GOLD THOUGHTS
by Ned W. Schmidt, CFA, CEBSSchmidt Management CompanyJuly 5, 2007
Economists spend considerable time fantasizing about a world than only exists in theory. If they become really good at it, they can move on to managing a speculative hedge fund. In that world, fantasizing has been elevated to a new higher level, one that uses computer algorithms. Because of that, the old joke from accounting has been adapted to the new paradigm of delusional valuation. Hedge fund manager asks, “How much is this CDO worth?” Math PHD replies, “What do you want it to be worth?” Fortunately, we don't have that problem when it comes to valuing the U.S. dollar. The global free market values it each hour of the day.
A popular fantasy of economists is that as the dollar depreciates the U.S. trade deficit will miraculously improve. That might be true if the U.S. trade deficit were not structural. One aspect of that structural nature is the importation of oil and petroleum products. Depreciating dollar will not cause oil to sprout magically out of the earth. Despite the grand effort to run cars on corn, the U.S. will keep on importing more oil. A more serious structural problem is that the U.S. increasingly makes little to sell the rest of world. The graph above is of U.S. manufacturing employment. The U.S. has had no net growth in manufacturing employment since the 1950s. Fantasy aside, the principal export of the U.S. is green dollars. With green dollars being the major export, the value of those dollars can only go down. With no visible end to the exportation of green dollars, the price of Gold has little choice but to rise over time. Fantasies are the only arguments for allowing your wealth to wither in paper assets. Reality is real assets, like Gold.
Economists spend considerable time fantasizing about a world than only exists in theory. If they become really good at it, they can move on to managing a speculative hedge fund. In that world, fantasizing has been elevated to a new higher level, one that uses computer algorithms. Because of that, the old joke from accounting has been adapted to the new paradigm of delusional valuation. Hedge fund manager asks, “How much is this CDO worth?” Math PHD replies, “What do you want it to be worth?” Fortunately, we don't have that problem when it comes to valuing the U.S. dollar. The global free market values it each hour of the day.
A popular fantasy of economists is that as the dollar depreciates the U.S. trade deficit will miraculously improve. That might be true if the U.S. trade deficit were not structural. One aspect of that structural nature is the importation of oil and petroleum products. Depreciating dollar will not cause oil to sprout magically out of the earth. Despite the grand effort to run cars on corn, the U.S. will keep on importing more oil. A more serious structural problem is that the U.S. increasingly makes little to sell the rest of world. The graph above is of U.S. manufacturing employment. The U.S. has had no net growth in manufacturing employment since the 1950s. Fantasy aside, the principal export of the U.S. is green dollars. With green dollars being the major export, the value of those dollars can only go down. With no visible end to the exportation of green dollars, the price of Gold has little choice but to rise over time. Fantasies are the only arguments for allowing your wealth to wither in paper assets. Reality is real assets, like Gold.
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