The Dow to Gold Ratio:

Discussion in 'Business & Economics' started by Carcano, Jun 4, 2009.

  1. joepistole Deacon Blues Valued Senior Member

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    22,910
    Now you are redefining the language...coming up with your own unique definitions...making up new definitions to old words.

    http://en.wikipedia.org/wiki/Fake

    As for pressure on the Federal Reserve, they serve 14 year terms and by law cannot be replaced for their opinions.

    http://www.federalreserve.gov/generalinfo/faq/faqbog.htm

    The chairman serves a four year term. And he is only one vote out of seven. I suggest you learn a little before you go off making wild emotional laden statements. But that is not the conservative way is it.
     
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  3. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Here in post 29 you clearly, but falsely, state that present value calculations use the interest rate stated in the contract. That is not correct as it is the discount rate not the contract’s interest rate, which is used. Many various DIFFERENT discount rates exist in the opinions of the different potential buyers of the bond, contract, or home. Thus the present value is NOT a definite value but each bidder for the contract has his own expectations and his own unique present value. The buyer is the one who calculates the highest present value.

    You also clearly think that there is only the one unique present value that results from calculating present value with these values in the contract. That too is wrong.

    Here in post 37 you have correctly used the discount rate but still seem to think there is a unique discount rate and thus a unique present value. For example, while your first sentence below is true it would be more accurate to say:
    When a contract is created it will sell in the market to the bidder with the highest evaluation of the present value of the obligation.
    I never said anyone would bid more than their evaluation of the present value. It is possible that someone not bidding (perhaps because Federal trade commission would not approve their then larger near monopoly, or because they have too much debt on books already, etc.) may have evaluated the present value even higher than that of the winning bid.
    The asset owner, say a home, may think his asset is worth $300,000. I.e. he thinks the "present value" = $300,000 but if he cannot keep it and no one bidding thinks his house is worth more than $270,000 then he sadly sells for less than his evaluation of the present value. (Perhaps he thinks the present value is $300,000 because he paid that for it only a month earlier but now has lost his job, cannot pay the mortgage, etc. so he must sell to avoid even greater loses if it goes to foreclosure.) Again it is clear that you still think there is a unique "present value."

    SUMMARY: Now you have the definition correct. - I.e. you know your first quoted post was wrong as the interest rate in the contract is NOT used to make present value calculations; However, you still seem to think that there is a unique present value. That is also wrong. Generally speaking everyone has a different present value for any assets. When there is an auction, the bidder with the highest present value becomes the new owner, he can and often does, go home happy as his present value was higher than the price he paid. (i.e. the other bidders dropped out so he did not need to increase his bid to his present value.)
     
    Last edited by a moderator: Jun 8, 2009
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  5. Carcano Valued Senior Member

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    Am I making up new definitions?

    No, I'm simply addressing the aspect of *value* while you cling for life to its legality.

    Reserve governors are appointed to a 14 year term but have to be confirmed by the Senate every four years. Bernanke is up for confirmation in 2010.
     
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  7. Carcano Valued Senior Member

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    I can assure you I'm neither conservative or liberal.

    Associating with official ideologies is usually an excuse to stop thinking.

    For example, most American conservatives are against state run medicine. I live in Canada where the state run medical system works very well indeed.

    I also believe many other sectors of the economy should be either state owned or highly regulated...an approach demonstrated successfully in some Scandinavian countries.

    Again, Canada has strict rules constraining the banking sector...resulting in THE most stable banks in the world!
     
    Last edited: Jun 9, 2009
  8. joepistole Deacon Blues Valued Senior Member

    Messages:
    22,910
    No my first statement was correct. I was refering to a first time note, the kind typically originated by banks. Banks originate loans. You were mixing secondary markets and treasuries...two very different things. Determination of present value in the after markets or secondary markets is very different than determining present value in an original contract. When a loan is originated you do not have multiple parties as you stated. The interest rate used by the bank is a market rate...what other banks charge for similar quality loans.

    My point is when a bank originates say a mortgage it knows the term and it knows the payment frequency and it knows the interest rate. The bank books the present value of that loan as an asset. The interest rate a bank charges is a market rate and reflects expectations about inflation and default risk.

    A bank originating a loan is no different than a company buying an asset. It is recorded on the books at cost (present value). In mark to market, interest rate changes over time, raising or lowering the value of the asset. This makes long term planing more difficult for banks.

    So there is no inconsistency or error in anything I have written.

    In the after market or secondary markets, there is still an interest rate. But it may not be explicitly stated. In the case of a zero coupon bond, the price of the bond is discounted as you noted so that it will yield a given interest rate. Similarly, coupon bonds may be discounted because interest rates have risen or sold at a premium if interest rates have fallen.
     
