How Much Should Gold Sell For?

J.P. Morgan is reputed to have said, “A thing is worth what it will fetch.”  That seems objective.  Nonetheless, there are two fundamental premises that underlie the statement. Those premises may alter the statement’s “meaning” for you.

  1. “What it will fetch” is a synonym for price and it purports to represent worth objectively.  Worth/value typically has meaning in terms of usability.  On the other hand, price may include emotion, fashion, speculation, urgency and other less measurable factors.
  2. The statement is only true for the instant in which the transaction occurs.  It is not necessarily connected to a continuum because the price is only valid against the conditions present at the time of the transaction.  There is no guarantee that they will be present in the future. Price is always situationally dependent.

If you reword Morgan’s statement, you will get this, “A thing is valued at its price.”  Most of us would not accept that without adding qualifiers.  A better version, “At this time, with these participants,  and for this particular transaction, this thing is worth this price.”

Notice from the legal department:
None of  what follows is investment advice.  It is intended as a basis for introspective thought and discussion with knowledgeable advisers who are familiar with your specific investments, capital formation needs and opportunities, personal needs, risk tolerance, goals and time horizon.

As to the title, I would rather ask what is the value of gold, but I have no idea how to address that.  Gold seems to be an asset whose price, as opposed to value in use, depends on fashion, fear, greed, celebrity shills, group think and bubble mentality.

I have trouble with those backgrounds when I am thinking about a concept like value.

My thoughts on gold are:

  1. Historically gold is a store of value.  It is recognized, measurable and nearly indestructible.  There are some non-decorative uses, but those are not  a large share.
  2. People have used it as a medium of exchange.  They traded what they had for gold and then some other time traded gold for what they wanted.  It was a “medium of exchange.”  It made trading easier by taking away immediacy.  In terms of this use, gold has become a relic.  The medium of exchange is now fiat money.  More convenient and unfortunately more easily manipulated.
  3. Some people want to own gold because the fiat money medium has become unpredictable.  Governments are making the trade of goods and services harder because no one can be sure what they will be able to buy (trade their money for) using the wealth that they have stored.
  4. Gold tends to always be worth, proportionally, the same as the goods it trades for and the paper currency price is unimportant.  If a cow was worth an ounce of gold one day then it should be worth an ounce of gold some other day.  The paper currency price could have doubled or halved and yet the gold exchange rate should be unchanged.
  5. Some people own gold to hedge inflation.  In this case, they don’t know how many pieces of paper money are needed to make a fair trade for an ounce of gold.  Good question that.  But, gold is an uncorrelated inflation hedge.  If you bought it in 1974 for $125 per ounce you would have outperformed inflation by at least double today.  If you bought it in 1980 for $800 you have lost a third of your purchasing power.  I want my hedges to improve predictability.  I can’t get that with gold.  For periods ending prior to 2006, it is an inflation hedge that works if you ignore the spike in 1980.  After 2006 there are other factors affecting its price.  Not many of them are measurable.
  6. It may have some short-term value as a safe place in case of currency devaluation in the United States, but I doubt it.  The old wisdom is “Buy on rumor, sell on news.”  That means that things have a tendency to trade up in anticipation of the news (rumor) and trade down once a degree of certainty appears (news.)  RIM and the announcement of BB10 in 2013, is a representative example.  As to the value of the $US, we are in the rumor phase just now.  If the Americans devalued by 50% tomorrow, would the price of gold be higher or lower in 90 days?
    Sell on the news, right?  Selling makes prices fall.  Gold would likely go down once the announcement was made.  How likely is a 50% devaluation, anyway?  You would need an 80% devaluation to make gold worth more than it sells for now.
  7. In terms of exchange value for other goods, gold is radically overpriced.  Gold is almost 30 times its 1972 price.  But notice that commodities of all types define the marketplace.  For example, gasoline,  a premium hamburger, and the price of admission to a movie theater, are each about 13 times as expensive in dollars as they were 40 years ago.  Crude oil is about 30 times as expensive versus 1972 and about 9 times versus 1974.  Crude is a political tool and some of that shows up in its price.
    Base metals are usually a good indicator of price level change.  Nickel prices today are around 6 times higher, copper 7 times higher, zinc 4 times, aluminum 4 times.  American household income, house prices, and the price of imported food are 5 to 6 times higher.  The price of domestic food like eggs, milk, beef, and pork are about 4 times higher. Published price level change is around 6 times.  As a “medium of exchange” for the all inclusive world marketplace, gold should be about $390.  The rest of the price derives from the other factors.
  8. There are other possibilities I suppose.  Maybe gold will become a reserve to back some, as yet absent, currency.  When gold is money, as it has been for most of recorded history, its value in exchange is based on price levels in the marketplace.  If tomorrow, someone wants to make it worth $5,000 per ounce, then they will make gold irrelevant to the people, because they will have to confiscate all of it to maintain that level.  If I were such a powerful person, I would wait for the price to fall before confiscating it.  Assuming I intended to pay anyone for it.
  9. There could be worldwide economic chaos.  In that case, all the bets are off.  It could have any price, but only for a short time.  In the interim, you will have trouble finding anyone to make change.

