Tuesday, October 30, 2012

Debts vs Wealth

"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." 

-Frederick Soddy, 1926


Anonymous said...


You once told me that, when shorting a stock, get out when that stock lapses into single digit values. The effects of that stock's low value upon the market and the psychology of its interested participants (and the tools they are willing to make use of at that point) make it in no way certain that the stock will go to 0 (even when it richly deserves it) but will, on the other hand, even fluctuate higher by small degrees.

Recalling this, and considering my investments for the future, I pose the following question:

If currency debasement and inflation await us in epic proportions, theoretically (and as you talked about in the communique re-establishing GASG) we could buy pure gold ingots with all our wealth and wait for a proportionate increase in Gold as the dollar declines.

However, if we apply the truism from above, relating to put options, do you believe the Government and the Financial system writ large will ever allow metal Gold to reach that kind of value? Won't the political necessity somehow provide ways to limit this inflation (artificially, and perhaps illicitly, of course) and thus prove metal Gold to be not the best investment to hedge inflation?

Admittedly it might be the best of bad options. But my question is, what other choices do we have? If I had 100k, would I just buy 100k in ingots or would I be better off with 50k ingots 30k GLD stocks and 20k silver interest of sort; or, for example, metals with a range of other instruments.

Or, gold metal, but as it rises, peel off currency from it to purchase real goods to forestall the metal 'bubble' being popped by the trickiness of the system when Gold's highs plays the same effect as an underlying stock's lows in put options.

Hope this makes sense.

Anonymous said...

correction: in par. 4, instead of

"ways to limit this inflation"


"ways to push value into other instruments other than metal gold"

Gerard said...

I think the governments have already been suppressing the price of gold for years. They've been doing it by leasing their gold into the market. They are running out.

HSBC, the custodian of GLD, is also one of the largest short sellers of gold also, so GLD's gold is probably also leased out.

If you want to know when to swap out of gold and into other assets, I say look to the dow/gold ratio to hit 2:1. It is currently around 7.5:1

The last time gold had an exponential run up, what caused it to crash was double digit interest rates. Not likely any time soon.

Anonymous said...


I was an English major. So let me test my understanding:

Dow:Gold ratio is now

7.5:1 (13:1.7) and assuming constant DOW value a 2:1 would be Gold = 7k/oz.

Or, Dow comes down to 3500 and Gold stays 1700. Thats also 2:1.

Where is the value of the dollar in those two scenarios?

Which scenario is more likely? Inflation or DOW crash - or do I even have those two scenarios understood?

Gerard said...

I don't know the answer. It depends on the decisions of the government and central banks in the US and abroad.

That's the beauty of using that ratio . . . as you point out the value of the dollar cancels out and is indeterminate.