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Wednesday, August 25, 2010

Value Of Gold

From The Motley Fool:

Valuing Gold
I’m not surprised people are flummoxed over how to value gold – it’s fairly complex – but saying it can’t be valued is presumptive without deep knowledge of the subject.
What people and even the WSJ miss is they start their valuation with gold and its price, a strategy akin to predicting how high a corn stalk will grow by looking at the seed. Sun, water, and nutrients determine how high corn will grow. Likewise for gold. Gold’s price is the effect, the result, not the cause. Other forces drive gold’s price including its supply, amount of dollars are outstanding, popularity of equities, bonds, cash, real estate, confidence in government & authorities, confidence in the economy, & many other factors. We must examine these forces to value gold.
It’s obvious there are no cash flows to ground a traditional valuation, but that doesn’t mean gold has no value. Even cursory thoughts on gold or other commodities would come to that conclusion. With knowledge of the future anything can be valued, gold included. The question is how well we can forecast the future. And based on analysis of the drivers above, I believe we can determine a range of prices for gold – both an anchor price and a range of likely future prices. [full story]
Value is always relative.  Gold, for example, has some value as a product.  As a product, one can calculate what a "fair market value" might be at any time based on demand, supply, and the cost of extracting, refining, and reshaping it.  Then there is the emotional value... the premium assigned to the price of gold because it is seen as a "safe haven" for wealth.   That's where all of the ads for Gold! come in.  When the economy is booming and people are trying to acquire bigger homes, bigger boats, bigger cars, bigger diamonds, more exotic vacations, etc.; the demand... and price... of gold is rather mundane... more along the lines of a cost-plus pricing.


So, suppose all of the economy-Armageddon stories have some truth to them.  The value of currency is going to fall so the prices of everything are going to rise dramatically.  Today will seem like full-employment.  People will be on the streets and lawlessness will abound.   Gold!

Maybe.

But, if food and fuel and shelter are scarce, will someone be willing to swap those things for a bar of metal?  That presumes that the bar of metal can be used to obtain those other scarce essentials.  Gold may be on the list of things that some survivalists want to have... after a hefty supply of those other essentials and a good supply of guns and ammunition.

Here is one alternative to Gold! if you really believe that everything is "going to hell in a handbasket."

Of course, if world economies improve, then you won't be seeing all of those ads for Gold! because the price will fall dramatically... just as it did in the 1980s.

2012 IS GETTING CLOSER

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CO2 Cap and Trade

There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)