In a continuation of the discussion from yesterday, I wanted to get into the charts were saying. I mean translate a chart into plain English.
Unfortunately, 95% of my followers won’t read this, but if you bare with me, I think you could use these charts I am presenting as a means of finding VALUE. Mike Maloney talked about something like this with the wealth cycles in his video. I was EXTREMELY curious about this, and what I wanted to do was to try and find RELATIVE VALUE of something to another. Find a common measuring instrument. You find that with the dollar moving and real rates, it’s extremely hard to find value in DOLLAR terms. But, what if you looked at EVERYTHING in gold terms.
Meaning, the modern heliocentric financial solar system model with gold at the CENTER of the solar system is the CORRECT way to value items.
You see the USD and Aussie dollar…Yen….Euro – all move up and down relative to each other – with obfuscated REAL VALUE. All of these are also tied to gold. Many currencies are pegged to the USD, or have a close relationship to it, so I’m going to continue with my measurements in GOLD, as the dollar is now 60% of the world’s reserve currency.
Let’s put on the lens and review a chart from yesterday. I’m going to discuss this one in some length to show you HOW to value this. Then, some others, I will be more brief with.
This starts with a tool called statistical process control. I am not ACTIVELY using it here, but I’m using the CONCEPT to understand when something is NORMAL or NOT NORMAL.
So let’s say you produce 1 million widgets a month. All of your widgets need to be between .55 and .56 cm in diameter. If they are not, they are cast aside as defects. The higher level of defects you have, the more of a cost you run into. You establish an upper and lower control limit.
I took the below from this site…
- A single point outside the control limits. In Figure 1, point sixteen is above the UCL (upper control limit).
- Two out of three successive points are on the same side of the centerline and farther than 2 σ from it. In Figure 1, point 4 sends that signal.
- Four out of five successive points are on the same side of the centerline and farther than 1 σ from it. In Figure 1, point 11 sends that signal.
- A run of eight in a row are on the same side of the centerline. Or 10 out of 11, 12 out of 14, or 16 out of 20. In Figure 1, point 21 is eighth in a row above the centerline.
- Obvious consistent or persistent patterns that suggest something unusual about your data and your process.
So the above is a way to ensure widgets are within specifications. If you see things that break these rules, you have to seek out WHY things deviated. In IT, we call them exceptions. And, when you make parts for a rocket ship, you need millions of parts – which may require six sigma level of quality and many machine-based processes. With an IT helpdesk, you may have thousands of calls a month, but this is a HUMAN process, so many more deviations will occur. I came up with a “three sigma” model myself about 20 years ago when I first learned this at Villanova University for my MBA for an operations management class. I then tailored my approach to IT services using this model.
Big picture as this then can pertain to any control system. And, taking this a step further, you can then use this to more or less gauge a mean over time in a controlled channel and observe relative value.
Let me explain using the oil chart from yesterday. But right before I do, I’m going to change the data for this chart to only reflect the last 50 years. Why? Because how gold was valued changed in 1933, and changed again in 1971. So gold for the last 50 years has been under the “petro dollar” and if I want to actually have a mean that MEANS something, I’m going to cast off data prior to 1971.
Maybe you trade within these ranges. For example, if you see a move heading away from the mean, you might see a year or two in a direction before it reverses. Get in and out of gold positions to buy oil positions. Then sell oil positions to get back in to gold.
One of my readers wrote me a massive email about this, and we’ve been going back and forth in discussion. I love this kind of discussion – where you can exchange ideas and interpretations. He felt the most recent data makes it look like oil is manipulated. What I would do is to look at the events during this period to understand WHY it is outside of the limit. In this case, the last few years you have seen the US shale oil boom help provide supply – but about a year ago you saw MBS and the Saudis, along with Putin and the Russians, decide to open up the taps. Their production costs are far less than the shale oil, so it looked like an intentional move to supply the world with oil to drive prices down and shale oil out of business. It seemed to have worked.
That being said, with these prices being artificially low, it shows a strong value buy, in gold. It shows here that in 2020, in gold, oil has been the cheapest it has been in 50 years. If the 50 year mean is 1.93g, and this is showing that it only takes half a gram to buy a barrel of oil, this is telling me to buy the hell out of oil and store it somewhere. This locks up “FINANCIAL ENERGY” into a RELATIVE store of value – into a battery.
If you think about what I just said – you take your gold and buy a barrel of oil at .5g. When it reverts to the 50 year mean, you take the oil and sell it back for gold. You then get 4 times the amount of gold back.
so BELOW the LCL shows a strong BUY sign for oil. That also means above the line is a strong SELL sign. I’m not a short seller, but if I had stores of oil yet from the above gold trade, this is where I would sell all and get out. It is possible oil could go higher in price to gold, but from a risk analysis standpoint, if you are OUT at the UCL, you really have done your firm a favor to de-risk.
See – in the above scenario, you may have bought 100 barrels of oil for 50g of gold when it was low, but as it went to the mean, you would sell your oil in tranches into a higher price. When to “get out” is when it is at the UCL. This would also mean that you would buy in tranches on the way down, as well.
