Buffett bought Coca-Cola in 1988 around $5 a share and it went to $80. $5 to $80.

that is an amazing return for 12 years. He messed up because he didn't sell in the bubble years when it had a 60 PE multiple. Don't even need to bust out the discounted cash flow. Should be an easy sell around a 60 PE because at best a company that size can grow 10-15% conservatively mid and long-term.

he definitely used leverage for merger-arbitrage

that's a contradiction. Value investors are the BIGGEST market timers. sorry buying low and selling high is doing market timing

The losing down years were offset by special situations, arb. In the early yrs up to 40% of the partnerships total capital was in arb and special situations. In 1962 the Dow was down and he was up 'just' because of special situations. Spec situations were his most consistent performer in the early years.

nope. they both used margin and Graham even shorted stocks. He was like a trader practically. I had a good link or pdf of Graham's partnership way back but this post from a Buffett circle-jerker should suffice.

'Graham’s partnership was a prototypical hedge fund. For starters, Graham actually hedged. He was short some securities and long others. For a while, he tried a basic long/short value approach, where he went long clearly cheap stocks and when short clearly expensive stocks.'

http://seekingalpha.com/article/8792...-and-tom-brown

notice how the range bound trend lines are drawn that incompass price in the 30s and 40s and 70s. See how in the 80s it broke out or made a new high out of that congestion? The chart only goes to 2007 i believe. we are stuck in the same chop as the 30s and 70s right now. This is a fact and Brons doesn't like it but you can't deny facts for there is a reason stocks aren't bullish now bc the economy is depressed and will continue to be until "real" economic growth and EPS push prices out of this channel. they made new highs in 2007 but that was the Greenspan/housing bubble. Bulls are going to find this out the hard way here soon that new highs cannot be made on more cheap money and leverage

What do I not like? That we had a horrible decade? Obviously I don't like that but please show me where I denied that.

http://www.bloomberg.com/apps/news?p...d=asuS1lGMjrQU
Eric Sprott, hedge fund manager, sees gold at $1500 this year and $2000 next year.

I have some ******ed questions about gold and thought maybe this was the place to ask. I've asked this before but I think I am still confused about the subject. I tried reading through this thread, but most of it seems to be filled with people squabbling and arguing.

So I just want to know a few variables that might affect the price of gold and gold bullion. On 2/4/10, the market tanked like 250 points and GLD went with it. I just want to know why. I had previously thought that when the market is doing poorly or when the dollar is going down, gold goes up. That was my previous knowledge of gold. This is essentially what I've read on gold:

"Gold is a commodity that is used as a “hedge” against fluctuations in the U.S dollar. Put simply this means as the value of the dollar falls the value of gold goes up and vice versa.
Furthermore a lack of confidence in the U.S economy (particularly banking) means investors look to “safer bets” such as gold. The knock on effect being that the demand increases whilst supplies stay the same and thus the price increases."

and

"During times of national crisis, such as a war or a serious natural disaster, the price of gold tends to greatly increase. People start to fear that their paper currency may no longer hold value, but they see gold as a stable asset that can always be used to purchase food and other necessities."

So.

1. How does our weakening economy affect the dollar? If interest rates are going to be kept low to stimulate growth and spending, that will increase the supply of money and weaken the dollar correct?

2. Should this cause gold to go up? Or is there a stronger variable here?

3. Is that stronger variable the risk factor of gold? Is gold considered a risky asset? Is that why it sold off yesterday?

I realize there are a plethora of reasons why gold traders do what they do and maybe the sell off on 2/4/10 can't fully be explained rationally, but I'd just like to understand some of the factors.

Also,

This is a post from seekingalpha from 2007:

"Market interest rates are going up, yet gold is going down. Am I missing something?
I know gold is also tied (via the market and trader psyche) to the value of the dollar. The dollar increase in value gold generally decreases and vice versa. But gold is also tied to inflation, as are interest rates.

An increase in market rates suggests the market assumes more inflation. Moreover, greater inflation promotes greater rates, which suggests a lower value for the stock market as per past earnings.

This is the thesis that I keep hearing the bears preach and the media suggest. However, the problem I have with the above thesis is that gold traders do not agree with it.
As of now, gold is saying inflation is very tame. So much so that gold is in a negative trend.
What strikes me as odd is that if inflation was a worry, gold would indicate it. Instead, we have interest rates rising to levels where they should have been, and this rise is being painted negatively due to the reason I gave above."

So I don't really understand the relation between gold and interest rates. If rates are going high, does that mean the dollar will go up because there will be fewer dollars circulating? If that's the case, gold goes down right? So why does the author seem surprised? What variable am I leaving out?

Most of the shorts on gold come from four major US banks. Aside from that it would (and pardon me here) be a waste of time to explain the technical analysis for that day, for everyone does it a little different.

Currently if rates are raised in the US, this would pose a major problem to our fragile system, this is not a worry for some time, so speculating on the outcome of a potential rate hike of .25% or so doesn't move me to prepare. Raising rates does not mean fewer dollars in circulation, no. If rates are raised right now that doesn't mean gold goes up or down, but considering to would wound the debt beast, I feel either is bullish for gold considering our situation. You left out a lot of variables. However the article is from 2007, so the answers should be quite clear to you now. One important note gold doesn't preform well this time of year.

