10 January 2011

bubbly rice

Learning how to invest in gold is annoying. As always, the expectation that people will do things in an efficient way is a useless hope.

The preferences of a market expressed by aggregate choices are not homogeneous. Try to understand the correctness of a certain sector, in the form of the average intelligence of people interested in that choice. Often, even telling people that an investment or activity would benefit them will not let them understand that it would, so the people choosing it will tend to be smarter than average and demand, and consequently average price level will be artificially low, or alternatively supply is low and profits are high. Avoid the unwise choices with a low amount of aggregate intelligence. Since price will only change over time due to a change in conditions, the limited capital and risk acceptance of individuals intelligent enough to make that choice means that additional investments do not affect the profit of other investors, only the profit of industries that depend on the consumption demand at a specific price.

However, it seems that most companies that sell gold to private investors are selling gold as a physical object to feel assurance from and profit from the difference between supply and demand for a long-term investment with physical shipping, in the form of a price premium on sales and/or purchases resulting from the uncertainty about the value of the good and the lack of liquidity.

It would be just as 'efficient' in the short term for the gold to never require shipping at all with no increase in uncertainty about the value of the good, and just store the gold as a number in the accounts of the selling company. The gross revenue then being used to further invest in gold coins purchased from other companies. However, since companies can be destroyed and constantly increasing physical storage requirements is not seen as the natural result of a business that sells things, this is not the service that these companies are selling to people interested in long-term investment in gold as a form of assurance against currency inflation. Similarly, while investment for individual retirement accounts is another common goal which is facilitated by a broker, taxes and income are a primary consideration and the liquidity of a smaller short-term investment in gold is not.

So it seems the only way to invest in gold on a short-term scale while retaining liquidity is an exchange traded fund for gold, where the service being sold is knowledge about the expected future changes in the price of gold. Investments are not a purchase, but an expression of agreement about the current market trends and a current profitable choice.

However one has to wonder if it's worth the effort

edit 7 minutes later http://www.bullionvault.com/ can has pretty website??

edit 11:20 pm 10 Jan 2011 . . . normally investment is limited by capital, in derivatives like futures exchange it's only limited by risk one is willing to take and the restriction of the negative consequences that stupidity can have by laws limiting risk. If only one person could invest with margin leveraging their capital, then any expectation of a rise in prices would be cause for a high-risk position if the rest of the market is intelligent. But when specialists in the market have access to the same leverage, the price difference between a futures contract and spot price already reflects the expected maximum profit from a high-risk position.

Since the greatest risks are consistently taken by those with the most confidence of success, futures prices should predict the actual future spot price to some degree after taking into account the depreciation over time with respect to a currency bearing interest※. But when short-term motivations are removed and simply finding the balance between leveraged risk and long-term profit becomes the goal, then there is no reason to expect a futures market to provide substantially greater profit than a normal long investment, without specific understanding of events or trends influencing the short-term market to the contrary. This is why gold exchange-traded funds have such high investment by major players like banks, since it doesn't make sense to depend on specific individuals with 'skill' for risky investments in a futures exchange. Those skilled enough to do so are already able to profit on their own while reaching the same limit with attention span and market opportunities, not investment capital, restricting their gains that they would have making decisions for a bank.

When leverage of risk is selectable, profit requires not only understanding of the proper price but also the proper amount of risk at that price, and many people will guess wrong without realizing why.

※In a stable economy with no change in economic output or the size of the money supply from credit and other promises, this means that gold would not be a profitable investment, because it would not be helping an intelligent person to do something they otherwise couldn't do without loans or outside capital investment, which are themselves a judgement of quality and take effort.

. . . actually I think 'contango' has nothing to do with the cost of borrowing money (the good doesn't even need to exist when the contract is sold) and everything to do with supply-side uncertainty, /sigh. when the cost of a commodity varies by up to 10% per year there's little point in worrying about people not knowing why they lost 0.6% of principle to renew a futures contract anyway. Maybe the sellers of gold futures contracts do have to put up some kind of guarantee that prevents them from earning interest on money they have, it's all quite confusing lol. Right now I can't even remember if short vs long is the same as seller vs buyer. too late? lol. I'm so productive. 2:43 am

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