  9. 2inquisitive The Devil is in the details Registered Senior Member

    Messages:
    3,181
    joepistole,
    No, Billy T was correct in his remarks. You are either confused or intentionally trying to confuse others.
    When a bank first originates a loan, the value of that loan is the book value, the value that is carried on the balance sheets. At origination, book value, present value and market value should be appox. the same. As time passes, the market value will change as the asset either gains or loses value. If the asset gains in value, the bank will adapt the new, higher market value to gain access to the increased equity in the asset to borrow new monies against. Normal accounting practice requires the bank to write down the value of the asset on their books if it loses market value. In neither of these instances is it required that the asset be sold. The present value of the asset also changes with gains or losses in the market value of the asset, but present value is a calculation dependent on several parameters that can be manipulated in assigning a discount rate. Future inflation expectations can be assigned a low rate which increases the present value. The future value of the asset can be assumed to be the same as the book value, or higher. Future interest rates can be assigned a low level that increases the present value of the asset. In short, by assigning rosy values to the discount rate, the current value of the asset can be increased to levels much above the market value of the mortgage. The banks do not want to sell their troubled assets because they would have to book the loss immediately. By employing present value calculations, they can delay writing down the value of their assets to their true market value. For those present value calculations to reflect anything resembling reality, interest rates must remain low, inflation must remain low, defaults must not increase, and the asset must regain most of its book value over time. In other words, a sharp V-shaped recovery with assets gaining back to near where they were before the recession. The banks are not prepared to handle a wide 'U', high inflation rates (not 'hyper' inflation) or even worse, an 'L' with stagflation.
     
  10. joepistole Deacon Blues Valued Senior Member

    Messages:
    22,910

    I think it is you who is confused my friend. Essentially there is nothing new in your comentary that varies with mine except your description of mark to market is more explicit.

    The point I was making is that present value or book value is created at loan origination based on a set of expectations which are reflected in the interest rate assumptions. Debt instruments have fixed obligations and the contract does not change over time. The assumptions used to value the contract may and often do change over time. Thus if a contract/debt is repriced it will need to reflect a new set of assumptions in the interest rate/discount rate used to calculate a new present value/book value for the obligation. In summary present value or a book value is determined at a point in time based on a given state of assumptions the market is pricing into debt instruments and prices change over time. But I repeat if a bank or other debt owner holds a loan to term the terms value of the loan, excluding opportunity cost, will not change.

    And I repeat, Mark to Maket is a nice concept. But in practice it is a bit more cumbersome especially in turbulent times. As for your comments about rosy assumptions, accounting manipulations are as old as accounting itself. You should know that financials always included a set of assumptions....that is how earnings can be managed.
     
    Last edited: Jun 9, 2009
  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    As I pointed out before, if the present value were the same for every bidder as it results from a calculation based only on the values in the contract, then why are there auctions? Why not just a lottery to select the winning bidder if all think the present value is the same? Perhaps if you try to answer that question you will understand your error.

    Also your error is very clear, as I said before, if you do your suggested method of making a present value calculation for a 10 year, $1000 face "zero coupon" bond. The interest rate of them being zero causes your "first post error" method to lead you to the very silly position that the present value is $1000 even though you get only the promises of payment of $1000 ten years from now.

    Recall from my prior post of this that someone (A) with a 7% discount rate will bid ~$500 for it and some else (B) with a 3% discount rate will bid about $750 for it. You, using the zero interest rate of the contract as the discount rate as the discount rate will calculate a present value of $1000 and bid $1000!!!

    Have you ever done a present value calculation? ( The easiest to do is for the zero coupon bond.) I did my first more than 50 years ago. It was a little offensive for you to quote Wiki to me.

    BTW, I did go to the Wiki link and can see why they mislead you into thinking that the present value is a fixed value all agree upon. Wiki is often wrong. In prior paragraph A's present value is $500 and B's is $750 and THIS IS FOR A JUST BEING AUCTIONED US BOND. (Stop trying to duck and weave by switching to discuss the fact that present values change with time.) If the contract were not a "zero default risk" US bond then various calculations of present value would differ even more.

    You should stop defending your error. Thank 2inqusitvie and me for taking the time and effort to correct your error.
     
    Last edited by a moderator: Jun 9, 2009
  12. Pandaemoni Valued Senior Member

    Messages:
    3,634

    First, the Dow is a somewhat arbitrary basket of stocks, but stocks in genetral do not need to be thought of as "one asset class." Thyere are various different stocks with very different chanracteristics. Buy shares in a repo company and you will find it's almost directly countercyclical.