I'm sorry, I know you were trying to be helpful, but I'm still confused...

Not a problem, reading back over that, it wasn't my most intelligible response. If the US raises rates (right now), that would most likely have a negative effect on the dollar (at least in the short term), as it would be seen as preemptive tightening. So in theory gold would go up in price, but a potential continuation of the deflationary trend may further drive down asset prices of different classes. I personally feel gold will do well in either environment (inflationary or deflationary) as compared with other assets in the short term. A good place to hold cash while other investments become attractive.

But the point being that article was from 2007 and holds only so much relevance today. Look at what the article said and what actually happened, there is a good lesson there.

Second point being that raising interest rates will have an effect on the price of gold, but it will depend on the circumstances, so no rule of thumb is available... thank goodness.

http://www.youtube.com/watch?v=HGPvVjfNYgs
Stephen Lynch on silver.

If we are moving towards gold standard monetary systems, then it makes sense to be buying gold.

If the world's nations are going to remain off of a gold standard and keep the monetary system the way it is now... then what is the point?

Without a gold standard, please explain to me why they aren't pretty yellow pieces of metal?

(I think we should go back to a gold standard, fwiw)

The point is that gold can still be traded in the market for profit? It can also be used as money directly if you can find a fellow goldbug to provide goods or services in exchange for gold. I will work for gold. I'll do anything for those shiny yellow rocks!


It your thread that got locked you said that gold was not logical. And I explained why it was the most logical for a store of value. But it is not logical in terms of velocity of money which is what governments want in a currency, but the common man desires a store of value over a higher velocity.

I think that a gold standard is logical. I think buying gold because the world currencies are sucking and it was previously used to anchor paper money is illogical unless you feel that the role of gold as an anchor to world currency will increase in the future against the US dollar.

The fact that plowking is mentioning how the IMF just sold a ton of it, makes me think that this is not the case... It could be though that the US gov and USD fail and that China and company rally around gold as the alternative to the USD... Any sort of logic like that used to buy gold makes sense.

Otherwise, TomCollins wrote this in another thread:

So everyone is buying gold now because currencies are terrible knowing that it will get overvalued some point and hoping to get out before everyone else. Isn't that the definition of a bubble?

Gold is like the last dry piece of land in a rainstorm and everyone is anticipating when to run to next when the wind direction changes. That piece of dry land is worth $1100/oz today, but in (however long) its back to being worth $300/oz??? because it has no inherent value beyond its aesthetics.

Also, shouldn't the price of gold go down during a period of deflation? Shouldn't the price of everything go down in deflation?

well... the world has been off the gold standard since 1971. But even though we're not on a gold standard, central banks still keep gold in reserves and gold has more than tripled over the last decade.

you can't keep increasing the supply of fiat money and expect prices of things (including gold) not to rise. so the point of buying gold is that it will maintain its purchasing power when the supply of fiat money grows. it's pretty simple. if you think that gold is overpriced right now because of speculation, than you can think that (i still think it's under priced personally). But if gold were at fair value, whatever you think that value happens to be... than the price of gold has to go up as you increase the supply of fiat money. therefore, you want to own gold instead of fiat money. that doesn't mean that you also can't own other things as well, since all prices should rise... but the good things about gold is that it has a very high value to weight ratio. So it's one of the few assets that you can actually hold in your hand. I can hold 20oz of gold in my hand, and that has the same value as a car. I can't exactly hold a car's worth of copper or zinc in my hand. So there aren't too many assets that you can keep in your house and carry around with you that have this much value... and you can always trade your gold in for fiat money in pretty much any country in the world. Even though metals like platnium and palladium have similar properties and have industrial uses... it is more difficult to sell these metals to a coin store... whereas with gold, coin stores around the world will give you a good price for your gold.

maybe it will, maybe it wont. the good thing about owning gold is that it is not the liability of anyone else. If we enter a deflationary spiral where assets lose a lot of value and where everyone starts to default on their obligations, gold can be a very attractive asset because you can hold the gold and you own it. If you own some type of bond or debt instrument or stock, the value of that can go to zero because someone cannot pay you back the money you loaned them or the business goes bankrupt and becomes worthless. So as everyone gets afraid and dumps all their stocks and bonds, some people might feel more comforable buying gold in this environment.

I agree about what you said Professor and I don't think gold will be going up much anymore, but stop saying it only has value because of its aesthetics. It's not like a piece of art. Once again, it is unique because it is very heavy, does not tarnish, is highly malleable, and an excellent conductor. No other metals or pieces of matter share all of these properties and that is where its primary source of value comes from.

ok... let's say that hypotheically, gold goes back down to $300 an ounce and settles at that price for a few years. Then 5 years later, the supply of fiat money doubles. would the price of gold still stay at $300 even if the money supply doubled? gold would probably go to $600 an ounce.

