Strange Bedfellows

I’m wondering if President Clinton’s increased appearance on the national stage – and increased criticism of the Obama’s opponents– is a harbinger of Hillary being named to the 2012 ticket.

Two currencies to fix Greece?

When I was a kid, Pop and I were bringing a boat north from Puerto Rico when we lost an engine and wound up marooned in the Dominican Republic for a few weeks while we waited on parts.

This was 30 years ago, and the DR wasn’t quite so tourist friendly, people butchered goats on the sidewalk, guys walked the docks with assault rifles, and we learned a bit about the economics of bribery.

Bribes, fees for service really, were best paid in U.S. dollars.  Dominican dollars were acceptable, but you had to offer more of them – despite a 1:1 official peg.  Slips and fees at the government marina had to be paid in Dominican dollars – no worries, they’d change your greenbacks right there at 1:1.  (Guys downtown would change you at 1.2:1,  I’d imagine guys in the know did even better.)

Running with two currencies seemed a great way to get good dollars into the country, and I suspect into the right pockets.

Lots of countries run with multiple acceptable currencies, which made me wonder… why can’t Greece do the same?

Print Drachma for domestic use, use Euro for international payments, “fix’ an exchange rate, and let the robust underground Greek economy sort out it’s own exchange rates.  Internally, you’d get Drachma inflation, likely Euro deflation. The peg allows you to keep marks high, and likely exports a smidge of inflation. The strong euro within Greece boosts tourism and foreign investment.

Thoughts?

Gold!

I’ve been a true believer in the gold story for a number of years, and for the most part the results have been fantastic.

More recently, I’ve been disappointed with the performance of the miners, and as of this summer, as gold approached the top of its trading channel, I began to accumulate GLD puts.   That part has been less fantastic.

I do not believe in gold as money, at least not yet.   I’ve never purchased anything with gold, don’t know of many people that have.  While it’s true that it has a historic use as a medium of exchange, so do goats.

I have a hard time believing that my house and land is now worth 30lbs of the stuff, rather than 60lbs – especially considering the probable reserves of AU down in the creeks and in the quartz veins.

I do not believe that a year’s labor from a doctor or engineer has been cut in half, or that the value of a Monet or productive farmland has fallen so drastically relative to the metal. 

I am skeptical toward arguments for continued appreciation when I look at Gold’s appreciation relative to other assets – fiat or no, real estate isn’t appreciating, wages aren’t appreciating, washing machines aren’t appreciating, copper, oil, platinum, etc etc…  You might not want to trade that pound of gold for a used Honda, but for a new BMW you might be tempted.  And if not a BMW, then definitely a Maybach.

The certainty of gold as a refuge during deflation seems questionable as well.  I believe that the appreciation during the 30’s was more a product of nations abandoning the gold standard and massive bank failures, but I’m certainly no expert.  I think earlier historic examples speak more to gold’s portability and security than any lasting intrinsic deflationary resilience.

Maybe slow appreciation is warranted based on scarcity – say at the rate of inflation.  Which would mean over the long term you will only lose real purchasing power at whatever the capital gains (or collectible) tax rate is.  And although it’s not happening anytime soon, improved discovery and recovery methods will tend to increase supply and pressure prices.  With asteroids containing trillions of current dollars worth of the stuff, I suspect in real dollars, the very long term direction is downward. (Don’t get me started on diamonds!)

Maybe we are not yet in a bubble, or perhaps this is the rarest of all animals -- the rational bubble, but the chart and the anecdotal stuff is becoming awfully similar to most previous examples which have ended in tears.  

From my limited understanding of such things, it seems that once a bubble breaks it retreats beyond fair value, and stays there for quite a while.

At some point, even if this run is meant to continue, we will correct to the 50day (currently at $1668) or 200day ($1492) but I’m beginning to suspect that this time the game is over for a time.  Recent action looks more like the end part of a run, rather than the middle.

Course, whadda I know:  I’ve been short this month, and I have been wrong, and I am adequately bloody to show for it.  (To add insult to injury, I was on the ocean for the spike down, and missed any opportunity to be made whole.)

Hope all are well,

J.

(P.S.  Even if you’re a fan of $Gold, what about GLD?  Although I’m not as conspiratorial as some of the links and stories I’ve seen, there do seem to be some additional risks…  Anyone doing a GLD/physical pairs trade?)