admin – Page 26513

iArb

Given the following chart, it is perhaps no surprise that the demand for iPhones in the US is higher than in the rest of the world. Forget about reaching for yield in CCC-rated cov-lite leveraged loans, ignore the latest internet no-profits-but-lots-of-eyeballs IPO, the real way to make money in the new normal is the ‘iArbitrage’.

A 38% return would seem just too-tempting for an enterprising hedge fund – and we are sure eBay will be more than willing to provide the transaction platform…

Chart: Goldman Sachs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/_0QFOm6D2aI/story01.htm Tyler Durden

Average Hedge Fund Returns A Tiny 6% Through October: Underperforms S&P And Mutual Funds By 75%

Collecting 2 and 20 in a world where “alpha-creation” through insider trading (thank you 72 Cummings Point Road for ending that party) is now history will be even more difficult after the current year is over when LPs get their year end performance reports and find out that for the fifth year in a row they have underperformed not only the S&P (by a whopping 75%) but the average plain vanilla mutual fund, which happens to collect a fraction of the fees hedge funds charge just to enjoy the privilege of engaging in pissing matches on CNBC with other hedge fund billionaires.

As the chart below shows, through October 31, the average hedge fund has returned a paltry 6%, 75% below the return of the S&P 500 and the average mutual fund. And while the traditional retort: “hedge funds aren’t supposed to outperform the market but to hedge downside risk” is always at the ready, the retort to that retort is that as long as Mr. Yellen is Chief Risk Officer for the S&P, and the Federal Reserve is engaged in QE and otherwise generating a “wealth effect”, which according to many will be in perpetuity or until the Fed finally and mercifully is abolished, the purpose behind the existence of hedge funds is simply no longer there as the Fed will never again voluntarily allow the kind of market drop that would make the existence of hedge funds meaningful.

Of course, if and when the Fed loses control, not even the best hedged fund will do much to offset the ensuing cataclysm.

Some other observations from Goldman:

The typical hedge fund generated a 2013 YTD return of 6% through October 31, compared with 25% gains for both the S&P 500 and the average large-cap core mutual fund. At mid-year 2013 the average hedge fund had returned 4%, suggesting second-half gains of 2% while the S&P 500 rose nearly 5%.
The distribution of YTD performance suggests that 20% of hedge funds have generated absolute losses. The standard deviation of YTD hedge fund returns is wide, at 11 percentage points. Fewer than 5% of hedge funds have outperformed the S&P 500 or the average large-cap core mutual fund YTD.
Equity long/short funds have posted slightly better returns than the average across all funds, at 10%. Many of the poorest performers YTD are macro funds, which generated an average YTD return of -4%.
Stock pickers have received a boost from their long books, as the most important long positions have outperformed the S&P 500 by nearly 500 bp so far in 2013. Our Hedge Fund VIP basket has returned 30% YTD.
However, many widely-held short positions continue to outperform, offsetting the strong performance of popular longs and hampering overall hedge fund returns. The 50 stocks over $1 billion market cap with the highest short interest as a percentage of market cap have returned an average of 34% YTD. More than half of the 50 key short positions have outperformed the S&P 500 YTD, and five have returned over 100%

Precisely as we forecast they would 14 months ago.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HGHoEmQ_I0E/story01.htm Tyler Durden

Average Hedge Fund Returns A Tiny 6% Through October: Underperforms S&P And Mutual Funds By 75%

Of course, if and when the Fed loses control, not even the best hedged fund will do much to offset the ensuing cataclysm.

