumptions we make about what’s driving gold’s price? I don’t know of any time that gold’s price has been $0. Even in 17th century Spain, when the country was overflowing with gold coming in from the Americas, there was terrible inflation, and more gold than one could eat, but gold wasn’t worth $0. Plenty of stocks go to 0 at some point. Sometimes even indexes go to 0. (By the way, I’m not a gold worshipper here, but I don’t think gold will ever lack a bid, even if that bid price can get low sometimes). > Another key feature is that there is a perception > that the asset cannot “go down” as loss aversion > is even stronger than greed. In the stock market > this was the “Greenspan put” where if stock prices > went down enough the Fed would intervene so a > whole generation of investors was ingrained into > “buy on the dips”. > > Similarly, with gold there is a “Beijing put” as > China has a variety of incentives to own assets > other than USD. Note that early this past Monday > morning US time (middle of the day in Asia) the > price of gold collapsed briefly to the 200 day MA, > a decline of more than 20% from the peak, but then > rallied. Without a large buyer stepping in the > market would have crashed. China needs the Euro > and gold as alternatives to the dollar to enhance > their own geopolitical strength and influence. > Yes, but the Beijing put is about a country and its central bank operating in its own interest. It’s a legitimate rationale for analysis. I don’t get this bit about “it’s rational for me to say that AAPL will grow at X percent per year because it’s been doing that in the past” and “it’s not rational to expect China to decide that gold is a good diversifier to its extremely large USD holdings and be a support to the price.” > > http://blogs.telegraph.co.uk/finance/ambroseevans- > pritchard/100000821/china-bernanke-and-the-price-o > f-gold/ > > However other central bankers (like > Bernanke/Trichet) do not like this as it makes > them look bad as a signal of global instability. > Moreover China has its own problems - social > unrest is on the rise and corruption is > everywhere. The bills for the debt-financed > property bing in '08/'09 are starting to come due > and growth is slowing, which is bad news > particularly with a regime change coming next > year. They will need their reserves to sterilize > the banking system rather than play games with the > gold market. Regime change in China next year? Or are you simply talking about a change in government? > > Central bankers crushed the Hunt brother in the > late 1970s and will crush the gold bugs again, > though it is not clear precisely when this will > happen. Many hedge funds have exited the trade in > recent months as the downside is now significantly > greater than the upside. Meanwhile GLD briefly > topped SPY as the largest fund by assets in the US > a couple of weeks ago, and retail investors have > firmly piled into the trade (the gold commercials > and such) which is another signal. > It is true that central banks may want to try to crush the gold trade, but the only real way for them to do that is to sell a bunch of it. And with central banks on the defensive these days, I don’t see that they want to weaken their balance sheets that way. Alternately they might convince governments to ban/confiscate gold, but I don’t see that happening in the European Union (the ECB has no legislative authority) or in the US (Republicans in the Congress would never allow it). It might be done through executive order, but I don’t see Obama doing that, and Congress might intervene against it. > The lesson to be learned is that the worst thing > that can happen to an asset is for it to gain > status as “safe” and always appreciating. The > story never ends on a happy note. Well, if you are arguing that it is wrong to think of gold as a safe and nonvolatile asset, then I agree with you. But it takes more than an asset being safe to make it a sensible trade.
@bchad “Well, if you are arguing that it is wrong to think of gold as a safe and nonvolatile asset, then I agree with you. But it takes more than an asset being safe to make it a sensible trade.” Well Said. wrt, your earlier comment re exit. I think people loose more not having an exit strategy especially when it comes to volatile assets. for eg. gold. I have a core position which is a macro play and I have set pre determined levels as to when I will begin hiving off part of my positions. There is also a portion which I use only for trading purposes and with that, I look purely at technicals & indicators and again have pre determined prices that I will sell portions. Given the volatility, my targets may or may not be achieved but I do maintain hard stops and follow the discipline. I might give up upside, but I am more concerned about preserving my capital.
