Peculiar Behavior

In the last issue of Seasonal Insights I have shown that the gold price behaves quite peculiarly in the course of the trading week. On average, prices rise almost exclusively on Friday. It is as though investors in this market were mired in deep sleep for most of the week.

 

The title of this blog post is a play of words on the title of an early Wim Wender movie, The Goalkeeper’s Fear of the Penalty, which in turn is based on a famous novel by Peter Handke (sometimes the title is also translated as “The Goalie’s Anxiety at the Penalty Kick”) [PT]

 

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Reasons to Buy Gold

The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.

 

File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the communists couldn’t be stopped, they frantically tried exchange their government-issued paper money for gold. In preparation for its exodus to Taiwan, the Kuomintang regime had forced everyone to exchange their gold, silver and foreign exchange for a new paper currency, the Jingyuanquan in 1948 (“golden yuan”) which it promptly inflated with gay abandon, belying its name. It then tried to combat rising prices with price controls – a strategy that has reliably failed since at least the times of the Roman Empire. It reversed the policy a few months later, as even its main supporters became thoroughly fed up. The people in the picture above were among those who had clearly waited too long to take advantage of this policy reversal. [PT]

 

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Economic Nirvana

“Inflation is always and everywhere a monetary phenomenon,” economist and Nobel Prize recipient Milton Friedman once remarked.  He likely meant that inflation is the more rapid increase in the supply of money relative to the output of goods and services which money is traded for.

 

Famous Monetarist School representative Milton Friedman thought the US should adopt a constitutional amendment limiting monetary inflation to 3% – 5% per year, putting inflation so to speak on autopilot. But why should there be any central bank-directed inflation at all? To his credit, in 1968 Friedman wrote the following in the American Economic Review: “[M]onetary action takes a longer time to affect the price level than to affect the monetary totals and both the time lag and the magnitude of effect vary with circumstances. As a result, we cannot predict at all accurately just what effect a monetary action will have on the price level and, equally important, just when it will have that effect. Attempting to control directly the price level is therefore likely to make monetary policy itself a source of economic disturbance because of false stops and starts.” This is quite correct and was the reason why he thought discretionary central bank policy should be replaced with some fixed rule, while naively adding thatPerhaps, as our understanding of monetary phenomena advances, the situation will change.” Of course the situation will never change – the failure of the bureaucracy to centrally plan money is simply a special case of the socialist calculation problem, which cannot be overcome (as an aside, it is not all clear why students of economic history should accept that central banks have been established for anything other than nefarious reasons). The most elegant solution would of course consist of simply replacing central planning with a truly free market in money. But that would mean abandoning a major tool of political and economic control that benefits the State and its cronies. Moreover, a great many economists would have little to do in such a free market, as central banks have essentially bought the entire profession. Naturally, most economists know better than to bite the hand that feeds them.

Photo via mises.ca

 

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Early Warning Signals in a Fragile System

[ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning]

We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 – 24 months were quite large, even if their absolute levels remain historically low.

 

Sizable moves higher in short term interest rates were recorded over the past two years. 2 year note yields only started moving up in mid 2016, but the surge in t-bill discount rates has been in train since late 2015 already. The moves in short term rates come from extremely low levels, but they are nevertheless quite noteworthy – click to enlarge.

 

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Incrementum Advisory Board Meeting Q4 2017 –  Special Guest Ben Hunt, Author and Editor of Epsilon Theory

The quarterly meeting of the Incrementum Fund’s Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is available for download below.

 

Ben Hunt, author of Epsilon Theory and chief risk officer of Salient Partners

 

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Expensive Politics

Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.

 

President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT]

Photo credit: AP

 

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Introduction

Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens.

A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend checking the podcast out in its entirety –  there is a lot more than is covered by the summary).

 

Mark Thornton and Claudio Grass

Photo via mises.org

 

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A Different Vantage Point

The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.

 

Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted on Friday. These intra-week ups and downs that end up going nowhere have become routine in recent weeks. Remember that industrial demand for silver is strongest in January – that is something short term oriented traders might want to keep in mind, as the effect on prices tends to be very strong on average (the “going nowhere in Q4” trend is also a recurring seasonal phenomenon over the past 45 years). [PT] – click to enlarge.

 

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A Date with Dracula

The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.

 

“Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver’s seat it was evidently hard to understand what was said over the racket made by the team of horses that drew their carriage over the Transylvanian collection of pot holes the natives quite audaciously referred to as a “road”. In fact, the thunderous clackety-clack of their hooves was slightly unnerving, not to mention the unsafe speed at which they were moving. “I said, who lives in yonder castle?”, Harker repeated, shouting this time. “Oh!”, Igor said, nodding (Igor was their coachman). “Why Sire, is castle of Count Orlok, of course”. Of course. Good thing we are about to visit Count Dracula and not Count Orlok, Harker thought. “Better known as Count Dracula”, Igor continued, still nodding, as though it needed to be emphasized. Crap. “So which is his real name?” Harker inquired, still shouting. “Depends on who you ask, Sire”, Igor informed him, “Murnau says…” Suddenly, a piercing sound rang in Harker’s ears. It was the howl of a wolf, coming from somewhere in the woods to their left. It could hardly have been louder if the wolf had been sitting in the coach right next to him. Good grief. What’s next?  To Igor he said, “Do you have lots of wolves here?” “Wolves?” Igor repeated, his tone of voice indicating mild concern. “Where wolves?” Why am I not surprised. “You have werewolves? Are there any horrors you don’t have in this shit-hole of a country?” And so it went… [PT]

 

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Big Crunch or Big Chill

Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.