Some other observations from Goldman:

The typical hedge fund generated a 2013 YTD return of 6% through October 31, compared with 25% gains for both the S&P 500 and the average large-cap core mutual fund. At mid-year 2013 the average hedge fund had returned 4%, suggesting second-half gains of 2% while the S&P 500 rose nearly 5%.
The distribution of YTD performance suggests that 20% of hedge funds have generated absolute losses. The standard deviation of YTD hedge fund returns is wide, at 11 percentage points. Fewer than 5% of hedge funds have outperformed the S&P 500 or the average large-cap core mutual fund YTD.
Equity long/short funds have posted slightly better returns than the average across all funds, at 10%. Many of the poorest performers YTD are macro funds, which generated an average YTD return of -4%.
Stock pickers have received a boost from their long books, as the most important long positions have outperformed the S&P 500 by nearly 500 bp so far in 2013. Our Hedge Fund VIP basket has returned 30% YTD.
However, many widely-held short positions continue to outperform, offsetting the strong performance of popular longs and hampering overall hedge fund returns. The 50 stocks over $1 billion market cap with the highest short interest as a percentage of market cap have returned an average of 34% YTD. More than half of the 50 key short positions have outperformed the S&P 500 YTD, and five have returned over 100%

Precisely as we forecast they would 14 months ago.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/HGHoEmQ_I0E/story01.htm Tyler Durden

Today's Wealth Destruction Is Hidden By Government Debt

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

Still unnoticed by a large part of the population is that we have been living through a period of relative impoverishment. Money has been squandered in welfare spending, bailing out banks or even — as in Europe — of fellow governments. But many people still do not feel the pain.

However, malinvestments have destroyed an immense amount of real wealth. Government spending for welfare programs and military ventures has caused increasing public debts and deficits in the Western world. These debts will never be paid back in real terms.

The welfare-warfare state is the biggest malinvestment today. It does not satisfy the preferences of freely interacting individuals and would be liquidated immediately if it were not continuously propped up by taxpayer money collected under the threat of violence.

Another source of malinvestment has been the business cycle triggered by the credit expansion of the semi-public fractional reserve banking system. After the financial crisis of 2008, malinvestments were only partially liquidated. The investors that had financed the malinvestments such as overextended car producers and mortgage lenders were bailed out by governments; be it directly through capital infusions or indirectly through subsidies and public works. The bursting of the housing bubble caused losses for the banking system, but the banking system did not assume these losses in full because it was bailed out by governments worldwide. Consequently, bad debts were shifted from the private to the public sector, but they did not disappear. In time, new bad debts were created through an increase in public welfare spending such as unemployment benefits and a myriad of “stimulus” programs. Government debt exploded.

In other words, the losses resulting from the malinvestments of the past cycle have been shifted to an important degree onto the balance sheets of governments and their central banks. Neither the original investors, nor bank shareholders, nor bank creditors, nor holders of public debt have assumed these losses. Shifting bad debts around cannot recreate the lost wealth, however, and the debt remains.

To illustrate, let us consider Robinson Crusoe and the younger Friday on their island. Robinson works hard for decades and saves for retirement. He invests in bonds issued by Friday. Friday invests in a project. He starts constructing a fishing boat that will produce enough fish to feed both of them when Robinson retires and stops working.

At retirement Robinson wants to start consuming his capital. He wants to sell his bonds and buy goods (the fish) that Friday produces. But the plan will not work if the capital has been squandered in malinvestments. Friday may be unable to pay back the bonds in real terms, because he simply has consumed Robinson’s savings without working or because the investment project financed with Robinson’s savings has failed.

For instance, imagine that the boat is constructed badly and sinks; or that Friday never builds the boat because he prefers partying. The wealth that Robinson thought to own is simply not there. Of course, for some time Robinson may maintain the illusion that he is wealthy. In fact, he still owns the bonds.

Let us imagine that there is a government with its central bank on the island. To “fix” the situation, the island’s government buys and nationalizes Friday’s failed company (and the sunken boat). Or the government could bail Friday out by transferring money to him through the issuance of new government debt that is bought by the central bank. Friday may then pay back Robinson with newly printed money. Alternatively the central banks may also just print paper money to buy the bonds directly from Robinson. The bad assets (represented by the bonds) are shifted onto the balance sheet of the central bank or the government.

