(P&I) The Real Gold Fix

Retail Gold Wafers
1000g On Its Face=$40,000

Drama. Gold as a store of value and hedge against inflation has lost its lustre in recent years and might never so return in the developed countries (Reuters, January 22, 2014, Will 2014 spell the collapse of gold?).

Absent war, revolution, hunger and flight, gold is of marginal value as “money” and the real value of a nation’s currency is in the productivity of its industry, agriculture and commerce – that is, in the productivity of its people and the demand for its products and resources both inside and out.

No one is immune to the travails of commerce. For example, one of the triggers in last year’s decline in the price of gold from $1700 the troy ounce to $1400 and now $1200 was the possibility that Cyprus would unload its gold tonnage in order to pay its bills (ibid, Reuters).

And although both Canada and the United States are developed countries and major trading partners, the demand for Canadian stocks and an interest in its commerce has significantly lagged the US since the recovery from the financial pseudo-crisis of 2008. Please see Exhibit 1 below.

Exhibit 1: US and Canadian Demand For Stocks

US Commerce

Canada Commerce

The charts show the “market value” of the S&P 500 and S&P TSX Composite companies and their “values” are a measure of their “worth” as a currency and a measure of their “worth” in commerce.

The “Risk Price (SF)” is the “fair value” in each case, that is, it is the value of these stocks, this commerce, as “money” in each currency that is not merely “cash” or weighed in gold.

The charts show that the demand for US stocks exceeds its supply and, therefore, the stocks are trading above the “price of risk” and are “undervalued” regardless of their price which investors think is more likely to go higher than lower pending further reflection and outcomes.

In Canada, the situation is the reverse. The supply of Canadian stocks exceeds the demand for them and the stocks are trading below the price of risk and are, therefore, “overvalued” regardless of their price which investors think is more likely to stay the same or go lower than higher and better buying opportunities might eventually surface.

The “price of risk” is a common currency measured in US$ and CDN$, respectively, and it is a “common currency” because it measures the same thing (like a weight) in both US$ and CDN$ and what it “measures” is what we hope for in our “money” – namely, that it should retain its “purchasing power”.

We can say, therefore, that at the present time, “Canadian commerce” is trading at the price of risk and is, therefore, “fairly valued” in Canadian dollars. In contrast, “US commerce” is trading at prices that are 25% above the price of risk (from the chart, $18 trillion versus $14.5 trillion in US$).

Undervalued at these prices, you say?

Economists would immediately opine that the US$ is “overvalued” because it is trading at a 25% premium to the “common currency” just as it might take more gold (as a quantity) to buy a US$ than it does to buy a Canadian dollar. But that is not the case.

We have to conclude that the US$ is “undervalued” because the demand for the US$ in terms of its commerce exceeds its supply. There is a demonstrated preference for stocks over money as cash.

Incidentally, there’s a vacant chair going begging at the other “gold fix” (Reuters, January 22, 2014, Who Will Take Deutsche Bank’s Seat At The Gold Price Fixing Table?).

For more information and additional references to the theory, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.