Comparing gold price to an Index Fund is a delusional construct based on bad data

Lets start off with how inflation is calculated to give a frame of reference.

When calculating CPI, well documented flaws in the calculation methodology compromises the integrity of the data used. Changes in the measurements and values of the basket of goods used to determine pricing has resulted over time in a series of data creep having a cumulative effect of the reported statistics no longer matching with what is observed in reality.

bad-data

 

These changes include Geometric Weighting, Hedonic Adjustment, and Substitution.

Substitution is where a government analyst might remove some item such as salmon, and replace it with say, catfish (hat tip to Chris Martenson). The items in the basket are picked at the pleasure of the person(s) determining the basket to reflect reality in prices for everyone.

This can be compared to the way an Index fund reports its view of value.

An Index fund is trying to match the performance value of a basket of items, however cannot ever accurately achieve this task. The fund manager is performing an iterative task where he is selling and buying instruments in a portfolio with the intention of matching a basket of items based on a spreadsheet decided upon by some analyst. The problem is, that as the Index changes, the fund manager must sell from his portfolio and add the new items in the index. The loss/gain on those trades is the delta from the actual Index performance if no trading were taking place. The cumulative effect over time is substantial creep from a base value measurement. The net result is just garbage data if one is trying to compare an investment in an Index Fund versus gold.

The second problem with trying to measure gold performance versus an Index Fund, is that the index itself is composed of a basket of arbitrarily decided items, it is not measuring a single item such as the USD gold price. Therefore, using it to compare performance with gold is an “apples to oranges” comparison. The comparison that is almost always used (I have never seen otherwise) focuses on USD / Gold as the trading pair. To be a fair comparison, the Index Fund performance, which we already know is questionable data for this purpose, should be compared to an Index of Gold in various currencies. The numbers used would have to be gold across a basket of currencies, and the “Gold Index” would have to allow for substitution of various currency pairs in the trading basket based on the whims of the Index Manager.

So for example, in 2014 I might drop USD/Gold from the basket and add EURO/Gold – this would clearly give a different performance value, and the cumulative effect so much more pronounced.

gold-all-currencies-2016

 

Comparing the USD gold price to an Index Fund is therefore disingenuous at worst, and naïve at best.

So the next time you hear someone parroting up this meme, keep this in mind.

 

 

 

Great New Words From Egon Von Greyerz

Great New Words From Egon Von Greyerz
by Egon von Greyerz – October 2012

1. Worldwide money printing continues unabated

2. Just In 10 years $120 trillion have been printed making global debt $200 trillion

3. World GDP has gone from $32 trillion to $70 trillion 2001-2011

4. Thus $120 trillion debt is required to produce a $38 trillion annual increase in GDP

5. The marginal return on printed money is negative in real terms

6. Thus the world is living on an illusion of paper that people believe is money

7. This illusionary paper wealth will implode in the next few years

8. The initial trigger will be the collapse of the world’s reserve currency – the US dollar

9. The dollar is backed by $120 trillion of US government debt and probably NO gold

10. All currencies will continue their race to the bottom and lose 100% in real terms against gold

11. This will create a worldwide hyperinflationary depression

12. All assets financed by the credit bubble will go down in real terms

13. This includes stocks, bonds, property and paper money of course

14. The financial system is unlikely to survive in its present form

15. The banking system including derivatives has total liabilities of around $1.2 quadrillion

16. With world GDP of $70 trillion, the world is too small to save a financial system which is 17x greater

17. This is why there will be unlimited money printing and hyperinflation

18. The only asset that will maintain its purchasing power is gold Click here for chart

19. Gold has been money for 5,000 years and will continue to be the only currency with integrity

20. Western countries’ 23,000 tons of gold is probably gone. See recent article by Eric Sprott.

21. The consequence is that most of the gold in the banking system is likely to be encumbered

22. This means that Central Banks one day will claim it back against worthless paper gold IOUs

23. Thus gold and all other assets within the banking system involve an unacceptable counterparty risk

24. Gold should be held in physical form and stored outside the banking system

DOW passes 10,000 – Talking Heads Rejoice – Dont Get too Excited

The DOW moves back above 10,000…..

Problem is that its measured in dollars…so if you factor in the rate of money creation and assume that affects buying power you get a DOW thats worth about 5000 in buying power.