As a consequence, Robinson Crusoe may have the illusion that he is still rich because he owns government bonds, paper money, or the bonds issued by a nationalized or subsidized company. In a similar way, people feel rich today because they own savings accounts, government bonds, mutual funds, or a life insurance policy (with the banks, the funds, and the life insurance companies being heavily invested in government bonds). However, the wealth destruction (the sinking of the boat) cannot be undone. At the end of the day, Robinson cannot eat the bonds, paper, or other entitlements he owns. There is simply no real wealth backing them. No one is actually catching fish, so there will simply not be enough fishes to feed both Robinson and Friday.

Something similar is true today. Many people believe they own real wealth that does not exist. Their capital has been squandered by government malinvestments directly and indirectly. Governments have spent resources in welfare programs and have issued promises for public pension schemes; they have bailed out companies by creating artificial markets, through subsidies or capital injections. Government debt has exploded.

Many people believe the paper wealth they own in the form of government bonds, investment funds, insurance policies, bank deposits, and entitlements will provide them with nice sunset years. However, at retirement they will only be able to consume what is produced by the real economy. But the economy’s real production capacity has been severely distorted and reduced by government intervention. The paper wealth is backed to a great extent by hot air. The ongoing transfer of bad debts onto the balance sheets of governments and central banks cannot undo the destruction of wealth. Savers and pensioners will at some point find out that the real value of their wealth is much less than they expected. In which way, exactly, the illusion will be destroyed remains to be seen.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Today’s Wealth Destruction Is Hidden By Government Debt

Submitted by Philipp Bagus via the Ludwig von Mises Institute,

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/suR4tpC7fSE/story01.htm Tyler Durden

Amtrak Is a Tax-Sucking Behemoth That Deserves to Die: Jim Epstein in The Daily Beast

I have a new story up at The Daily Beast on Amtrak and
it’s alleged resurgence. Here’s how it opens:

“We’ll take you across the mighty Mississippi through eight
states—past wheat fields and ranches, missions and pueblos,
mountains and deserts,” reads the promotional copy for
Amtrak’s Southwest Chief, a sleeper train
that weaves 2,256 miles from Los Angeles to Chicago along
portions of the old Sante Fe trail. “You’ll see spectacular
landscapes and pristine vistas not visible from interstate
highways.” While gazing out at scenery worthy of the best John
Ford flicks, riders can chow down on offerings from Amtrak’s
full-service kitchen, such as the angus steak burger for $9.75, a
$16 Vegetarian Gemelli Pasta, or the wild caught Mahi-Mahi for
$23.25.

This “journey of elevations,” as Amtrak describes it, may be a
bliss-out for passengers, but should taxpayers be forced to
underwrite the ride? In 2011, the Southwest Chief ran a $66.5
million deficit, meaning the federal government had to kick in $185
for every passenger on board. And to keep the Southwest Chief
running, Amtrak is now seeking additional state aid of $120
million over the next decade.

As any popcorn-stand profiteer posing as a movie
house operator can attest, captive eaters create golden
opportunities to supersize profits. But on the
Southwest Chief—and Amtrak trains in general—food and
beverages are a financial drain. Last week, the
inspector general revealed at a congressional
hearing that Amtrak lost $609 million on its meal services
over the past six years, citing all kinds of eye-popping details
about giveaways to staff, spoiled food, and service workers earning
about four times the standard industry wage. Defenders of Amtrak
argue that the report was just a headline-grabbing jab that
distracts from the larger story of the organization’s
resurgence.

Read the whole thing.

from Hit & Run http://reason.com/blog/2013/11/23/amtrak-is-a-tax-sucking-behemoth-that-de
via IFTTT

Gun Grab Against “Mentally Ill” Won’t Make Us Safer, But Will Laws Even More Arbitrary

After mass shootings, gun-control proponents and lawmakers are
always quick to say we need to keep weapons out of the hands of the
“mentally ill” and that better policies would identify people who
were likely to snap and start killing people.