 

OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in which the expansion not only stops, but reverses as it is overcome by gravity, is no longer deemed likely. Observation of distant supernovas and their red-shifts in the late 1990s pointed clearly to an accelerating expansion; this was the meantime confirmed by other data as well, such as those on fluctuations in the density of baryonic matter (baryon acoustic oscillations), which are evident in the large scale structures visible in the universe (ever larger structures are discovered, the record is currently held by the Hercules–Corona Borealis Great Wall, which measures an estimated ~3 gigaparsecs or roughly 10 billion light years across). The precise shape of the universe remains open to question, but recent evidence strongly suggests that it is a flat, Euclidian universe (thus, dark energy is assumed to be driving the acceleration of the expansion – a hyperbolic or saddle-shaped universe with a matter density below the critical value would expand forever anyway). The second and third image above show the current ideas about the timeline of the universe since the big bang. It is held that the current era of accelerating expansion started about 7.5 billion years ago. Ever since, all galaxies  – indeed all objects in the universe – are flying apart at continually increasing speed. The last image shows the size of the observable universe, which has a diameter of 28.5 gigaparsecs, or 93 billion light years (i.e., we can “see” 46.5 billion light years in every direction). Readers will notice that this is much larger than the age of the universe would suggest. Shouldn’t the size of the observable universe be limited by the speed of light, and hence correlate roughly with the age of the universe? Actually, on account of the ongoing expansion of space-time, the light from the oldest, most distant galaxies we can currently see comes from objects that have moved much farther away from us in the meantime (a process referred to as “co-movement”). Over time, we will see more rather than fewer galaxies, as light will have had more time to travel and the light from even more distant galaxies will begin to reach us. The observable universe will grow, but there is a strict limit to this. The effect will reverse at an estimated threshold radius of 62 billion light years (compared to the current 46.5 billion), i.e., the maximum diameter of the observable universe will be capped at 124 billion light for all observers, regardless of where in the universe they are (note: all observers subjectively believe that they are at the center of the universe, as all of them can “see” a spherical volume of the same size surrounding them). Once this threshold is reached more galaxies will begin to red-shift out of visibility than will become newly visible, and eventually, darkness will descend on us, or rather, our descendants (trivia: the most remote quasar so far recorded by the Hubble telescope is a dark red blotch 31 billion light years from here). What is there beyond the boundary of  the observable universe? Estimates of the size of the “causally disconnected” part of the universe (which we will never be able to see or interact with) range from 3×1023 times the size of the observable universe, up to a volume 101010122 times larger than what is visible to us. Both the “big rip”, in which the universe becomes cold and dark in a mere 22-50 billion years as the expansion accelerates to such an extent that every shred of matter is literally torn apart, or the “big freeze”, a slow heat death, in which maximum entropy is reached about 100 trillion years from now, remain possible alternatives for the end of everything. As the big freeze approaches its end, the last remains of baryonic matter will begin to degrade at temperatures a mere sliver above absolute zero, with protons and neutrons decaying into electrons and positrons that may form bizarre atoms light years in size (a.k.a. “positronium”), which will orbit each other at the ultimate snail’s pace, moving just one centimeter in a million years – in complete darkness, natch. All of this could still turn out to be wrong: our measurements may well be flawed; misled by effects caused by a relatively low matter density in our own sector of the universe and the nearby voids, which only make it appear as though the entire universe was expanding at an accelerating pace. It is also possible that as result of an unusually inhomogeneous distribution of matter (differences >20%), denser regions are actually already collapsing inward, but their contraction looks similar to an expansion from our perspective, due to the differences in the curvature of space in regions with varying matter density. Note that no “dark energy” would have to be invoked if that were the case. [PT, end of astronomy lesson]  – click to enlarge.

 

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Known and Unknown Anomalies

Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals sector as well.  Today I am going to introduce one of those to you.

 

As Donald Rumsfeld, former secretary of defense knew, there are things we know we know, things we know we don’t know, and things we don’t know we don’t know (unfortunately he neglected to consider that there are also things we think we know that just ain’t so, such as “Saddam has WMDs” – but let’s not digress). Anyway, Seasonax knows them all! [PT]

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New Chief Monetary Bureaucrat Goes from Good to Bad for Silver

The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.

 

Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor of Nevada before the bar dropped (based on his sanguine facial expression). [PT]

 

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