Gold ain’t happening yet

Paulson and Soros still think Gold is a buy, adding to their stakes as the price declines. It’s also not very brave of me to blog about this now as gold has declined when for much of the financial crisis it was increasing in price. I’ve been watching other things.

The idea that the gold price must increase because of massive monetary easing reflects a broken understanding of the economy and a liquidity trap. The money isn’t going anywhere. It is being hoarded in bank vaults. Very few people want to borrow, and aside from banks buying up gold with their excess cash (which would effectively be a massive speculative prop-trading bet on the direction of the gold price) there are few reasons for gold to be spiking massively.

One possibility is the simple safety argument. If you don’t know where else to put your money, put it into gold because it’s gold and it’s safe. Except why should gold be safe? The price swings all over the place like many commodities, but unlike most commodities it has limited industrial uses. Gold arguably has very little intrinsic value.

I’m not saying gold is going to tank. I really don’t know.  I also don’t think anybody else really has a good idea of where the gold price is going to and much of the speculation is by people who think it’s going to rise. Therefore it may have been overbought already (whatever that means when it comes to gold, that is).

Hyperinflation is not here. Gold price increases are not guaranteed. If your entire investment view is centered on monetary policy giving rise to massive inflation, you’re in for a painful ride.

(The one risk that does remain is that when the economy starts turning, and I’m thinking maybe as far away as 5 or 10 years out, if the liquidity isn’t quickly pulled back, we might have high inflation and increases in gold prices. I don’t see this as a major part of the view of current gold bugs. There are too many ifs and too much time and far too much uncertainty.)

A post about a post about accounting standards

The IASB and FASB are trying to get their heads around expected loss models for credit provisioning. I’ve seen some of what they’ve suggested over time and they really have had some odd ideas. Maybe this is one area where actuaries really are more comfortable since it’s our daily world.

Anyway, to the point, it looks like their is trouble in paradise.  The FT Alphaville guys have a post showing the tense discussion between the two recently.

I don’t know what this means for the IFRS4 Phase 2 project and insurance accounting conversion. Well it’s not good anyway.

Inevitable meltdown

Yes, government bond yields around the world are plummeting to all-time lows.  They’re falling through the floor as investors realise the global economy is about as close to the drain as it’s been even through the “Global Financial Crisis”.

What do you mean “what about Greece and Spain”? Government bond yields are plummeting everywhere except where countries are part of a horribly flawed, disintegrating monetary union that isn’t in sync with the ideal currency union requirements.

Spain’s unemployment is higher than South Africa’s and the banking sector is teetering on the brink.  Greece desperately needs to go through the economy destroying exit from the Euro – the fallout from which will make it seem like leaving was the wrong choice when it fact it is the right choice.

European banks are enduring a jog on the bank – the relentless pressure of which will eventually push Greek then Spanish banks into a bottomless hole and take several European banks down with them.

It’s all falling apart and the world will not be the same after 2012. Textbook makers will make a killing out of updating their editions to reflect how much is different arising out of the 2012 disaster that was always going to happen.

Digital currencies and more

Bitcoins are a bad idea.  I’ve put this forward from multiple directions already.

What’s interesting is the range of new, government-sponsored digital currencies that are in development. Digital currencies might also be a little bit of a stretch, they’re still more like digital payment methods. Unlike Bitcoins, there is much to recommend about low-cost, high-security, electronic digital payment platforms.

Japan is toying with slightly different ideas. Rather than using a traditional ATM card to withdraw cash, you might simply use your palm. It really is only a matter of time before the ubiquitous plastic card disappears into a cellphone, embedded chip, retina scan or something.

Sweden is moving towards a cashless economy, with one of the driving factors being security – as in personal safety. Maybe I’ve missed some news stories (or not read Dragon Tattoo enough times) but I wouldn’t have thought that Sweden would be first in the world at worrying about personal safety.

To be clear, there are several wide-scale advances in this area around the world already.  These aren’t specifically digital currencies, but rather different, more efficient methods of payment.  The UK Oyster card is a good example of a wide-scale contactless payment system that works well for small payments in a fast-speed transaction environment. The precursor of the UK’s Oyster is Hong Kong’s Octopus card, which is actually used or micro-payments on transport systems, many parking areas and even vending machines.

Google and PayPal have systems allowing small digital payments that are cost-effective, but still linked to an account so your account information is linked directly to the transaction. One of the apparent virtues of Bitcoins is their anonymous nature. Now for the most part most individuals aren’t particularly bothered by anonymity, but it is a genuine concern. Do you really want a vending machine company to know when and where you buy your Coke and Vitamin Water from their vending machines? Would you want this information to be aggregated with your online purchases and fuel purchases and airline ticket purchases? Very soon the information that Google currently stores on you would be a drop in the information ocean from these real world movements and transactions.

So Canada’s proposal for an anonymous, digital currency is really interesting. Government backing is one good way of giving credibility and scale to a system that many competing system will not be able to manage.

For me, one of the most interesting aspects of the story was the Canadian Mint’s IPO of an exchange traded listing for gold receipts for gold stored at the mint. This is basically the oldest form of gold-backed currency – receipts of gold on deposit at an institution where the receipts were tradeable and allowed “gold” to be used for transactions more conveniently and safely that gold bars and coins.

What once was old is now new.

Greek default?

So European politicians have more or less agreed a deal which may, more or less, push some of their problems to one side for a period. Yes, I’m not madly optimistic about this as a cure-all.  This is not the end of the Euro problems.

Part of the deal is a “50% loss for private investors”. Which is part true and part nonsense but will be an effective Greek default when enacted / agreed. (I don’t care how “voluntary” it may be, it’s a default and almost all definitions of default include restructuring of debt in any way that isn’t what was originally promised.)

Why is it only partly true? Well it’s not necessarily a “loss” for private investors. The probability of default on Greek bonds has been just about 100% for a while now. This probability of default is derived from market prices for Greek bonds and market spreads on Greek Credit Default Swaps (CDS) and an assumed Loss Given Default or Recovery Rate for investors when the bonds do default. Actual Recovery Rates vary widely, but often analysts plug in the average Recovery Rate over most of this century on unsecured debt which is around 40%.

So if market prices for Greek bonds assumed 100% default probability and a 40% recovery, then a 50% recovery doesn’t sound so bad. The potential downside is that Greece may still (need to) default on these written-down bonds at some point in the next two decades.

So the real question is what will the new probability of default be? Then we will know whether investors “took a loss” and perhaps gain the market’s view on how successful the deal really will be.