What could happen to the price?

If we assume

  • Price levels are now higher by 6 times (US Inflation) compared to 1972, and
  • The $US will some day fall by half from its current value, (price levels then at 12 times)

Gold will likely sell for no more than $750 per ounce once the news appears.  BUT.  The price could go up before it goes down.  Just because the price is crazy does not mean that it cannot become crazier.

When the people stop wanting to own it because the crisis has passed or has been accepted, the price will fall.  That is the risk of dealing in things that are priced based on what everyone fears or “knows” to be true.  Notice that owning gold is non-economic.  It earns nothing and costs to store.

For perspective, you might enjoy a well-respected book published in 1841 by Scottish journalist Charles MacKay.  Extraordinary Popular Delusions and the Madness of Crowds.  The Kindle edition is $1.00.

Some, the ones who understand market psychology far better than I and who are far braver than I, will make a lot of money over the next few years.  Like the people who shorted mortgage backed securities in 2005 through 2007.  There are three conditions for success.  You must be brave, very disciplined, and very well financed.  There will be turbulent times in the interim.

Think it through.  The information is there.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

The Alchemist’s Dilemma II

Despite its attraction, becoming rich by turning lead into gold is a flawed idea. Answer the question “If I succeed, then what?” If something scarce becomes common, its price falls. The price of lead and gold would become nearly identical. Lead might even be worth more.

If your goal is to become rich with alchemy, then if you succeed, you will fail.

Few people today view transmutation of base metals to be worthy of study. Nonetheless, the alchemist’s dilemma still exists. Something that is common cannot have value. Yet some believe that information and knowledge are values. Some promote their superior knowledge. Knowledge can have value as long as not many people know. Knowledge has value only when it is scarce, not necessarily when it is true.

Suppose everyone knew the stock market would go up every Monday. People would have cash on Monday morning and buy. Once everyone knows that, it will stop working. The early adapters will start buying on Friday and selling on Monday. Anything everyone knows is not worth knowing, unless you can take advantage of what everyone “knows.”

In the long run, what everyone knows cannot remain true. People will work the system to neutralize the knowledge.

What people need today is not knowledge or information. What people need today is meaning. As a professional adviser, do you tell people facts or do you tell them what the facts mean in the context of their goals?

Since facts are a given in the marketplace today, meaning will become a marketable advantage.

But, it has a price.

  • You will need to know the client’s goals and often they don’t know what they are, should be or could be. Education to do there.
  • The client’s time frames are too short, and thus their risk tolerance is much less than they or you thought.
  • Be careful of expressing a hard number for expected yield. Once they express their goal of earning 6%, that becomes a fact emotionally. What you will see is not misstated risk tolerance. It is their inability to tolerate disappointment. It can help if you deal, in the short term, with a range of outcome rather than average returns.
  • It is difficult to assess what the available information means. Some is easy to dismiss as not relevant to the client, other information is relevant and has multiple possible outcomes. Maybe you should wait for more clarity. A friend of my father’s once told me that you don’t necessarily want to be first. “A pioneer is a guy with an arrow in his belly.”

Best advice. Keep in touch with your clients and ask them to keep in touch with you. Share what you know and explain how it fits with their plan. Together you can travel through the time tunnel to the future.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Liveware Fails

A computer systems designer’s view of the world is that the hardware works, the firmware works, and the software works. It is the liveware that causes the problems.

It is not so different when it comes to investing.

We are all, every one of us, our own worst enemy. We have an intellectual time envelope that is too short for our needs. We can recall three or four years of the past with some clarity and can estimate about a year into the future and that with difficulty. The rest is an emotional blur. Doing the investment component of a financial plan requires much longer time frames. Poor fit. Liveware fails.

Beyond the near term, we guess the future. The projections we make are more a representation of our experience, beliefs and biases than they are of any objective reality. If you don’t guess then notice that your advisers do. While they have more experience and more objectivity than you, they still have beliefs and biases. Liveware fails.

The big liveware bias is impatience.

It is closely coupled with end point bias. The current event is the only one that matters and why was I not doing this?