The real world – not to mention the Constitution – stands
athwart fantasies of precognition. If you want to get a sense of
how seemingly common-sensical restrictions on the rights of
mentally ill people play out, check out this Reason TV video, which
originally went live on November 18, 2013.

Here’s the original writeup:

In the wake of any mass shooting, there’s a predictable and
justified burst of public outrage and sorrow followed by a series
of do-something legislative proposals meant to prevent similar
tragedies from ever occurring again.

Depending on the political leanings of the politician or media
figure offering the solution, the proposal often rests upon one of
these twin assumptions: We must rid the world of the wrong kinds of
weapons (i.e., “assault weapons”), or, we must keep guns away from
the wrong kinds of people (i.e., “crazy people”).

“How many more copycats are waiting in the wings for their
moment of fame from a national media machine that rewards them with
wall-to-wall attention and a sense of identity that they crave,
while provoking others to try to make their mark?” asked
Wayne LaPierre, official lightning rod of the National Rifle
Association, in the wake of the Sandy Hook elementary shooting. “A
dozen more killers, a hundred more? How can we possibly even guess
how many, given our nation’s refusal to create an active national
database of the mentally ill?”

Even the nation’s premier gun lobby believes keeping guns away
from the mentally ill is a good idea. It’s a sensible-sounding
proposal, a logical precaution. But some forensic psychiatrists,
whose jobs include the task of identifying potentially violent
individuals, say that targeting the mentally ill isn’t as simple as
it sounds.

A recent Mayo
Clinic study points out that mass shooters tend to
meticulously plan their crimes weeks or months in advance,
undermining the idea that the mentally ill simply “snap” and go on
shooting rampages while also complicating the notion of effective
gun control through gun registries, since a methodical planner has
plenty of time to obtain weapons through illegal channels.

Take Lynette Phillips, a suburban California housewife who
suffers from anxiety disorder. She encountered the APPS after a
trip to Aurora Charter Oak Hospital’s psych ward resulted in her
involuntary commitment. Phillips claims she voluntarily checked
herself into the hospital after a bad reaction to a new medication
and that the involuntary commitment was an error made by an
overzealous nurse. Representatives from Aurora
Charter Oak declined to comment on the story, but she was
released before the full 72-hour hold, and a letter
from Phillips’ personal psychiatristconfirms some of the
details in her version of events, including the fact that she
sought treatment herself.

A more basic problem with a strategy that targets mentally ill
people is that the vast majority of them are not violent. When you
control for substance abuse, a factor that exacerbates violence in
all populations, only about 4.3% of
people with a “severe” mental illness are likely to commit
any sort of violence, according to a University of Chicago study.
The violence rate among those with a “non-severe” mental illness is
about equal to that of the “normal” population.

“In the absence of a history of violence or any of the other
risk factors, it is impossible to predict who will become violent,”
says Stephen K. Hoge, a forensic psychiatrist at Columbia
University. “If we put doctors in the position of acting on behalf
of the government or acting on behalf of social control, then that
undermines the therapeutic mission.”

In other words, by targeting and stigmatizing the mentally ill,
especially in the absence of a coherent risk-identification
strategy, the effect may be to discourage people who need help from
seeking it, while also stripping away the rights of a huge group of
people who will likely never commit a violent act.

California is the vanguard of the gun registry movement in the
U.S. The Attorney General’s office maintains a database called
the “Armed
Prohibited Persons System” (APPS), which identifies three
groups of people whose guns should be confiscated: Individuals with
a documented history of violence, convicted felons/wanted persons,
and people with a “severe mental illness,” as defined by the state.
Lumping the broad category of “mentally ill people” in with
criminals and violent abusers can ensnare innocent and seemingly
harmless individuals in an overly expansive dragnet.

