Ure Basic Economics: The “Gold Product”

Long – but useful ramble here:  One of the hangovers from being #2 at a regional jet air carrier in the Caribbean is a fine sense of Standard Accounting Ratios.

When an airline figures it needs a 73% passenger load factor to break-even, it’s not blowing smoke…it’s an accounting calculation.  It’s something folks in airline admin, like me, model and tweak and press and connive in order to get all the costs as low as possible and thus, have the best chance of making money.

It’s the art of the ratio.  If you have 100-seats, then if 73 of them don’t have fare-paying butts in then, the airline will lose money on that flight. On the other hand, if there are 100 people in 100 seats, the odds of making money goes up…but again, there are other ratios that need to be considered.

Take your car..

Say you have a $500 payment on it.

Say you drive 100 miles a month.  That would mean you are paying $5 per mile just to drive the car…and some places cabs can be that cheap….and public transportation sure as hell is. 

You get ahead (or behind) in life working these things out.  And then living “by the numbers.”

When you drive 1,0000 miles a month, then your car cost per mile drops to 50-cents…and so forth.  That’s the magic of utilization – which is the amount of use out of something you get for the fixed part of ownership.

Then, there’s the whole matter of variable costs. 

Some of the things in your car depend on how much you drive it.  A fine example is gasoline.  If you get x miles per gallon and drive y miles, you can figure out one of your variable costs.

People don’t put as much attention to the fixed cost side of things…they seem to worry more about the variable costs.

“What in the world could this have to do with the cost of Gold?”

Let me explain:  Keeping a little bit of what meager income we make is a matter of looking at ratios and understanding dynamics of money.

I’m sure this morning, you’ll find lots of finance sites likely to focus on the pop in gold the past couple of days and proclaim that a huge breakout is here.  Not that they would be wrong, but let me introduce you to the dollar/gold ratio.  Because being right, but for the wrong reason can lead to disastrous decision-making.

The basic idea is this:  If a dollar is worth a Euro, then it ought to take about 1,066  of them to buy an ounce of gold. 

Referring to the chart at the top of this page,  please note that gold, indeed is up again this morning – or at least it was at press time.

But at the same time, the “value of the dollar” is dropping.  It was down to 0.875 Euro this morning,

So here is the magic of ratios: 

Price of gold (say $1,218.70) times the dollar to Euro exchange rate (.875) equals a fully priced ounce of gold at about €1,066.3625.

And what would the price of gold pencil to if the dollar rose to 0.94 Euro?  Simple:  $1,134.

The gold/Euro ratio is not fixed, and sure, it will drift over time.  But when you’re playing in a multi-currency world, pah-leese don’t tell me a huge bull market is gold is happening – yet.  The huge bull markets are when major changes in the underlying ratios take place, not when currency has cut loose its moorings temporarily, as it has recently.

My point (and this is why thinking in ratios is so damn important) is to look for the underlying ratio when you are trying to understand anything financial.

Yes, you can make money on gold options and yes, the price of gold is going up…but a study of RATIOS reveals that the driver isn’t everyone waking up and running out and buying six Krugerrands before breakfast.  This is a currency swing.

I will repeat what I was screaming at you a month, or so, back when I told you to watch the Fed which is printing up M1 and M2 like CRAZY to keep the economy pretending to recover:  The forex market is starting to devalue the dollar a bit…and as they do (like printing M1 at a 10.6% annualized rate won’t have an impact?_) the dollar may fall more relative to the Euro.

That will press gold us, begin some internal inflation in the US and offset the big bad ugly word that no one in Washington can cope with: deflation.

Why do you think I was headlining all that stuff about the Fed H.6 currency stocks report a while back?  Do I have to draw you pictures?

Where could it all go?  Well, say the US continues to devalue relative to the Euro.  Say we get down to 0.78.  Where might gold go – strictly on a currency move – in this instance?   Are least to $1,366 or thereabouts.

Of course, were this to happen, the underlying ratio would change.  There’s a pile-on effect that is not insignificant. 

In fact, when you study ratios long enough, a particular neuron in your brain will short out and you will see that the ratios aren’t nailed to the floor and appear as a nonlinear curve over time.  And when the curve gets to a certain spot, the related (nonlinear) pile-on of lemmings begins and prices go off the charts to the stratosphere and becomes self-reinforcing.

Yes, and we can get rich in these instances.

The bottom line is what?

I’m skeptical of this being a major bull market in gold just yet.  We need to see gold up into the $1,300+ range and wait for some pile-on effect to appear to become a real ratio-pusher.