    Second, the analysis above seems curious to me. Take *any* asset and compare it against the Dow and, in terms of its rates of return, sometimes it will outperform the Dow, and sometimes the Dow will outperform it. Almost never do two different assets have identical rates of return over any non-transient period. Even if that asset is a mutual fund that tracks the Nasdaq, or (especially) a single share of any goven stock that makes up the Dow. It would be something to find that there was a flip every 4.72 years or something, but if you can arbitrarily set the timeframes from period to period, all Dr. Faber found was the obvious. (He might might easily have found 5 "major phases" or 500 or onloy 2, depending on the asset he chose, but the same trick could have been done with pork bellies, and I guarantee a generally similar looking result.)
     
  13. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    "...Those who think gold is a great investment need to think again, too. Sure, it can be one. And it has been one -- now and then. But over long periods, it doesn't have the best track record. Check out what $1 invested in various things between 1802 and 2006 would have grown to:

    Investment / Real Return, in 204 Years
    Dollar / $0.06 (All numbers are inflation-adjusted.)
    Gold / $1.95 - {Gold does protect agains inflation, long term IF you ignore the storage cost and robbery risk.}
    T-bills / $301
    Bonds / $1,083
    Stocks / $755,163 (Data: Jeremy Siegel, Stocks for the Long Run.)

    $100 investment would have netted you more than $75 million in stocks, while your money wouldn't even have doubled in value if you owned gold. {Bily T adds: & you paid to store it or risked it be stollen, possible with your death during the robbery.}

    I know, we won't be investing for 204 years. And gold has done well lately; it recently topped $1,000 per ounce. That's more than twice where it was five years ago. But check out these returns:

    Between / Total Gain or Loss with Gold:
    1900 and 2000 / 1,372%
    1900 and 1950 / 83%
    1970 and 1980 / 1,607%
    1980 and 1990 / (38%)
    1990 and 2000 / (27%) (Data: National Mining Association.)

    Clearly, you can do rather poorly with gold over various long periods. The 1970-to-1980 period is legitimately exciting, with an annualized 33% gain.
    But even the overall 1,372% gain isn't so hot, since it's over 100 years. Annualized, that comes out to just 2.7%.

    You can do better:
    So go ahead and invest some of your money in gold if you really believe in it. Just know that with prices near all-time highs, it might be more likely to fall in value than to keep rising -- which is why it's good to seek out investments that seem cheap. But consider parking much of your money in places where it's most likely to grow well for you, such as stocks. ..."

    FROM: http://www.fool.com/investing/value/2009/10/07/stocks-that-are-better-than-gold.aspx

    On "You can do better" final paragraph, Billy T adds:
    Especially ADRs of companies with growing economies, like Brazil. - In dollars from Dec08 crash low until yesterday, the BoveSpa index, (Brazil's S&P 500 or dow) is up 180% ! - much more than the dow or S&P. Part of the is due to the dollar dropping from 4Dec08 peak of buying 2.536R$ to yesterday dollar worth only 1.750R$. I.e in ~10 months, the dollar has lost 31% of it value vs. the Brazilain Real. Also, in case you think this 10 months is cherry picking then note during Lula's 9 years, the BoveSpa in dollars is up 1100%, but that too is "cherry picking" as when "left wing" labor leader Lula was a "just elected" unknown, a lot of money was trying to get out of Brazil.
     
    Last edited by a moderator: Oct 8, 2009
  14. Carcano Valued Senior Member

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    6,865
    http://www.telegraph.co.uk/finance/...hedge-book-as-world-gold-supply-runs-out.html

    Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world's top producer Barrick Gold.

    Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

    "There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

    "Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

    Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.

    The supply crunch has helped push gold to an all-time high, reaching $1,118 an ounce at one stage yesterday. The key driver over recent days has been the move by India's central bank to soak up half of the gold being sold by the International Monetary Fund. It is the latest sign that the rising powers of Asia and the commodity bloc are growing wary of Western paper money and debt.
     
  15. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    Quite possibly Barrick is correct, but two factors need to be considered when evaluating their statement:

    (1) It is strongly in Barrick’s self interest to encourage the belief that gold is well past "peak gold."

    (2) Many parts of the world have not been explored with modern methods or if they have been, the controlling government is not telling the results.

    For example China is now the world's largest gold producer and rumor has it that they have found a huge gold ore deposit in a several kilometers long East-West strip near their northern border. Even if the ore is not rich in gold, the scale of the deposit and a somewhat higher price may bring a large amount of gold to the market in less than a decade - postponing "peak gold" for many years. China has recently changed the laws to let foreign gold industry participate in gold production in China.

    Also a large gold ore deposit has just been found in the mid east - one of the former USSR's Islamic states, but I forget which. - Search a little and you should be able to learn which.

    Telling when “peak X” has occurred is not easy until years later, but I think we can safely conclude that “peak sperm whale oil” is long past now.