But the involuntary commitment was enough to put Phillips on the
government radar and make her an Armed Prohibited Person. A few
days after she returned home, armed officers from the California
Department of Justice entered her house in order to confiscate a
gun she’d purchased as a gift for her husband. Upon finding more
than one firearm in the house, the agents took all of the Phillips’
guns and ammunition. They had no warrant. The CA DOJ would not
comment on this story.

“They didn’t need to do that,” says Lynette’s husband, David,
who described a scene in which the officers spread all of their
guns and ammunition on the front yard as the neighborhood watched.
“They embarrassed us in front of the neighbors.”

The Phillips have no criminal record, history of violence, or
documented substance abuse problems. But it was only with the help
of an attorney that they were able to get their guns back from the
state after several months of effort, and only under the condition
that David keep the guns in a safe that’s inaccessible to Lynette.
They did not return any of the seized ammo.

The Phillips have vowed never to let government agents into
their home without a warrant again, and Lynette remains shaken by
the experience. Since its inception in 2001, the APPS program has
resulted in the seizure of more than 11,000 guns.

“To the extent that society continues to vilify the mentally ill
and scapegoat them as the primary cause of gun violence, is a major
step backward,” says Hoge.

Watch the Reason TV video above, “The Truth About Mental Illness
and Guns,” to hear more about flawed gun control policies and for
the full story behind the Phillips’ gun confiscation
experience.

Approximately 7:30 minutes. Produced by Zach Weissmueller. Shot
by Tracy Oppenheimer, Will Neff, and Weissmueller.

Go here for more links, downloadable versions, and videos.

from Hit & Run http://reason.com/blog/2013/11/23/gun-grab-against-mentally-ill-wont-make
via IFTTT

Gun Grab Against "Mentally Ill" Won't Make Us Safer, But Will Laws Even More Arbitrary

Here’s the original writeup:

In the wake of any mass shooting, there’s a predictable and
justified burst of public outrage and sorrow followed by a series
of do-something legislative proposals meant to prevent similar
tragedies from ever occurring again.

Depending on the political leanings of the politician or media
figure offering the solution, the proposal often rests upon one of
these twin assumptions: We must rid the world of the wrong kinds of
weapons (i.e., “assault weapons”), or, we must keep guns away from
the wrong kinds of people (i.e., “crazy people”).

“How many more copycats are waiting in the wings for their
moment of fame from a national media machine that rewards them with
wall-to-wall attention and a sense of identity that they crave,
while provoking others to try to make their mark?” asked
Wayne LaPierre, official lightning rod of the National Rifle
Association, in the wake of the Sandy Hook elementary shooting. “A
dozen more killers, a hundred more? How can we possibly even guess
how many, given our nation’s refusal to create an active national
database of the mentally ill?”

Even the nation’s premier gun lobby believes keeping guns away
from the mentally ill is a good idea. It’s a sensible-sounding
proposal, a logical precaution. But some forensic psychiatrists,
whose jobs include the task of identifying potentially violent
individuals, say that targeting the mentally ill isn’t as simple as
it sounds.

A recent Mayo
Clinic study points out that mass shooters tend to
meticulously plan their crimes weeks or months in advance,
undermining the idea that the mentally ill simply “snap” and go on
shooting rampages while also complicating the notion of effective
gun control through gun registries, since a methodical planner has
plenty of time to obtain weapons through illegal channels.

Take Lynette Phillips, a suburban California housewife who
suffers from anxiety disorder. She encountered the APPS after a
trip to Aurora Charter Oak Hospital’s psych ward resulted in her
involuntary commitment. Phillips claims she voluntarily checked
herself into the hospital after a bad reaction to a new medication
and that the involuntary commitment was an error made by an
overzealous nurse. Representatives from Aurora
Charter Oak declined to comment on the story, but she was
released before the full 72-hour hold, and a letter
from Phillips’ personal psychiatristconfirms some of the
details in her version of events, including the fact that she
sought treatment herself.

