Asset Class Moves March 1 2013

Stocks were up 0.23%
Bonds were, to my surprise, also up 0.06%
US Dollar was up strong 0.40% versus a basket of world currencies, and up 0.30% versus the Euro.
Asian and European stocks were mixed
Gold was down -0.15%
Oil was down -1.12%

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Commentary:

You might think this is odd, but I get a little emotional on benign days like today in the asset markets.  While the asset markets did not move much, it appears to me there are certain valuation shifts happening in the background, shifts that metaphorically feel like they should be anticipated and prepared for.

For several days, my brain has been queuing me to write about gold as an asset and the factors that may change gold’s value.  I’ll get back to that.  I’ll begin with . . .

Apple

I don’t take any pleasure in this, because I never like to see any asset lose value.  But for whatever valid or invalid reasons, Apple closed at both a YTD low and a 52-week low, at $430.  I don’t like it when I don’t understand the valuation of an asset.  Because I cannot roughly approximate where Apple’s price will go, I have not owned it individually since January.

When the headlines asked:  Is Apple the new Microsoft?  The question seemed poignant and analogous.  Unfortunately, the stock valuation question was not:  Will Apple be a profitable and large company?  Regardless of the Apple’s size, it appears the more determinative stock valuation question is:  Will Apple’s earnings per share continue to increase?   And with Apple’s earnings per share so high, it was a legitimate question to ask.

Here you can see a technical indicator, called a “death cross,” where Apple’s 50 day moving average stock price (in green) passed below Apple’s 200 day moving average stock price (in red).  Supposedly, for stock technicians, this is a bad sign for a stock’s near term appreciation.  I don’t know how often that proclivity rings true.

Apple 1 yr chart death cross March 1 2013

I don’t know where Apple’s stock price is going to go from here.

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Can you make money from selling into a panic?

Jim Cramer, the CNBC nightly stock commentator, repeated one of his sayings this last week:  “No one ever made money selling into a panic.”

Cramer is a stock cheerleader who I can appreciate, and who appears to be very bright over the long term, because stocks over the long term tend to improve in value, but I have watched him for decades now, and there have literally been decades when he missed the mark – when stocks lost so much value that stock investors lost their shirts either for many years, or as in the case of the Internet/Semiconductor boom, lost their shirts permanently.

The problem with his statement: “No one ever made money selling into a panic” is:  Even if it is true, it misses the more important investment consideration which is:  While no one may have ever made even more money selling into a panic, many investors have preserved capital/principal and preserved gains by selling when stocks were priced high and it appeared a panic was beginning.

So, listening to Cramer, is kind of like listening to Annie telling you every night the sun will come out tomorrow.  While the odds are she is correct, to do well as an investor, it is important to recognize when a season of winter is likely coming.  And historically, winter comes fairly regularly.

Which leads to a discussion of . . .

Why Does Cramer Say “Gold Is A Type Of Currency”?

First, Kramer has not always said, “Gold is a type of currency.”  He only started saying it more frequently after living through the last 12 years, when on many of those days, his beloved stocks got kicked in the teeth as gold appreciated in value faster than stocks.

So, when he regularly discusses diversification these days, he will commonly show a pie chart that suggests an investor’s allocations should include a 20% position in gold.  This is kind of humorous because I’d be very surprised if he personally had 20% of his investments in gold currently.

So, is gold a type of currency?

No, but I understand the concept Cramer is trying to get across.  As with many analogies, they have imperfect comparisons.  To understand gold, it is probably better to consider it an asset rather than a currency.  Like most assets, gold requires an additional trade for it to be used as currency in most transactions.  So, in that sense, it is more like an asset.

In contrast, currencies can be used to purchase anything in their indigenous areas.  Further, currencies need to be more flexible and have the ability to facilitate more economic activity than gold can.

For investors, it is important to understand that under current economic policies, all or almost all world currencies are designed to lose value.

And this is why Cramer wants to emphasize gold in discussions of currencies.  Historically, in periods where world currencies are losing value at a faster than normal rate, gold has understandably maintained or increased its value.

