Paranoid theories cannot take the shine off gold

Have u ever wonder why people like to choose gold as an avenue for store of value. Apparently, there is a belief on a conspiracy theory that some invisible hand will continue to make sure gold price will be maintained or increased overtime. The goldbugs that continued to belief into this theory has been wright for the last 100 years i guess and based on the current trend of gold price, this theory is continue hold. if you wish to know more

By John Dizard

Published: October 9 2009 20:21 | Last updated: October 9 2009 20:21

They asked me to write about the goldbugs’ point of view, including the paranoia and conspiracy theories about gold. You know. “Them”. The request could have come in any number of ways: a note composed from cut-up newspaper headlines, or a “suggestion” from a muffled voice over the phone. In this case, it was an “FT editor”. I can only speculate about his true identity.

If you immerse yourself in the world of goldbuggery, the nothing-is-what-it-seems worldview can become that infectious. The paranoia of the goldbugs, die-hard believers in the value of the metal, has been with us a long time, intensifying since the collapse of the last great gold bull market in the early 1980s. Now, though, the goldbugs’ resolute disbelief in the legitimacy and value of official currencies is influencing mainstream market opinion, helped by this week’s record price of $1,061 per Troy ounce.

The fundamental premise of goldbug conspiracy theory is that the metal would have continued to hold and even increase its value over the years against the “fiat” currencies if there had not been a sustained, secret intervention on the part of some powerful group of market manipulators. The speculated-upon identity of the “Hand”, or “Seller”, or “Manager” varied over the years, from JPMorgan, the US Federal Reserve and Goldman Sachs (of course), to miner Barrick Gold or George Soros.

Underlying all the conspiracy theories are two convictions: gold is the only true measure of value, and the people in charge share the goldbugs’ belief in the centrality of the gold market in the organisation of the economic and financial world.

The first premise has both a material and a religious aspect. In the material world, gold’s chemical stability, rarity and ductility have in all societies made it a precious asset. However, that very scarcity and weight, along with the need to re-assay gold offered as payment, limit its usefulness as a medium of exchange for a world with today’s volume of trade. While it is a useful, and, over the longest term, essential, store of monetary value, there is a limit to the degree to which it can substitute for paper or electronic currencies.

The utility of gold as a store of value can, for the obsessive, verge on religious devotion, or even love, despite the Bible’s admonition that “the love of money is the root of all evil”. A true goldbug would probably say this applies only to the government’s money.

The second premise, that the committee or committees which run the economy do so through their setting of the gold price, had some basis in truth when governments or central banks were willing to buy and sell gold to set their currency’s exchange rates. The US government’s willingness to do that with the public ended in 1933, and its sales of gold to official counterparties ended in 1971.

For a few years after the 1971 “closing of the gold window”, the end of US government gold sales, there was residual interest in foreign governments’ valuation of their gold reserves. A website popular with goldbugs, Zero Hedge, recently revealed a 1975 Federal Reserve memorandum to President Gerald Ford, in which an argument between the Treasury and the Fed is outlined. Zero Hedge describes the memo as a “smoking gun”, and goes on to say: “So to all conspiracy theorists claiming that gold is being manipulated on a daily basis by the Federal Reserve: when it occurs over and over, and is so well documented, it is no longer a theory.”

The memo itself is rather less dramatic and has nothing to do with manipulation on a daily basis. Essentially, the Fed chairman, then Arthur Burns, was telling Mr Ford that if the French buy lots of gold it will lead to an increase in world liquidity and more inflation. As usual, Mr Burns was wrong. Gold was not necessary to inflate or deflate world liquidity; that could be done through money market operations by government currency issuers, including the French and the Americans.

Gold could move the larger financial world directly if central banks tied the level and rate of currency issuance directly to their gold reserves or to the metal’s price. Central banks, or a shadowy Doctor Evil, do not need to manipulate the price of gold if the price does not limit their freedom of action. What matters to governments is their ability to finance themselves through bond sales. This would be hampered if the bonds’ value was being eroded by higher inflation, or by devaluation of the currency relative to other currencies.

And that is what the gold price is beginning to tell us. The investing public may be too worried about imminent inflation; more likely, given the continued weakness in employment and wages, not to mention housing, we will have weak dollar-measured general price inflation. However, in spite of mantra-like official statements to the contrary, it would seem that the US government wants to competitively devalue its way to national prosperity.

That hasn’t worked yet, since the trade-weighted dollar is about where it was at the beginning of the crisis, but I am confident that if a government wants to debase its currency, it can ultimately succeed in doing so.

One of the advantages of being a goldbug now, or becoming one soon, is that it is one commodity whose price is not likely to be manipulated below its market-equilibrium level by the US government (“Them”, if you prefer). There will be attempts to limit speculation in such essential commodities as oil, grains, or base metals, but a gold price rise would simply represent a successful devaluation.

So while the goldbugs’ conspiracy theories are chimerical, their investment strategy is at last aligning with that of the real world.