A more basic problem with a strategy that targets mentally ill
people is that the vast majority of them are not violent. When you
control for substance abuse, a factor that exacerbates violence in
all populations, only about 4.3% of
people with a “severe” mental illness are likely to commit
any sort of violence, according to a University of Chicago study.
The violence rate among those with a “non-severe” mental illness is
about equal to that of the “normal” population.

“In the absence of a history of violence or any of the other
risk factors, it is impossible to predict who will become violent,”
says Stephen K. Hoge, a forensic psychiatrist at Columbia
University. “If we put doctors in the position of acting on behalf
of the government or acting on behalf of social control, then that
undermines the therapeutic mission.”

In other words, by targeting and stigmatizing the mentally ill,
especially in the absence of a coherent risk-identification
strategy, the effect may be to discourage people who need help from
seeking it, while also stripping away the rights of a huge group of
people who will likely never commit a violent act.

California is the vanguard of the gun registry movement in the
U.S. The Attorney General’s office maintains a database called
the “Armed
Prohibited Persons System” (APPS), which identifies three
groups of people whose guns should be confiscated: Individuals with
a documented history of violence, convicted felons/wanted persons,
and people with a “severe mental illness,” as defined by the state.
Lumping the broad category of “mentally ill people” in with
criminals and violent abusers can ensnare innocent and seemingly
harmless individuals in an overly expansive dragnet.

But the involuntary commitment was enough to put Phillips on the
government radar and make her an Armed Prohibited Person. A few
days after she returned home, armed officers from the California
Department of Justice entered her house in order to confiscate a
gun she’d purchased as a gift for her husband. Upon finding more
than one firearm in the house, the agents took all of the Phillips’
guns and ammunition. They had no warrant. The CA DOJ would not
comment on this story.

“They didn’t need to do that,” says Lynette’s husband, David,
who described a scene in which the officers spread all of their
guns and ammunition on the front yard as the neighborhood watched.
“They embarrassed us in front of the neighbors.”

The Phillips have no criminal record, history of violence, or
documented substance abuse problems. But it was only with the help
of an attorney that they were able to get their guns back from the
state after several months of effort, and only under the condition
that David keep the guns in a safe that’s inaccessible to Lynette.
They did not return any of the seized ammo.

The Phillips have vowed never to let government agents into
their home without a warrant again, and Lynette remains shaken by
the experience. Since its inception in 2001, the APPS program has
resulted in the seizure of more than 11,000 guns.

“To the extent that society continues to vilify the mentally ill
and scapegoat them as the primary cause of gun violence, is a major
step backward,” says Hoge.

Watch the Reason TV video above, “The Truth About Mental Illness
and Guns,” to hear more about flawed gun control policies and for
the full story behind the Phillips’ gun confiscation
experience.

Approximately 7:30 minutes. Produced by Zach Weissmueller. Shot
by Tracy Oppenheimer, Will Neff, and Weissmueller.

Go here for more links, downloadable versions, and videos.

from Hit & Run http://reason.com/blog/2013/11/23/gun-grab-against-mentally-ill-wont-make
via IFTTT

Jon Utley on Terrorism and Panicked Responses to Radiation

Radiation suits Japan’s panicked Fukushima evacuation of some
130,000 persons was unnecessary, but it serves as a great warning
for us. For most of the evacuees, their first year exposure was
about 2 REMs of radiation, fifty times below where it causes
illness. Some were exposed to 22 REMs, still far below the sickness
level of 100 REMs. Yet the Japanese were basically following
American civil defense guidelines. Irrational fear of radiation
permeates Washington’s civil defense and nuclear regulatory
guidelines. That’s a problem, writes Jon Utley, because the U.S.
will eventually be targeted with a radioactive terrorist attack—and
the greatest danger might be the government’s response.