Gold

I can hear you asking:  Why should I care about gold?  I’m never going to buy some gold as an investment.  I couldn’t afford to buy even one ounce of gold, even if it was priced at $1,500/ounce.

Nevertheless, understanding how comparative asset classes compete for investors’ dollars is important for all stock and bond investors.  So, if you want to invest in stocks or bonds, it is probably smart to have a better understanding of what factors effect the price of gold.

As a primer, here are two Wikipedia articles worth scanning:

The Gold Standard on Wikipedia

Gold As An Investment on Wikipedia

The first article will give you some historical reference to how gold was used by governments in the past, as a basis to legitimize the value of their common currency.

The second article gives an overview of gold’s historical price appreciation in adjusted US Dollars, as shown in the chart here.

As you can see, while gold is still trading near all time highs in number of US dollars, it is not currently trading near all time highs in adjusted value of US dollars.

Historical Gold Price Chart 2013 In Adjusted Dollars

Gold vs. the US Dollar

The price of gold, worldwide, is still denominated in US Dollars.

So, on a day when the US Dollar gains value against a majority of the world’s other major currencies, if gold only maintains its value on that day, the actual value of gold increases on that day.

And if the US Dollar loses -0.50% in value on any given day, but gold gains 0.50% value on that same day, gold effectively has only maintained its value, because the underlying currency, upon which it is denominated, lost value.

Why Do No Governments In The World Still Use A Gold Or Silver Standard?

The answers to that question are many and complex.  But as I mentioned above, there is a need for a lot of currency to facilitate the world’s economic activity.  And since the 1960s and before, world governments have come to face the reality that it is simply impractical to generate a sufficient supply of gold to be used as currency.

So, this is one of the major reasons why over the long term an ounce of gold has improved in value much faster than any world currency has improved in value.

Currencies are not designed to be appreciating assets.  Gold is also not “designed” to be an appreciating asset;  rather, gold has appreciated in value as an asset because, even with the latest technological advances in modern mining, gold’s supply is still strongly limited compared to the demand for gold.  The costs related to mining one ounce of gold are still prohibitive.  While the price of gold has boomed in the last 12 years, the value of gold mining companies’ stocks has not.  The best and largest gold mining companies are not dramatically improving their earnings per share because the real costs for mining, storing, insuring, and transporting gold continue to increase.

So, Is Now A Good Time To Buy Gold?

Not yet, in my opinion.  Because gold’s price chart experienced a “death cross” recently:

Gold 5 yr Price Chart Death Cross March 1 2013

For large supply & demand and comparative investment factors that I don’t pretend to fully understand, the chart suggests gold may struggle to gain value in the near term.

But if you asked me:  If you had to choose between a) having all of your savings and the US dollar for the next 20 years and you could not trade in or out of that asset class, or b) having half of your savings in the US dollar and half in gold, then I would gladly prefer half in gold because the US dollar is designed and intended to lose value slowly (reducing the actual amount of our US government debt) and I perceive, correctly or incorrectly that the demand for gold will continue to exceed its supply as nearly all world government concurrently agree to have policies that intend to devalue their currencies.

Even though gold dropped -0.15% in value today, it’s underlying currency denominator, the US dollar, gained 0.40% versus a basket of other major world currencies.  So, in real value, gold still gained value today.

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Diversification

While I am a strong proponent of diversification, I prefer to only diversify among the asset classes I perceive will appreciate both in the near and long terms.  So, while I don’t own gold now, if stock prices improve, and stocks as an asset class become less attractive to me and other investors, I can see myself being more tempted to create a diversification into gold.

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Why Might This Information Be Important?

It might be important because this is where we’re at now.  And to profit going forward, decisions need to be made in this time window.

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BTW, Warren Buffett’s Annual Berkshire Hathaway Report and Letter to Shareholders came out today and it can be read here:

http://www.berkshirehathaway.com/letters/2012ltr.pdf

A very smart man and always an entertaining read.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any significant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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