Eddy Elfenbein recently put forward a simple model relating gold prices and interest rates:

The key insight is that Gibson’s Paradox never went away. It still exists, just in a different form. I got this idea from a 1988 paper by Larry Summers and Robert Barsky, “Gibson’s Paradox and the Gold Standard.”

Where I differ from Summers and Barsky is that I focused on short-term interest rates while they focused on long-term rates. Well, with Operation Twist we got a perfect test of who’s right.

The Fed’s new plan is to sell short-term Treasury bills and buy long-term Treasury bonds. This means that long-rates will be pushed down and short-rates will be pushed up. If gold rises, then Barsky and Summers are right; if gold falls, then I’m right.

At this point Elfenbein is only talking about correlations. But as he continues to discusses his model, he seems to take a causal stance:

I said in my original post that the price of gold is basically a political decision. The Fed can change the game anytime they want to. I can’t say whether this will lead to a long-term decline in gold. That will depend on inflation and interest rates. But for now, the gold market is clearly observing the short end of the yield curve.

I don’t want to presume too much about Elfenbein’s belief about any potential causation. But it’s still an interesting question: is there any evidence of causation? If so, in which direction does it run? (more…)

This is a bit of a drive-by post and I’m not going to comment for now on the chart below. I haven’t really absorbed it mentally yet. I don’t know the source of this data either so take it with a grain. But discuss…what does it mean? My god, what does it mean?


Ok, people, if this?thing is going to happen, that obviously sets us up for a certain future, depending on your views. So, if you had $100,000 to invest in the aftermath of a bill passing and you had total flexibility (within reason, e.g. stocks, options, futures, metals, Treasuries, FX), do you have a bead on an optimal “Living-with-the-Bailout” portfolio/asset allocation plan? I’m stumped right now (or rather more concerned with stopping the bill that dealing with the aftereffects) but wondered if any of you smart dudes had one in the works. And I obviously know that you all will be concentrating on things like debt reduction etc. but I’m interested more in your ideas for profiting from this even if you don’t plan to actually pursue that route. I’d also like to see how the plan ties into your outlook for various markets.

As someone with Georgist sympathies, that’s too bad.

I don’t normally get political here so I’ll just say that if you happen to be suspicious of this bailout stuff, you might want to check out this site which is both an analysis and a petition that you can sign if you want to tell the people in charge just where they can stick it. Not that I have an opinion, mind you. Surely not.

What does this have to do with the free market? As Kevin?Carson?likes to say, if this is the free market, then I’m against it. Of course, it is not the free market. The free market is a profit and loss system void of privilege. When businesses fail, they are supposed to actually fail, not turn to the taxpayers. What we really have is (state or political) capitalism, corporatism, or fascism. An essential characteristic of this system is that while profits are private, losses are socialized, i.e., ultimately covered by the mass of people without political clout.

It is worth making an aside here. When the banks actually run out of money they can?t lend. Asset prices depend critically on the ability to borrow against them (and that includes the price of current mortgages in the secondary market). When the banks can?t lend asset prices can fall to very low ? indeed insanely low levels. At the height of the crisis some 2 bedroom apartments walking distance from the centre of Oslo (one of the richest cities in the world) and with full 180 degree fjord views traded hands for USD15000. You would have easily made 30 times your money buying those properties. Property prices can fall to very low levels without any bank lending. Indeed the ability to borrow to buy assets is often crucial in maintaining their prices?

…from this article on the Norwegian financial crisis. Credit-based inflation…an idea at the same time obvious?(once you are made aware) and profound. The implications of this for the idea of wealth, poverty and the understand of value are bone-chilling. Or am I making too much of it?

With oil on everyone’s mind these days (and since Jason breached the topic), I’ve had one question nagging at me. Everyone seems to think that oil and gas have nowhere to go but up. If that assumption holds, then why wouldn’t everyone just buy all the oil futures they can, hold them and become rich? Or to put it another way, why doesn’t the supposedly efficient market just spike price all the way to $200-300/barrel if that is really where we are all but destined to go. Why the steady daily grind up? It’s the basic contrarian question: if everybody thinks it’s going up, doesn’t that put it into question that it’s going to happen?

Like all speculative bulls, they have to go through the motions. Rarely does a market have an instantaneous bubble rise. It takes time. But I can’t help but wonder if the minute everyone thinks it can’t ever come down that it will. If oil were destined to go up until it is replaced, then there really isn’t any point in even wasting one second investing anywhere else, is there?

Most of my thoughts about bottoms recently have focused more on the beach-bathing variety I’m starting to see as spring creeps back to the beach. But since everyone is wondering about the market bottom, I’ll bounce the proverbial quarter off of it and see how high it goes.

I’ve talked before about market “gravity” and price clusters that attract future bids. It’s based on basic auction theory: the price that attracts the most bidding represents the best guess at the value of an item even if people who really want the item badly (or are ill-informed or excited) will pay more (or in reverse auctions, less).

I’ve advanced my work on the idea by taking to the computer and working with the R statistical platform to analyze markets from an auction theory perspective.

So how does the?S&P look in this context? (more…)

I thought these suggestions for traders?from NakedShorts was too good to not repeat here:

  • It is far more important to look to simplicity (and common sense) than it is to look to increasing complexity as a means to better control investment outcome.
  • A model whose robustness is unknown or unknowable should never be employed.
  • Sophisticated tools should only be used if it is possible to verify that all required assumptions are satisfied (at least to a good approximation).? When this condition can be met, a simple application of a sophisticated technique is preferable to a complicated one.
  • Has anyone seen the TIP rates? TIPS are inflation protected Treasury bonds and arguably offer a view of the minimum amount of “risk-free” real?return people expect on their money. According to Accrued Interest, the 2-year TIP yield is now -0.72%. That’s negative zero point seven two percent. People are willing to give their money away for the next two years to avoid?risking more in risky assets. This fits in line with the poor rates Jason pointed out at his banks. Throw inflation into the picture and they lose money. It kind of reminds me of people being held up at gun point and sheepishly handing over their wallet to keep from getting shot. It’s criminal. But keep reading the article above for some interesting alternatives that take advantage of the situation we find ourselves in.

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