Another problem is fear of loss and its companion fear of missing something good. Probably we should throw in the absence of any clue about random events, too. You will almost always miss outcomes that occur randomly.

If these traits are allowed to propagate, the collection leads to unpleasant outcomes.

When you invest, you are merely moving money from now to the future. When in the future is your decision. Say retirement years. If you are investing for a 30 year long period that starts 20 years from now, how can it make sense to check the progress every day or every month or even every year?

Think about it! Carrots take about 70 days to mature. If you plant carrots in your garden, do you dig them up 3 times a day to see how they are doing? Probably not.

Digging up the carrots 3 times a day is about the same as looking, once a month, at a portfolio with a 20 year time horizon. If you look at the carrots three times a day, the probability of the carrot turning out well at maturity is likely not far from the probability of your portfolio turning out well. Close to zero chance.

What could you learn from digging up the carrot anyway? What if neighboring carrots were not doing the same? Do you even know the standard? Is each 8-hour period identical? What should/would you do if growth fails to meet your expectation? Should you change the plan or recognize that your expectation was likely wrong or things are a bit random?

Similarly, looking at your portfolio each month, what could you possibly expect to see that would be the basis for sound, objective action? There are not 50 people in the world who know, with precision, what is going on in the general market in 30 day periods. You are not one of them and neither is your adviser. Warren Buffet does not know and says so. So should you. Be humble.

What to do?

  1. If you toss your money into the investment time machine, you need to know to when it is going. You need to know a little of the process it will use to transfer the money in time. Maybe you need a couple of machines using different processes. equities, Bonds, real estate.
  2. You don’t need to beat everyone else. Comparative wins are of no value.
  3. You don’t need to know anything about some reporter’s idea of the importance of what happened yesterday or might happen tomorrow. There are no reporters among the 50 people in the know.
  4. Eventually, you will decide that you need your money so you can participate in the economy in a way that suits your lifestyle when it reappears. Essentially, have enough to live the way you want to or not. If the portfolio meets you needs, it will not matter whether you beat all your friends or came last. All you need is to participate proportionally in the economy along the way.
  5. You also need to notice that the portfolio is going to be around for another 30 years or so after you retire, so the end point that occurs at retirement is only the beginning of another time stretch. No big deal if the precision is not perfect.
  6. Invest your time with an adviser who is process driven, who can help you manage your impatience and fear, who can help you learn about the processes involved and help you find appropriate time machines for your money.
  7. Pay no attention to advisers who are operating in short time frames. You will know them because they are the ones that emphasize their achieved rate of return last month or quarter instead of measuring your progress to your goal. They feed your emotional faults.

Investing is hard, especially so if you emphasize the wrong factors. Emotions are bad. Failing to get paid for everything you invest is bad. Feeding off other people’s emotions is bad. Not recognizing how reality works is bad.

The economic system we know has been around for a long time. Find a way to participate in it and trust that it will work for you.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Power and Influence

Recently, Seth Godin pointed out that you don’t own attention or trust or shelf space. You rent it and it has a cancellation clause. As soon as you behave as if you own it, it goes away.

Power and influence are transient too. You need to nurture both if you want to keep them.

A Cree chief once told me that traditionally he, as chief, had unlimited power. Right up to the point where he could order someone to be killed if he wanted to. But, he went on, it is a funny kind of power. It is there if you don’t try to use it and it may not be there if you do try to use it.

“It is like in your world. The pedestrian has the right of way and the man is the head of the house and they are both safe if they don’t try to prove it.”

Long-time relationships with clients are like that. You have the ability to influence people based on your history. You will have influence only as long as you nurture the relationship. Fail and it goes away.

You will continue to have it as long as you don’t try to use it exclusively to your own advantage.

If either happens, you lose your power.

In life, and in business, recognize that you have ownership of only one side of any relationship. You have to earn the other side.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Life Insurance Lets You Die Neat

Will Rogers once said that, “Just because a thing is common sense, does not mean it will be common practice.” Not much has changed in the 80 years since.

As an example, the most valuable asset most people have is the ability to earn income. They have other valuable assets too. Their home, their household goods, their jewelry, their car, and their teeth.

How many of these are fully insured against loss or damage?

All but their income.

We can agree that it is common sense to insure the things you value. After 30 years in the business, I can assure you that it is not common practice.

Maybe it is because people don’t know what their income is worth. Here is a handy chart showing the net present value of $1,000 worth of monthly after tax income. It assumes your capital will earn, after tax, 1% more than inflation.