Of interest, this UCL and LCL is roughly 30% higher and lower than the mean, because you can see some decent swings here.
So this would tell me that for a lot of things, I might want to have a relationship with gold established to determine buy/sell points, in my relative currency.
Gold versus silver.
How I would read this is – when below the red line, this is a STRONG buy in gold to acquire silver. When above the red line, this is a good time to sell your silver for gold.
Another way to approach this is to cut out the 1970s and use only 1981 or so on. This would give you 40 years of data and lower the mean, significantly. By doing this, you could also refine the range you wish for deviations. Any which way you look at it, 2019/2020 shows the lowest cost in gold to acquire silver in a long time. I’m using a yearly average close rather than showing the monthly spikes to also tighten the data for major macro moves. You won’t catch the highs or lows, but if you can get that middle 80-90%, you should reduce a lot of risk in the trade while boosting confidence. This shows me ultimately that there’s massive profits to be made here just to get to the lower control limit of about .45g.
Let’s truncate this to the last 40 years and remove the 1970s.
So – I’m going to try and use the last 40 years for the rest of these to tighten up the measures.
I wanted to bring copper back because it looked pretty correlated with gold. Especially if you use the last 50 years.
Again – I’m eyeballing these for UCL/LCL. What this is showing me is that copper is also a really good buy in gold, especially recently. Copper is also very interesting for it’s narrative with supply/demand for infrastructure versus the lack of exploration and projects that are available. I dropped off the 1970s because it skewed everything kind of high and by doing so, it reduced the mean from .25 to .178.
Real estate and stock markets
The one thing that Maloney seemed to do then was value real estate to gold and Dow to gold. I think this is extremely important to know where to put your assets. Above, you see, IF you are to hold gold, perhaps what commodities or items you would then hold instead of gold, at that time.
For example, if I find that you are much better off, today, relatively speaking, to hold gold rather than the Dow, and you look at all of those above charts, it’s then telling me I should not necessarily hold gold, but HOLD THOSE COMMODITIES IN LIEU OF GOLD. Meaning, with GOLD being the universal translator of money, it would make sense to have silver rather than gold.
Now, let’s say for example that the silver squeeze works, taking silver to $150 per ounce and OPEC cuts production and oil goes over $100. At the same time, copper scarcity hits and goes to $6 or $7 per pound. If then the DOW is showing that gold is cheap compared to it, and these other commodities have reverted to their means or higher – then HOLD GOLD.
Let’s look at the markets versus gold first. Let’s just use Dow as a proxy. I figure the other markets will be in the general ballpark of the same trend as the Dow.
What this is telling me is something pretty interesting. This is showing me that below the average, I should be selling gold to buy the Dow, and above the orange line I should be selling the Dow to get into gold. Or, at the very least, I should be buying/selling in tranches.
What this is telling me here is that there is a trend moving in the direction where the Dow will decrease in value relative to gold. Gold will increase in value relative to the Dow. I used about 100 points here relative to the mean as the UCL and LCL, which is about a 25% deviation from mean. You could make it larger or smaller, depending on your risk tolerances, but I wanted to point out the trends here. So in theory here….
You would sell to get gold. Sell gold to get silver or copper. Now, because we are using USD as the currency, you bypass gold. Sell dow to buy silver and copper. My guess is uranium is in the same boat here, as are most commodities who have seen a sharp move up the last year with gold. The percentage gains of these commodities over gold is extraordinary though, but still have a lot to catch up to gold and get to the mean.
With real estate, this one is a little more tricky. Values of home prices vary by markets, and wildly. So, I tried to find MEDIAN home prices which might be more reflective of the general population of houses. This skews the data slightly in that you remove the $100m mansions in the Hamptons.
What this is telling me here that there’s a slight down trend to get out of houses and get in to gold, but relative to gold over 40 years, it’s a good place to be. Some high data points here show where real estate is EXPENSIVE in gold – which can also be reflective of gold’s low price in USD.
If I look carefully, in 2001 this is saying to sell real estate and get into gold. You saw gold then appreciate over 11 years. I have rental units and a house I live in. If I ever see a top like that, again, in my life, perhaps I sell real estate and buy gold?
Today, what you are seeing is real estate, historically, is a good value in gold. Mind you – I am using data last from 2020, and housing prices have shot up the last few months where the price of gold has gone down. My guess is that line is now above the red UCL.
This seems to make sense – in 2008, 2009, 2010, and 2011 – gold prices kept rising as real estate went into the gutter. I bought my first rental in 2005 and my second in 2007 (I lived in this one for 6 years and could not sell due to low prices). However, in 2012 when gold prices started to recede, real estate prices were stagnant, rising the blue line. What this tells me below the red line when the blue line is going down is that gold prices are rising faster than real estate prices.
So back testing this, you can see that in perhaps 1980 if you were buying real estate for 20 years you outperformed gold, but at that high point, if you began converting that to gold in tranches over years, you would have made stupendous returns in 2011. This also tells me that in 2012, real estate is cheap in gold and undervalued so I should buy real estate.
These charts might help you see a 40-50 year investment period where you can see RELATIVE VALUE of items in GOLD.