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  16. nirakar ( i ^ i ) Registered Senior Member

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    I was thinking that if a decent stable world currency, private or public, backed by companies or nations, linked intelligently to commodities and labor rates and global population, was created then all this storage of gold as currency and a inflation hedge would be unnecessary and the value of gold would plummet. I knew that industry, architecture decorations and dentistry were not consuming much of the gold. I was thinking that most of the gold produced was sitting around as gold bar in vaults. I was wrong.

    Most of the gold goes to Jewelry. About 1/4 of the gold produced in the world goes to Jewelry for Indians. One of the reasons Indians like Gold is distrust in currency. I think crime will increase in India and then perhaps Indians will not want to keep so much of their wealth in Jewelry.

    There is about $950 worth of gold in Jewelry, coins, bars dentistry and electronics out there in existence for each of the earth's six billion people. Since 3/4ths of the earth's people have very little wealth the other fourth must have about $3,800 worth of gold per person mostly as jewelry. I did not think Middle class Americans had that much gold. The Wealthiest 10% of Indians must have more like $12,000 worth of gold per person in their jewelry.

    Edit- there was a whole in my thinking. Current gold consumption does not =accumulated gold. Indians are adding about $25 worth of gold per person per year if I did my math right. That does not get them to owning so much Gold.

    Gold does not wind up in the trash or blowing in the wind as dust so almost all the gold ever mined is still in use and it gets repeatedly recycled.

    So, gold's value is peoples distrust of currency and people's particularly Indians love of Gold jewelry.


    Quoting from various sources:

    The best estimates available suggest that the total volume of gold ever mined up to the end of 2006 was approximately 158,000 tonnes, of which around 65% has been mined since 1950.

    According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes.[14] About 2,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

    What percentage of Gold is used in Jewelery, Industry and Investment?
    Around 70% of gold demand is jewelery, 11% is industrial (dental, electronics) and 13% is investment (institutional and individual, bars & coins). Gold jewelery has strong "investment" attributes in all countries, and in markets such as India and Middle East is sold by weight at the prevailing daily rate with a supplementary "making charge" which varies according to the complexity of the piece. Jewelery is not used as currency in any market. I hope this answers your question: for further details see our website where you can subscribe to access further demand data and commentary.



    Who owns most gold?
    If we take national gold reserves, then most gold is owned by the USA followed by Germany and the IMF. If we include jewelery ownership, then India is the largest repository of gold in terms of total gold within the national boundaries.

    India is the world’s largest consumer of gold, as Indians buy about 25 per cent of the world’s gold,[37] purchasing approximately 800 tonnes of gold every year. India is also the largest importer of the yellow metal; in 2008 India imported around 400 tonnes of gold

    In 2001, global mine production amounted to 2,604 tonnes, or 67% of total gold demand in that year. At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes.[35] This can be represented by a cube with an edge length of just 20.2 meters.

    Gold is so stable and so valuable that it is always recovered and recycled. There is no true "consumption" of gold in the economic sense; the stock of gold remains essentially constant while ownership shifts from one party to another.

    Indian consumers buy about 25 per cent of the world’s gold, the vast majority of which is imported, making the country the largest market for the metal.

    According to James Burton, chief executive of the World Gold Council, the global miners’ group, in the first half of 2007 India was on track to buy more than 1,000 tonnes of gold for the year, but demand “tailed off at the end of the year”, as gold prices rose. Jewelers in India have been particularly hard hit and tell of subdued sales as consumers baulk at high prices. Even families of marrying couples, traditionally obliged to drape newlyweds in the precious metal, are passing on family heirlooms instead of buying new gold.

    India’s handful of gold mines produce about 2.5 tonnes of the metal each year, a fraction of the country’s annual consumption of about 800 tonnes. It is unclear how much gold India could yield, although Mr Reddy has alluded to possible domestic reserves of 25,000 tonnes.


    "Most observers calculate central bank reserves are supposed to have about 30,000 tons of gold worldwide in their vaults, but we believe the amount of gold actually there may be more like 15,000 tons," Murphy said. "The rest of the gold is gone."


    The world's oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion, e.g. every cubic kilometer of water could contain 10 to 20 kg of gold).

    Rank Country/Organization Gold
    (tonnes) Gold's share
    of total
    forex reserves (%)[8]
    1 United States United States 8,133.5 78.9%
    2 Germany Germany 3,412.6 71.5%
    3 International Monetary Fund 3,017.3 -
    4 France France 2,487.1 72.6%

    Rank Country/Organization Gold
    (tonnes) Gold's share
    of total
    forex reserves (%)[8]
    1 SPDR Gold Trust 1,104[12] -
    2 iShares Gold Trust 66.9 [13]
     
    Last edited: Nov 14, 2009

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