bchadwick Wrote: ------------------------------------------------------- > I agree. I just think these are indicators, > rather than the definition. I know lots of people > will feel that this is academic hair splitting, > but if you are trying to separate cause and effect > (and therefore improve your model and predictive > ability) you have to be careful to keep causes > separate from definitions. Good point. There won’t ever be a green light as to when the tide turns. That’s why this industry pays well - same as legal/healthcare/management etc. No one will compensate you to make an obvious call. > Do we really know why people own AAPL? Do they > really have the cash flows to support it? How do > we really know that the growth assumptions > embedded in the price is are not just as soft as > the assumptions we make about what’s driving > gold’s price? > > I don’t know of any time that gold’s price has > been $0. Even in 17th century Spain, when the > country was overflowing with gold coming in from > the Americas, there was terrible inflation, and > more gold than one could eat, but gold wasn’t > worth $0. Plenty of stocks go to 0 at some point. > Sometimes even indexes go to 0. > > (By the way, I’m not a gold worshipper here, but I > don’t think gold will ever lack a bid, even if > that bid price can get low sometimes). This is true. AAPL will fall apart someday as do all companies. The fund I work for sold our shares about a month and a half ago. Again the trick comes down to timing. When it does crater there will be a legion of people telling you to “buy it on the dips” too since that has worked for so long. The difference is that an investment is when you give someone money you expect them to put to work making money for you and returning your principal as well. Speculation is when you count on someone buying from you at a higher price. > Yes, but the Beijing put is about a country and > its central bank operating in its own interest. > It’s a legitimate rationale for analysis. I don’t > get this bit about “it’s rational for me to say > that AAPL will grow at X percent per year because > it’s been doing that in the past” and “it’s not > rational to expect China to decide that gold is a > good diversifier to its extremely large USD > holdings and be a support to the price.” Good point as well. I think the market is showing serious signs of strain and topping but China can theoretically prop it up and may. More of a political/socioeconomic bet than a play on fundamentals (since gold has none). > Regime change in China next year? Or are you > simply talking about a change in government? Regime is the wrong word. The leadership is going through substantial changes next year right when the economy is showing significant signs of strain (in my view). > It is true that central banks may want to try to > crush the gold trade, but the only real way for > them to do that is to sell a bunch of it. And > with central banks on the defensive these days, I > don’t see that they want to weaken their balance > sheets that way. Central banks don’t need strong balance sheets since they control their currency. The ECB is capitalized with something like $10b - minuscule. > Well, if you are arguing that it is wrong to think > of gold as a safe and nonvolatile asset, then I > agree with you. But it takes more than an asset > being safe to make it a sensible trade. I don’t think we really disagree too much on anything except the timing. I believe gold is near the end of a multi-year parabolic run and you believe it has a long way to go. As FA said we’ll just have to put our money where our mouths are and see who is right.
Actually, I don’t know if it has a long way to go. I just haven’t seen the fundamental drivers of flights to gold changing yet (which is primarily based on the incentives for central banks to resolve the crisis through attempting to provoke inflation because inflation is preferable to deflation). When those pressures ease, it’s time to reduce gold allocations. My view is not based on “gold always goes up” or “gold is safe.” It’s based on the idea that the global economy is in trouble and governments are more likely to try to pursue inflationary policies to resolve it than deflationary ones (though I’ve been less accurate about that in the European theater). It’s based on the idea that people want to diversify away from the USD and there is no other attractive and available real asset to substitute. Eventually those problems will be resolved, and so I expect gold to go down eventually. And my “exit strategy” comment is about trying to get a better or more nuanced rule than sell on a trailing stop of X%. (I’m not bashing people who do that - in fact - that’s the best I’ve come up with so far: but I feel there’s got to be a better rule than that) It’s also true that governments choosing to pursue deflation over inflation (which the Europeans are doing and the Tea Party wants to do, and whose likelihood of happening I underestimated) would be bad for gold… but that will also be bad for stocks too… So I’m looking at gold more as a diversifier to Treasurys than a diversifier to stocks. The discussion probably shouldn’t be gold-vs-stocks, but gold-vs-Treasurys.
bchadwick Wrote: ------------------------------------------------------- > The discussion probably shouldn’t be > gold-vs-stocks, but gold-vs-Treasurys. Depends on your time frame. The longer you’re thinking, the more it turns into gold vs fiat.
Aren’t Treasurys essentially fiat?
Yep. “Long gold = short mankind”.
Hey, stop making jokes about my golden manhood, ok!
Lol
bchadwick Wrote: ------------------------------------------------------- > Aren’t Treasurys essentially fiat? Sure, but I was thinking more along the lines of in the short term you have to make certain asset allocation decisions. Long term you hold gold because, in extremely simplistic terms, fiat goes to zero.
