Of Gods and Gold

Posted by on 12/02/09 in Debt, Literature, Markets, Risk

On his journey home from the Trojan War, the fabled Greek hero, Ulysses, had to pass between two potentially devastating monsters. On one side, Ulysses and his shipmates risked being grabbed and eaten by one of the six heads of the great beast Scylla; yet, should they stray too far in the other direction, they would plunge into the swirling gulf of Charybdis who would swallow the entire ship. As was, Ulysses and most of his shipmates managed to make their way through the dreadful situation, less six sailors plucked away by Scylla.

Ulysses’ story resonates in a world where investors pile into gold at all time highs (no, we don’t focus on the inflation adjusted price of gold any more than we would adjust the nominal value of other assets), at the same time that other investors (or the same possibly?) practically pay the US government to hold their money in the form of Treasury Bills.

Somewhat simplistically (though not entirely), one could argue that the investment in gold is a vote against the US dollar, while the investment in T-bills is a vote in favor of the US dollar. With both votes so extreme, there is no clear picture of what these trends predict.

In an effort to make sense of this dilemma (and with a nod to Ulysses), we sent a text message to that ancient Greek economist, the Oracle of Delphi. “Oh Oracle,” we asked, “should we buy gold or Treasuries?” We thought we had our answer when she refused our credit card and demanded payment in a basket of soft commodities. But no, that would have been too simple. Being an economist, she sent us a YouTube video in which she intoned the following obtuse lines:

Gold will be your salvation
In a world of risk
Where only the dollar is safe.

We threatened to make delivery on the commodity futures contracts unless she clarified her meaning. Knowing she was beat, she followed up with a Tweet that read:

Gold is but a way station
On the road
To what the dollar will be.

Before we could ask for further clarity, the Oracle posted a chart on her blog showing the price history from March 9, 2009 to December 1, 2009 of five Exchange Traded Funds (pooled investment vehicles that trade as a stock), then signed off. We have reproduced it here for you.

Source: Google.com

We humbly realized that while the investment media have been dazzled by gold these past several months, other risky assets have been far more rewarding since the equity markets bottomed in early March. Even Real Estate Investment Trusts (REITS) are up well over 70% during the period. Then we realized that the investment in Gold may not be as different from the investment in T-Bills as we had presupposed. When other risky assets are up 45-100%, Gold’s 27% return during the same time frame seems downright paltry.

So what does it all mean? Ah, that is the question. And for the price of a basket of commercial property in Hong Kong, we’d be happy to tell you. In the meantime, watch out for Scylla.

Disclaimer: This report does NOT represent a recommendation or offer to buy or sell securities. Consult with an investment professional regarding your specific situation and the suitability of specific investments. ETF returns are calculated based on daily closing price movements net of internal expenses of the ETF. The actual performance of an ETF may vary from the performance of the underlying index, commodity or sector. Returns posted do not include the costs associated with brokerage or adviser fees. Such expenses would impact the actual return. And, of course, past performance is no guarantee of future results.