What if you increased the money suppy by a factor of ten? Prices in the stores then also go up ten fold... and a chocolate bar that used to cost $1, now cost $10. Well... is gold still going to cost $300 an ounce? of course not, the price of gold would go up to $3000 even absent of any speculation or fears of future currency debasement. would gold ever then go from $3000 an ounce back down to $300 an ounce if they money supply didn't contract? of course not, the price would stay at $3000 an ounce then, and the chocolate bars would stay at $10.

So how much has the money supply increased since gold was $300?

i'm not exactly sure.... it also depends on how you define the money supply. i found this graph.



The M3 money supply stops in 2005 because the Fed stopped published that data... however they still published a lot of the components for it, so John Williams from shadowstats estimates M3 (and it's currently falling year over year actually).

i generally think m3 is the most accurate becasue it is the broadest measure... but generally the money supply is considered to be the total supply of money and credit. but that is a little tricky to define also.

http://www.shadowstats.com/alternate...-supply-charts

and

http://www.shadowstats.com/charts/mo...e-money-supply

So John Williams posts the year over year percentage change in the money supply.

So you will note that the year over year change in M3 started falling in 2008 when the credit contraction happened because the growth in credit was mostly responsible for the huge money supply growth. But that just means that M3 just grew more slowly. It's only been within the last few months that the M3 money supply was actually shrinking. But even though M3 started falling, the Fed spiked the M1 monetary base. But since the banks aren't lending that money yet and they are holding onto it in their reserves to pad their balance sheets and just lending it back to the Fed for the interest that the Fed pays, this spike in the monetary base is not working its way into the broader money supply yet (and maybe it never will if the Fed drains those reseves back out... who knows... the Fed exit strategy is pretty complicated).

So just from looking at that chart... it looks like the M3 may have doubled over the last 10 years... it's kind of hard to tell. It looks like the M3 has been growing between 5% and 10% per year over the last decade (but went as high as about 17% at its peak... and is now actually shrinking by about 2% per year).

But also keep in mind that gold was probably somewhat undervalued in 2000... and was very overvalued in 1980. So obviously gold fell from it's peak of $850 in 1980 to i think around a low of $250 around the year 2000... despite the fact that the money supply grew a lot during that 20 year period. so you can't just look at what the money supply was in 2000 and the gold price, and then project that out to now, because there are other factors which determine the price of gold also. It's obviously not just all about the money supply... but the money supply is a pretty signifcant factor in determining the price of gold.

Obviously during the 1960s, the money supply was growing, but the price of gold stayed at $35 because the US government would dump gold onto the london exchange to keep the price from going up. And some people (like GATA) think that the gold price has also been manipulated down with the short selling of gold, and central bank lending their gold out to people who sell it into the market, yet the central banks still keep the gold on their books even though it got sold into the market and therefore they are relying on that person with the short position to be able to cover their short and deliver their gold back.

but obviously the money supply growth has been pretty significant over the decades... and it's pretty obvious to everyone. chocolate bars used to cost 5 cents or whatever it was like 50 years ago... now they cost $1. or "i remember when a time bag cost a dime".

reminds me of these three austin powers clips:
http://www.youtube.com/watch?v=cKKHSAE1gIs

he asks for $1 million the present and they laugh because it's hardly any money at all these day. And he asks for $100 billion after he traveled back in time to the 1960s and they laugh at him and say "that amount of money doesn't even exist..."

http://www.gold-eagle.com/editorials...ert051409.html

good article about deflation and gold.

Could you offer any reasoning behind this AC?

A different look at money supply

http://www.oilprice.com/article-is-t...he-decade.html

Good point he makes about the money being in the hands of the banks who can't be forced to lend the money... even though that was the supposed original intention and even though the banks have incentive not to lend the money, by having reward for it being parked at the FED. This does not in itself mean there will not be price inflation, in fact the amount of stimulus needed to further sustain our sideways trading should be enough to shatter CBO estimates for the next decade. It does not take into account massive federal spending increases. Deflationary arguments to not take into account that we are seeing inflation and deflation right now. Is is possible during a deflationary period for the cost of living to go up and the currency be devalued compared to other stronger currencies and stores of wealth like gold and silver?

http://goldmoney.com/commentary-the-...-currency.html

Consumer goods... cheaper, cost of living will continue to increase.
(health care, food, energy, taxes as compared to real wages)

Hello

I was directed here with this question. I want to play the china manipulation announcment on the 15th, using OTM options on GLD that expire the next day I don't want to pay for the time premium (mistake?). I understand that the annoucement will have more of an effect on FX rates, but because my assumption is that china will not react for a few days to the announcement the affect will be more on gold as a safety asset. Here is the magic question do you think that them being labelled a currency manipulator has been priced in, and if they are not labelled as a currency manipulator gold will have a drop? Opposite do you guys in generally agree on the thesis that if they are labelled the manipulators gold will have a pop? Any response/critism of my plan is appreciated

Thanks

Gold's movement in short time frames is hard to play like this.

No

Haven't they already been labeled a currency manipulator...
there have been hundreds of stories about this in the last couple months alone.

There have been many and there is a ton of political pressure but the 15th is big day when the treasury makes that decision. Thank you for the input mrmusic.