Yes, but as long as you aren’t in hyperinflaiton, stocks are better than fiat too. If you are just anti-fiat but not expecting hyperinflation, you might well prefer stocks to gold. I guess what’s being revealed is that it’s as much a portfolio decision as an asset decision. We’ve been in an environment where gold was a losing bet for a long time, and more recently it makes more sense because of concerns about the management of fiat currencies, and therefore people are increasing their allocations to gold… …but the quantity of available gold is not increasing as fast as the allocations are increasing, which drives up the price. Gold is definitely bubble-prone, but that doesn’t necessarily mean it’s in a bubble right now, or that the pop (if there is one) will be to dramatically lower levels. For me, I find myself keeping my gold decisions separate from my stock decisions. This means I could be positive stocks and positive gold, negative stocks and positive gold, negative both, etc.
Yep, I agree with you. There are always gold and silver stocks to invest in…
bchadwick Wrote: ------------------------------------------------------- > For me, I find myself keeping my gold decisions > separate from my stock decisions. This means I > could be positive stocks and positive gold, > negative stocks and positive gold, negative both, > etc. So how do you feel about stocks now? That was a nice market call you made right before the debt ceiling implosion.
It’s rare that a trade seems so obvious to me and not to others, as was the case at the end of July, but it’s nice when that happens. It would be nicer if the obvious trade would be to the upside, since I don’t particularly like making money while the rest of the world crashes (even if it is preferable to losing money along with the rest of the world). I’ve been sensing that it’s time to increase exposure *a bit.* I’m about 50% cash right now, so I feel free to nibble. Expressing this view with options is a possibility, and probably a better way to do it. But I think we have to wait for Europe to implode or for the Germans to step up and say “we’ll fund you dummbkoffs, but we want the Sudatenland back” (jk) before putting on any positions in scale. If the US election goes to the Republicans, as seems likely right now, I think we can expect austerity and a subsequent hit to GDP and earnings. I need to rerun analyses to figure out what sets of forward earnings+growth assumptions are implied, but I suspect that the current valuations don’t reflect the likelihood of enforced austerity from Republicans, merely the “uncertainty” brought about by policy paralysis. I realize that these views are somewhat contradictory, as realistic analyses often are. So I think that if you have a short term time horizon, it may make sense to step in a bit if you have cash to deploy, but realize that you might have to run out, so have a stop ready. If you are fully invested in stocks, then you need to figure out if you can handle the risk and uncertainty and reduce positions to a point that you can manage. If you’re managing a stock portfolio to a benchmark and can’t equitize, then the usual bit about dividend paying stocks with strong balance sheets and stable earnings makes sense. Something George Soros said is that it often helps to have a little bit of exposure to something, even if you are unsure of it, because it forces you to watch it and think about it. If you are 100% out of something, you can forget to monitor it, and then when it gets on your radar again, it’s already made most of the move. Having a very little bit of exposure to things you think will eventually want to own in scale isn’t a panacea, but it keeps you on your toes.
bchadwick Wrote: ------------------------------------------------------- > Actually, I don’t know if it has a long way to go. > I just haven’t seen the fundamental drivers of > flights to gold changing yet (which is primarily > based on the incentives for central banks to > resolve the crisis through attempting to provoke > inflation because inflation is preferable to > deflation). When those pressures ease, it’s time > to reduce gold allocations. The recent accessibility of investing in gold is definitely a fundamental driver in this multi-year run up in gold. The question is, how much? I think it’s significant. Looking back on other bubbles, I see a structural change in the ability of the average retail investor to pile into a trade as a large component in most bubbles. (See also zero doc/very little down/near-zero interest rate mortgages for the housing bubble, and online discount brokerages like etrade/cheaply available realtime quotes for the tech bubble.)
Sweep the Leg Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > Aren’t Treasurys essentially fiat? > > Sure, but I was thinking more along the lines of > in the short term you have to make certain asset > allocation decisions. Long term you hold gold > because, in extremely simplistic terms, fiat goes > to zero. That would make sense, if no other asset accounted for fiat depreciating, yet most do and they are also more useful. Gold’s long term correlation to inflation isn’t even that great relative to a basket of consumer staples stocks. As the poster above said, I think the recent runup in gold has far less to do with fundamentals than it does with tens of billions of dollars flowing into paper gold allowing far more access and leverage. Remove that and I think you’d see a pretty quick deflation of gold.