Per $1,000 Income After Tax / Month
To Earn Capital
Remaining Value
15 188,614
20 238,284
25 285,542
30 330,507
35 356,432
40 397,956

For example, a 35 year old retiring at 60 (25 years) and bringing in $5,000 per month now would need capital of $1,427,712 to be financially indifferent to being unable to work.

It is not the insurance answer. The table merely tells you what your job is worth. It tells you nothing about how much insurance you need. Whether it is for disability income insurance or for life insurance, it is not a bad place to start keeping things in perspective.

Your adviser can help you integrate other factors like debt, savings, new expenses like childcare, education savings, inflation and tax effects, government programs like CPP, new expenditures needed like house purchase or expenditure that might go away like clothing, work expenses, and recreation. One-income flexibility is very limited so risks are greater. You need to provide some of the big things.

Your amount of your reasonable insurance need is just a big arithmetic question.

Disability insurance has a capital value you can calculate too. For young people the premium is a tiny percentage of the capital value. If you don’t have the insurance and you don’t have the capital, what exactly are you planning to do if you get sick or hurt?

Both life and disability insurance needs change over time. That fact can influence the kind of insurance you buy but it should not influence the amount you buy now.

Almost everyone is under-insured when you relate the coverage to the value of the asset. Under-insured will not matter if you do not leave a financial footprint when something adverse occurs. Like you have neither debt nor dependents nor a need to spend money.  For the other people, the ones with obligations and expectations, rethink the amount.

Everyone has an untidy financial life. You are never finished everything. There are always half-done plans and plans not yet started. If you don’t get the time, you will still need the money.

Insurance lets you be neat.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Student 1, Professor 0

Some years ago, a learned university English professor was explaining the meaning of a Margaret Laurence novel to an undergraduate class. One of the students objected to his position and was caustically put down.

The next week, the same student raised her hand and rejoined the argument. “I talked to my mother and she says I am right and you are wrong.”

The contempt from the learned professor was palpable. “And just why would you think that your mother knows more about this novel than I do.” Sarcasm dripping.

The reply of, “My mother is Margaret Laurence.” pretty much ended the discussion.

What can we learn from this? Probably quite a few things but the obvious ones are:

  • You never know enough about another person to understand fully how they came to believe what they tell you.
  • Everyone knows something you don’t
  • Be polite when you are right, and be especially polite when you “think you are right”
  • A strongly held opinion is a poor substitute for a simple fact.
  • It never hurts to have a route marked out for the retreat

Be a little humble.  You can learn more with open ended questions than you can learn by asserting your knowledge and expertise and demanding that followers follow.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Are We Going The Same Way?

Many of us in Canada have been a bit mystified by the uproar over aboriginal conditions and the rights they have under their many treaties.  While few of us  believe that they were well treated in the 19th and early 20th centuries, the argument is harder to make about the present.  Lots of money is being spent to little gain. 

What is going on and why?

  • Most of the remote, emphasize remote, first nations have ideas about reality that don’t match the ideas that most of the rest of us hold.  They will continue to hold them until the other choices are clearly connected to their benefits.  See Mike Caro’s law.
  • It is hard to help people who feel oppressed and who mistrust the ones that are trying to help them.  Worse, many do not have the tools that could help them understand their choices.  That may be a carryover from older days.  Some of it is cultural and language driven.  Most aboriginal communities have a very high connection to physical things and the present time.  Theory and the distant future do not exist.  If your understanding of the future was very short, how would you rationalize education or even health?  Some languages have very limited future tense.  How hard is that to overcome?
  • Some of the first nation hierarchy uses the existing system to their own benefit.  Accountability is overdue but difficult to impose.  In some ways it would similar to changing a union’s hierarchy and attitudes.
  • Many of the helpers don’t understand the people.  They think our ways will work in their environment.  They will not. Traditions and other value systems need to be integrated not replaced.  The people in the First Nations want most of the same things that we want, but the system conspires against them.  They want, in no particular order and an incomplete list, safety, security, cultural integrity, opportunities for their children, healthcare and education.    Some of their strongly held beliefs and cultural limits conflict with their achieving these.  They may need to compromise a little, too.

The Man from Mars would have no trouble diagnosing the original cause of the problems.

400 years ago, the Canadian First Nations had an inadequate immigration policy.  Everything since is just details.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

A Disturbing Question

All life insurance salespeople regularly meet people who are delusional about how much capital is needed to replace their career earnings.

According to LIMRA, in Canada, insured husbands have enough life insurance to replace their income for 4.1 years, and wives for 4.6 years.  What to do?

Years ago I worked with an experienced and creative salesman who had a simple question that tended to bring the prospect closer to the real world.