When measured against gold however, it looks more like this:

DOW / GOLD Ratio Chart - 10 Yr

DOW / GOLD Ratio Chart - 10 Yr

That tiny little uptick is what all the Wall St cheerleaders are excited about.

If history repeats and the DOW and Gold meet at a 1:1 ratio at the top of golds run up, and the DOW keeps rising (due to inflated dollars more than anything else) , then where is that meeting point going to be? Maybe these guys calling for a 20,000 DOW are right…but what also does that mean for gold? What also would that mean for the buying power of the dollar?

To me that looks like a buying opportunity in a major trend.

US Mint Suspends Sales…Again

Alex’s Notes: The last time the US Mint suspended gold sales it marked a start point for a rise in volatility and major sell-off in commodities.

You may notice that the date I posted that article in the link above perfectly co-incides with a spike in the ‘Fear Index’.

This chart is the ‘VXO’ also known as the ‘Volatility Index’ – it typically represents when there is a great deal of fear sentiment in the marketplace, or lack of.

Volatility Index Chart Chart

Volatility Index Chart Chart

The interesting thing I would like to point out is that although we saw a rise in fear as well as a general sell-off in commodities, retail demand for gold soared and it was not un-common to see anywhere from 10% to 300% premiums on gold coins for sale on Ebay.

Are we about to see another massive spike in retail gold demand?

U.S. Mint gold, silver coin sales ‘temporarily suspended’ – again

Sales and suspension of gold and silver coin or bullion coin sales by the U.S. Mint are becoming a regular part of doing business as overloaded refiners and mint facilities struggle to meet continuing high demand.
Author: Dorothy Kosich
Posted:  Tuesday , 14 Jul 2009

RENO, NV –

Unprecedented demand, a shortage of blanks, and restrictive policies and regulations continue to exacerbate what is almost becoming a chronic shortage of gold and silver coins authorized by the U.S. Mint.

The U.S. Mint has again “temporarily” suspended sales of almost all of its gold uncirculated and proof coins, along with nearly all of silver uncirculated coins because of the limited availability of blanks.
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Gold Goes Parabolic – Chart Gold Price 2000 – 2008

Chart of the Day – GOLD

Gold has been in a strong bull market since 2001 and picked up the pace in mid-2005 and then again in mid-2007. In fact, gold has gone parabolic and today briefly crossed the $1000 per ounce level for the first time. Today’s chart illustrates how the price of gold has nearly quadrupled during its seven year bull market.

Gold Chart 2000 to 2008


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Silver Certificate Dollar

Alex’s Notes: I have been searching for a picture of this for a while now.

This is a picture of a US “Silver Certificate”. These are what our money used to be based on, silver and gold.

Why is this important? Is this some kind of nostalgic, old mans wierd collection item?

No, the reason this is important is that the vast majority of Americans do not understand our own money.

Money is simply a form of exchange that we use on a daily basis to expedite the exchange of our services and goods to one another.

What gives money its value, is simply our collective agreement that it has value. If we did not agree it had value, it of course would not be useful as money.

With todays “Fiat Currency”, this is especially true, because the only thing that says our money has value is the government.

Look closely at this certificate. Note that it says “This Certifies That There Is On Deposit, In The Treasury of The United States Of America, One Dollar In Silver Payable On Demand”.

Now why would we have had money that certified that there was something of value on deposit in the US Treasury?

Maybe because generations ago we knew that if there was nothing backing the dollar, then the government could make as much of it as it wanted?

It used to be that we KNEW our dollars had value, because you could walk up to the United States Treasury, and demand the Silver or Gold that backed the money, and the Treasury was required by law to cough up the precious metal in exchange for the Certificate.

This is what our money looks like today:

Notice anything different?

Yes. Now it says “Federal Reserve Note”.

What is a “Note” you say? A “Note” is an instrument of debt, meaning if you have a “Note” from me, it means I owe you something of value, and you can come collect it from me later.

Let me ask you what may seem like a strange question: If you took your “Federal Reserve Note” to the Federal Reserve or the Treasury today, and demanded they pay you what is owed on the note, what do you think would happen?

I will tell you what would happen, they would call the police and have you carted off for being some sort of whacko.

So basically this means the government can print up as much money as it wants, and says ‘Trust Us, This is Valuable!”