But the ratio (which is kind of rocking chair curve) will be covered in more detail in an upcoming Peoplenomics® report.  But the key thing is to keep an eye on the general business outlook and currencies.

If people really were buying Krugerrands and Maples for breakfast, the currency shift could be discounted away.  But that’s not what’s going on here on this planet.  At least not yet.

While the move over $1,200 is constructive, hold to decaf while we see how bad deflation really is, and how much of the Fed money printing really chases goods and services.  The truth will be revealed in the ^TNX 10-year note rates and the 90-day Euro futures.

If the ^TNX doesn’t drop down next week after options expiration tomorrow, I will be surprised.

This is, don’t forget  (index) options expiration day and traders love to drive markets up to scalp a few bucks.  Trading may be fine for some, but it’s too much work for old men  like me.

Stocks should put on 100-points, or more today.  But it’s not because we recovered from our economic woes overnight.  It’s because with the currency shift, it now takes a few more (watered down value) dollars to buy the same intrinsic value represented by the underlying companies.

I’ve found reducing financial thinking as much as possible to ratios has helped me make average to slightly better financial decisions.  You might consider giving it a try.  A few minutes with a calculator can change your relationships dramatically.  Especially the one with your bank.

Longwave economics is not about hit-and-run trading.  It’s about these larger ratios over time that anyone can teach themselves to observe and invest by.

More Dot-Connecting

Madison Avenue Mike, when he’s not being a demigod of NYC fashion, is one of the more cogent news tipsters around here.

His “picks” this morning include the report that the Fed really has secret bailout plans and capabilities that dwarf those powers of mortal finance….

And he spied parent banking firms are likely to plead guilty in some FX-schemes.  Of course, the caught-red-handed bankster class ain’t commenting – but you’ve been around our coffee-klatch news operation here long enough to know what “No comments” means, right?

Blah, Black, Blah…Producer Prices

Here, read this press release:

The Producer Price Index for final demand fell 0.4 percent in April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved up 0.2 percent in March and decreased 0.5 percent in February. On an unadjusted basis, the index for final demand declined 1.3 percent for the 12 months ended in April. (See table A.) In April, more than 70 percent of the decrease in final demand prices can be attributed to a 0.7- percent decline in the index for final demand goods. Prices for final demand services edged down 0.1 percent. Within intermediate demand, prices for processed goods fell 1.1 percent, the index for unprocessed goods moved up 0.9 percent, and prices for services advanced 0.5 percent. (See tables B and C.) Final Demand Final demand goods: The index for final demand goods moved down 0.7 percent in April following a 0.3-percent rise in March. Leading the broad-based decline, prices for final demand energy fell 2.9 percent. The indexes for final demand foods and for final demand goods less foods and energy decreased 0.9 percent and 0.1 percent, respectively.

Not that things will get cheaper, though….the markets know this and so the Dow will still open nearly a hundred up. 

History Is Laughing At Us

How do I know this with some certainty?  Well, the name of the chief economist at HSBC is named what?

Stephen King.

Novel, huh?

And this Stephen King has some of the better horror out lately…

This Stephen King says the whole planet is headed for some Titanic problems, shortly.

Oh, and the other Stephen King’s latest “Drunken Fireworks” is due out shortly. 

One of the Kings, or both, coming to life near you.  History’s laughter haunts us, as the descent of high culture picks up speed…

Speaking of Speed

Still no answers but lots of questions about that Philly train wreck.

Meantime, 10 people died on a Myanmar migrant boat, but no wall to wall coverage, since there’s not much video available.

14 people have been killed in a Kabul hotel attack, but no stand-up reporter handy?  Out of range of the remote microwave truck?

Damn…such are the tough decisions in the newsfotainment world, eh?

News is what we say it is, dammit.  And we have a story rotation, the same way radio programmers do with the Top 40.

Or, ain’t the public ‘sposed to figure that out?

Crimminee sakes…

Sucking Vitamin B

Good news time:  Vitamin B may slow the growth of some skin cancers.

Wait…isn’t there vitamin B in beer?

You bet – and a lot more vitamins according to this LiveStrong article.

You been drinking son?”

“No sir, just taking my vitamins…”

And of course, in the South everyone know that Vitamin B is Budweiser while in Seattle is was Vitamin R for Rainer. And in Denver, Vitamin C is Coors and….oh stop it.  Too early…more coffee?

Related health note:  17 diet hacks that have nothing to do with diet or exercise

Comments

Ure Basic Economics: The “Gold Product” — 2 Comments

  1. hi there. you refer us to kitco. if you go to the kitco gold index on that site they also track how much change in gold prices is due to the change in dollar value. thank you for your site…