“Are you planning to be dead long?”

Once that settles in, you can be more analytical and proactive.

“What you have here will last a year or maybe two.  Would you have any objection if I showed you a way to do something about that?”

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Never Ask Why

Why is a power question. Why demands that the other person rationalize their behavior or result. It is never positive. In some, maybe many cases, it will cause your client to shut down.

The most common users of “Why?” are authority figures or ones that want to be. Why did you come home late? Why did you not do your homework? Why did you strike out? Why didn’t you close that deal? Why is there no gas in the car? Why is dinner not ready?  Husbands, mothers, and teachers.

None of these questions can possibly have a useful answer. As an adult-to-adult conversation piece, “why?” should be seldom used.

A sociologist who studies and writes about deviant behavior, claims that if he goes to a bar and talks to a prostitute, the question, “Why are you a prostitute?” will get him exactly no useful information. On the other hand, “How did you come to be a prostitute?” will often get the life story. The form matters. “Why” is judgmental. “How did it come to be,” is non-judgmental and open ended.

It is the same with clients. Why did you buy that fund or that policy won’t work. You can see the client bristle. It means exactly the same thing as, “That policy is stupid, rationalize owning it.”

How did you come to own that policy will elicit some interesting answers. My favorite so far is, “Buying it was the easiest way to get rid of the salesman.” In that case, the client had nine small whole life policies issued at yearly intervals. Give the salesman marks for follow up.

Providing good financial advice that a client can and will accept is subtle and easily derailed. “Why” is a put-down and is self sabotaging. Replace it with “How did it come to be that ……”

It will work with your children, spouse, employees and others in your life just as well or better than with clients.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

What Is A “Good” Financial Plan?

I have been trying to understand the point of a financial plan for the last month or so. I have come to the conclusion that only a few people know and I am not certain that I am among them.

I have talked to a number of people who prepare financial plans. Adjusted for clarity I have these general answers to the question above:

  1. A good financial plan is one that helps the client to understand why he should own what I am selling.
  2. A good financial plan is one that the client can understand and commit to in order to reach their goals.
  3. A good financial plan is one that helps the client to see how the pieces relate to one another.
  4. A good financial plan addresses risks in a productive way.
  5. A good financial plan is bound, has more than 40 pages and at least one colored pie chart. (God help the clients)

To come to grips with preparing good financial plans, we need to know more.

First of all recognize that no plan works. If the plan is not going to work, then accuracy is not a value. Internally consistent might be good but accuracy or precision or elegant mathematics will likely just hide things.

Most of the original thought on planning comes from the military. Military planning predated personal financial planning by centuries and is well known.  One of the great military philosophers was Field Marshall Helmuth von Moltke the Elder. He was Chief of Staff of the Prussian General Staff from 1857 to 1871. One of his maxims is “No plan of operations extends, with any certainty, beyond the first contact with the main body of the hostile force.”

Why? Because the outcome of the first battle is unknown. The remaining resources are unknown as are those of the opponent. You cannot know what to do unless you know what you have to do it with.

Reworded, “No financial plan survives first contact with unforeseen reality.” You need to be able to adapt and the plan needs to allow that.

Second observation is that all plans reflect more of the planners biases than they reflect the real world. The planner cannot know everything so unless there is a clear outline of assumptions and the meaning of the assumptions, the plan will be purpose driven. You should aim for a range of assumed values within which the plan will work but you need to also communicate that that range of values may represent only a small share of the possibilities.

So, where to go once we know the plan will be biased and soon wrong?

We should adopt the approach that planning is to help us understand our circumstances. How the pieces come together, how they might come together in future, and what are the limits to possible outcomes.

Is the plan specific to the present, like arranging insurance or financing a house, or is it longitudinal – pertaining to a long time period. Specific plans can be measured against real world conditions as they exist now. There are no others that you can relate to. As long as future flexibility is addressed you are finished.

Longitudinal plans are for other purposes.

  • Insight. What is the general direction and how do opportunities and limits impact. For instance, what if there is not a long time? Longitudinal plans are always wrong but they do help us to see ways to better use resources.
  • Identification of opportunities and pitfalls. Once known and known within the range of assumptions, specific action can be taken to address them. Like inter-generational loans, insurance, income splitting and so on.

Longitudinal plans should never be done with an emphasis on accuracy. They are for direction and to provide a reference base for future changes.

On the positive side, again from the military, “Plans are useless, planning is necessary.” Dwight D. Eisenhower

Financial planners should get past the idea of plans that only facilitate sales. Remaining in the product world means the clients will be less well served, and the profession will be demeaned.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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