When
allocating capital a successful method for increasing wealth is to buy cheap
valuable assets and if you ever sell them then do so when the assets are expensive
or very expensive. But how can one accurately perform mental calculations of
value? I recommend using gold as the numeraire. This allows one to get a clearer view of the
relationship between price and value.
When
allocating capital for longer than a millisecond or two, like the parasitic high frequency trading operations, one of the key metrics
I use is the 200 day moving average.
In the
financial markets, the 200 day moving average exerts a force much like
gravity on the current price.
WHAT IS THE 200
DAY MOVING AVERAGE
The
200 day moving average is actually fairly simple. The sum of the close from
the previous 200 trading days divided by 200.
WHY
THE 200 DAY MOVING AVERAGE
The
decision to use 200 days instead of 199, 50 or 500 is fairly arbitrary and
dependent completely on the preferences of the capital allocator. I like the
200 day moving average because the numeraire par excellence is so heavily manipulated that price and value are
bifurcated, a static point with an undefined entity like the FRN$
is meaningless,
a moving average provides a dynamic
figure and two hundred days is long enough to filter out short term abnormalities
providing objectivity.
Consequently,
while gold may be extremely volatile day to day the 200 day moving average
shows a completely different picture; a nice gently sloping bullish trend
line. In the financial markets, the 200 day moving average exerts a force
much like gravity on the current price.
HOW TO
USE THE 200 DAY MOVING AVERAGE
The
200 day moving average is merely a technical tool in the capital
allocator’s arsenal. For example, on 14 July 2009 in Platinum Liquidity Increases I argued the case for why
platinum was undervalued, a good buy and made a recommendation to purchase
it. Of course, the foundation was the market fundamentals; low worldwide
production, scarcity, lack of stockpiles, durability, fungibility, industrial
demand and legal tender status. Then came the technical factor, the 200 day
moving average of the platinum to gold ratio.
THE
RELATIVE PRICE
One
way I use the 200 day moving average is to calculate the relative price of an
asset which is the 200 day moving average divided by the current price. Then
I look at the relative price over time to determine when an asset is cheap or
expensive.
I have
found that during this secular bull market, gold in relation to FRN$ is
valued by the market as cheap
when its relative price is around .99, average
value between 1.00 and 1.25, expensive between 1.25 and 1.35 and very expensive
above 1.35. This can be accomplished by looking at the relative price and
using standard deviations to form trading ranges.
Money
is made when you buy not when you sell.
APPLYING THE
RELATIVE PRICE AND 200 DAY MOVING AVERAGE
Back
in July 2009 platinum was trading at $1,118 per ounce with a 200 day moving
average of 1.21 ounces of gold per ounce of platinum and a historical ratio
closer to 2.0. Thus, with bullish fundamentals and being cheap relative to
gold based on the 200 day moving average relationships I purchased platinum
and it is currently at $1,540 per ounce with a 200 day moving average of
1.31. The trade has resulted in the goal: an increase of net worth when measured in gold ounces,
the numeraire.
CHARTS
TO HELP YOU QUICKLY VALUE PRECIOUS METALS
To be
honest, I got tired of having to click a few times in order to quickly
determine the 200 day moving averages for the various precious metals.
Consequently, I had a gold price chart, silver price chart and platinum price chart (all
three charts are available on this precious metals price page) created that
contains the spot price, 200 day moving average and relative price along with
a legend stating whether the metal is cheap, average value, expensive or very
expensive based on historical trading ranges.
PLATINUM
IS CURRENTLY THE BEST VALUE
With
the precious metals I recommend accumulating physical metal on a regular
basis, either monthly or quarterly. I recommend using a reputable coin dealer
like Gainesville Coins for smaller purchases like a
single Silver American Eagle or a trusted third party vaulting service like GoldMoney
for larger amounts when you do not want the headache of guarding it yourself.
But
how does one quickly determine whether they should buy gold, silver or
platinum? As you can see from the charts, currently gold with a relative
price of 1.0366 is the most expensive relative to its 200 day moving average
while silver is in the middle at 1.0267 and platinum is the cheapest at
1.0109. This is confirmed with the platinum to gold ratio which is currently
1.303 compared to 2.0. Thus, if you were to purchase any of the precious
metals then I would recommend purchasing platinum because it currently
appears to be the best value.
Remember,
at all times and in all circumstances gold, silver and platinum remain money
and currency. Consequently, you can always trade platinum for gold or gold
for silver. The capital allocator’s goal is not necessarily to have the
most amount of gold ounces but instead the highest net worth using gold as
the numeraire.
CONCLUSION
When
it comes to allocating capital I like to focus on intrinsic value. Buy low
and sell high and I think money is made when you buy not when you sell. To
accurately perceive value I use gold as the numeraire and the 200 day moving
average to filter out daily noise and aberrations. Sure, as The Great Credit Contraction grinds on and
being able to secure and multiple one’s wealth has become more
difficult.
But
there are always opportunities and deals to be made. The issue is whether you
buy valuable assets on the cheap or when they are expensive. These precious metal price charts will
allow you to quickly and easily discern the current prices of the metals and
their relative value over the previous 200 days to determine whether to buy gold, silver or platinum.
DISCLOSURES:
Long physical gold, silver and platinum with no position the
problematic platinum, SLV or GLD ETFs.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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