The writer is an FT columnist

Revenue Recognition vs Respect Recognition

Yesterday I was reading an article written by the current president of MASB about revenue recognition for property developer. The crux of the issue was whether current practice of recognizing profit based on % of completion is appropriate. He further elaborates that if % of completion method is not applicable complicates related issues on taxation and borrowing cost of property project. The standard did discuss on whether a developer is in a business of

1. selling finished products or
2. rendering construction services

Situation 1 means developer only earns it revenue after property is completed and delivered to customer. Situation 2 means developer earns revenue on stages as the construction of property progresses. Hence, the corner stone of this topic is you register a sale only when you have EARN a revenue irrespective of circumstances.

Lets not getting over zealous on technicality of this concept, leave it to all smart accountants to find out.

Coincidently, knowing an accountant who is an expert in applying revenue recognition concept but fail to apply the same concept in gaining respect from others – Respect Recognition vs. Revenue recognition concept.

It relates to a tale of a very senior accountant who is in late 40s trying to introduce concept of respect to an organization she newly joined. This senior accountant is leading a team of approximately 10 accounting staff. Due to working culture differences between this senior accountant and the existing staff has led to an exodus of massive departure of staff. The main crux of issue was senior accountant represents that she does not receive “respect” she deserved from staff for being the most senior accountant in the company.

Now i wish to remind all my readers, respect is like revenue, must be EARNED not BEGGED. I do recognize that you could rarely learn anything from accountant about life, but this one might be a relevant application of accounting concept into our daily life. Please leave me a note if you beg to differ.

Happy Chinese New Year

Investment vault wishing all readers Happy Chinese New Year. May the Bull wake up from its hibernation for past one year and live up the spirit to chase the Bear Nian away.

Trading results after a week

As promised, i will post my trading records here. From the table, as you can see, i have started with a higher volatile equity product - warrant. As the market is expected to be volatile for Q1 2009. We should ride with the wave of the volatility.

Bought 25k of Ramunia-WA and sold all at different day. profit RM257, return 8.8% in a week, not to bad ah.
Ok good news is told, now is the bad one. On 6 Jan, 50k Resorts-CH was bought at RM0.85. Currently, i am sitting with paper loss of RM700 just for this counter. that translates to 16% loss. Do you find any error in in writing??

Actual the purchase price is RM0.085 not RM0.85 (first line third para). i was supposed to queque for RM0.085 (it was traded at RM0.09 at that time), unfortunately i have keyed in RM0.85. As a result, the system will match the best price at RM0.085 instead of what i keyed in.

Lessons learn:
1. any derivatives products are highly volatile, it surges fast, slump quciker, for starter dont start with this prodcut;
2. start your paper trade, learn or season yourself with the trades of trading first.
3. start as early as you can, as you are probably aware, its darker before dawn, all bad news has been looming around the world, but market has reduce to go down further, probably in 6 to 9 months time, we will have switch strategy to investing instead of speculating.

Happy trading.

Start My Trading Adventure

Today is the first day in 2009. Wish to take this opportunity to express my greeting to all of you Happy New Year 2009. Have you completed your New Year Resolutions and wish list or to do list?

Well, for me i have finally decided to start my virtual trading starting from tomorrow 2 Jan 2009, the first trading day in 2009. I have been educating myself for the past two years in stock trading and investment through reading lots of books, blogs, research reports, reading about technical analysis, fundamental analysis and so on. As rightly pointed out CPTEH, education is a critical factor to have edge in stock trading.

For the past two years, I have enjoyed the education journey and it has really expanded my knowledge on various aspects of world and local economy. I have also learned that we should have our independent view of the state of economy of the country rather than relying on the news from the local politically controlled news paper. I do not need to name it, you should know. I have decided to discontinue the subscription of the local English paper instead subscribed for the Edge.

Besides, learning about the co-relation between the state of world economy and the local economy also enhance my understanding as to why movement in DOW has an impact on other stock market worldwide. As you probably hear before that “When the USA sneeze, the world will catch a cold”. It shows that the state of health of the USA economy is a barometer of the state of economy world wide. However, opposing to this belief, there is also a group of economists strongly suggest that the economy of Asian countries is slowly de-couple from the US due to the relentless growth from the countries like China, India, Vietnam and some of the countries from South America.

The idea I wish to highlight here is economy is a very complex subject. Various economists equipped with different school of thoughts will continue to bring forward their argument on certain economic topic. It is rather confusing to all beginners who have problems in understanding the topic discussed. DON’T WORRY, I was one of them before this. After two years of bombarding myself with all kinds of investment books and readings, my advise to you is sum up as that all economy has a cycle to follow ie peak and trough. Whatever predicted and argued by the economist is NOT crucial from the stock trading point of view, as the stock market is a voting machine in short term and a weighing machine in long term, all information should have been discounted into the price of individual securities.

Stock trading is a zero sum game, ie someone need to pay for your profit you made. There is general belief that only 20% of the market participants make money from stock market while 80% of them continue to loss. Hence, before your start your stock trading journey, I suggest you do the same as me spend a year or two to re-educate yourself in finance as I wish you will in the 20% category. Please take note that by virtue of you reading my blog, you are already in the right track marching to 20% category. After all, it only makes sense to be in market if you are able to beat 4 participants at any point of time as occasionally we will be beaten by the insides who are deemed to be privy to the certain information that is not flows to market. Stock trading is a high risk game, so get yourself prepared before you enter.

I will try to post my stock portfolio starting tomorrow, if possible. Let see how many participants I can beat. Once again, happy new year.



Wishing you and your Family
Happiness, Success & Good health