When you look up asset classes, you get a bunch of different opinions on this. Two are very distinct:
- Real estate
Others, I am seeing as things like cash, bonds, derivatives, etc. I also don’t see commodities listed. I am going to put this third asset class as money and tangible goods. To me, this is money, in some form. Many years ago, you might barter 3 cattle for 20 sheep. Or copper for silver. Or trade gold for cash.
So in my third category, I’m calling this money and money equivalents.
If you look at this in the broad scope, this is:
- Money – daily and short term transactions can be used in this class.
- Equities – larger groupings of money placed into interest bearing assets (longer duration holds to “park money” and be rewarded for parking with the right entity)
- Real estate – Very large groupings of money placed in property for long term holds.
Side note: Steve St. Angelo talks a lot about energy and energy cliffs and is a strong proponent of how energy is stored in silver and gold. I prefer to use the words “FINANCIAL store of energy”. There could be a world 50 years from now where solar and nuclear power go to battery packs installed on trucks that dig and mine, and go to plants that are powered by nuclear, and everything is refined – from soup to nuts using Artificial Intelligence (AI) to dig, feed, and refine – similar to how your roomba vacuums your floor. You may have an operator running all of this, or a small team. But this may require financial capital to finance the purchase of equipment. The labor. The battery packs. The power bill to the nuclear plant. But there may be no fossil fuel energy involved, at all. I find it interesting to call gold and silver an energy store of wealth, but I find it more accurately depicts a FINANCIAL energy store of wealth. Yes, capturing the sun’s rays or creating nuclear fission and putting that into bars is energy as is oil – but over time, this can become more efficient and thus the INPUT into the equation is MONEY, not ENERGY. Maybe 100 years ago men mined with picks and shovels, expending newtons of force on rock. Gas powered equipment may have moved belts and crushed rocks. The energy used to mine, physically, was massive. By creating machines and automation, with equipment that gets better efficiency, the energy used to mine in PHYSICAL ENERGY form is less. And will be less 100 years from now. What will NOT change is the financial energy put in to creating those bars is measured in ROI – and this will not change. Therefore, $1,000 in money 100 years ago may have produced $2,000 in gold for a 100% ROI in financial energy returns – which is then captured into that financial battery. Today, in relative terms, adjusted for inflation, $1,000 may return $2,000 for a 100% ROI and stored in bars. You become PHYSICALLY more efficient at mining, but the ROI needs to be a certain number or else you will not mine. So therefore, you can put that $2,000 into a time capsule and 1,000 years from now the relative value of that $2,000 will still provide you the same purchasing power, regardless of the physical energy that went into producing the bar. This will be probably another writing over lunch coming up where I go more into this.
To get back to my regularly scheduled writing…
If GOLD is MONEY, you then can see above that at certain times it’s good to sell the stock market to get into gold (money).
The question then you are asked many times…what percent should I have in gold or silver? I’m going to then use an EXAMPLE sheet below. If you have $1 million in assets, this is what you might have…
So a million dollar asset (I’m not talking net worth) would look like…
$750,000 in homes, land, rentals
$200,000 in equities
$50,000 in cash
If I looked at the chart above, it might tell me that it’s really a good time to NOT be in equities. What if I sold all of my equities and got out? You then have $200,000 in assets not allocated. Do you want to put that all in cash? Gold? Silver?
If MONEY is gold, you saw yesterday that if I wanted to buy the USD with grams of gold, it’s the cheapest it’s ever been. However, just because something is CHEAP doesn’t mean it’s a good store of wealth. We all know the USD is risky right now. So maybe if gold was money, you might then look at selling gold for silver. Selling gold for copper.
Maybe I have seen the 2021 real estate market and see the upward trend and don’t want to buy more real estate. Now, am I going to add $200,000 in copper and silver? No. But, in my case, I use mining stocks in gold, silver, and copper as proxies for this. I’m not counting them as “traditional equities” because they tend to move in the opposite direction of the high charging equities of the world.
So then you may want to know what allocation should be cash, gold, silver, silver equities, copper equities, commodity equities (OIL!!), etc. THIS is where you should not listen to me, but your financial planner. I’m trying to tell you how I VALUE things, and where I might MOVE financially stored energy from one asset class to another. And – how I would devise a way of evaluating them. How you set up your tools, deviations from mean, rules, etc is up to you. Perhaps you do daily charting or weekly charting rather than yearly charting? I created the yearly charts as an EXAMPLE of the direction of the cruise liner. If you were to take actionable trades on this, you probably might look at weekly closes and adjust the mean and distance from that mean. If you really think about this in GREAT depth – that average I show you over 40 years is not a 50dma or a 200dma, but a 14,600dma. When you veer too far from that mean, you are bound to come back to it.
So there you have it – I have a few more parts in this series coming up, but for now, I wanted you to see how VALUING things in GOLD as the center of the financial world can then help you understand how to move your “money” from one asset class to the next. This is not suggesting you sell your home at the peak and buy gold coins and live in a motel room. The idea here is to find things out side of the norm to then perhaps find a strategy to capitalize on these movements.