View this article.

from Hit & Run http://reason.com/blog/2013/11/23/jon-utley-on-terrorism-and-panicked-resp
via IFTTT

Gold Beat Stocks Except During the Tech Bubble

Warren Buffett once noted, Gold doesn’t do anything “but look at you.” It doesn’t pay a dividend or produce cash flow.

However, the fact of the matter is that Gold has dramatically outperformed the stock market for the better part of 40 years.

I say 40 years because there is no point comparing Gold to stocks during periods in which Gold was pegged to world currencies. Most of the analysis I see comparing the benefits of owning Gold to stocks goes back to the early 20^th century.

However Gold was pegged to global currencies up until 1967. Stocks weren’t. Comparing the two during this time period is just bad analysis.

However, once the Gold peg officially ended with France dropping it in 1967, the precious metal has outperformed both the Dow and the S&P 500 by a massive margin.

See for yourself… the above chart is in normalized terms courtesy of Bill King’s The King Report.

According to King, Gold has risen 37.43 fold since 1967. That is more than twice the performance of the Dow over the same time period (18.45 fold). So much for the claim that stocks are a better investment than Gold long-term.

Indeed, once Gold was no longer pegged to world currencies there was only a single period in which stocks outperformed the precious metal. That period was from 1997-2000 during the height of the Tech Bubble (the single biggest stock market bubble in over 100 years).

In simple terms, as a long-term investment, Gold has arguably been the single best passive investment of the last 40+ years.

Moreover, I think there is considerable value in Gold today as an investment. Indeed, I can make the arguments that Gold is both cheap as a cigar butt and as a moat.

If we look at Gold as a cigar butt (trading at a discount to its intrinsic value), we must first consider Gold’s intrinsic value.

Many investors argue that Gold has no intrinsic value. I disagree with this assessment as it does not consider the nature of the financial system.

Let’s compare Gold to the US Dollar.

Every asset in the financial system trades based on relative value. Ultimately, this value is denominated in US Dollars because the Dollar is the reserve currency of the world.

However, even the US Dollar itself trades based on relative value. Remember the Dollar is merely a sheet of linen and cotton that is printed by the Fed and is backed by the full faith and credit of the Unites States.

In this sense, the Dollar’s value is derived from the confidence investors that the US will honor its debts.

A second item to consider is the fact that the Dollar’s value today also derived from the Fed’s money printing. Indeed, a Dollar today, is worth only 5% of a Dollar’s value from the early 20^th century because the Fed has debased the currency.

As a result of this the world has adjusted to this change in relative “value” resulting in a Dollar buying less today than it did 100 years ago.

In this sense, Gold’s value is derived from investors’ faith in the Financial System (ultimately backstopped by the Dollar) and the Fed’s actions.

Gold also moves based on investors’ confidence in the system. If investors’ are afraid that the system is under duress (meaning that they have little confidence in the Dollar-based financial system) then they perceive Gold has having a higher value.

Similarly, if the Fed prints Dollars by the billions, Gold is perceived as having a higher value relative to the Dollar.

Thus, Gold does not have any less intrinsic value than the US Dollar does. In that regard we can price it relative to the Fed’s actions and to the fear of systemic risk to get an assessment of its true value.

With that in mind, today Gold is clearly undervalued relative the Federal Reserve’s balance sheet (see Figure 3 on the next page).

Since the Crash hit in 2008, the price of Gold has been very closely correlated to the Fed’s balance sheet expansion. Put another way, the more money the Fed printed, the higher the price of Gold went.

Gold did become overextended relative to the Fed’s balance sheet in 2011 when it entered a bubble with Silver. However, with the Fed now printing some $85 billion per month, the precious metal is now significantly undervalued relative to the Fed’s balance sheet.

Indeed, for Gold to even realign based on the Fed’s actions, it would need to be north of $1,800. That’s a full 30% higher than where it trades today. Eventually this relationship will normalize. Gold is clearly being manipulated lower.