How global distress drives up gold prices

Throughout history, gold has held a special place as a safe haven for investors during times of global distress. When political tensions escalate, conflicts erupt, or economic uncertainties loom, gold tends to shine as a valuable asset, leading to a surge in its price. This article explores the intricate relationship between global distress, especially during wars and other turbulent times, and the rise of gold prices, with real-world examples from history.

1. The Gold Rush During World War II

World War II serves as a prime example of how global distress can significantly impact gold prices. As the war escalated and governments sought to finance their military efforts, they printed more money, leading to inflation. In such times, investors and individuals turned to gold as a reliable store of value. The price of gold skyrocketed from $20.67 per ounce in 1939 to $35 per ounce by 1944, mainly due to its role as a hedge against currency devaluation.

2. The Oil Crisis and the Iranian Revolution

In the 1970s, the world witnessed a surge in gold prices following the oil crisis and the Iranian Revolution. Oil prices skyrocketed, and political turmoil in the Middle East created uncertainty in the global economy. As a result, gold's value soared, reaching an all-time high of around $850 per ounce in 1980. Investors flocked to gold as a safe asset during these turbulent times.

3. The Global Financial Crisis of 2008

The 2008 global financial crisis is a modern example of how gold responds to distress. As banks collapsed, stock markets tumbled, and economies faced turmoil, gold prices surged. During this period, gold prices reached new heights, peaking at over $1,900 per ounce in 2011. Investors sought the stability and security that gold provided during uncertain economic times.

4. Recent Turbulence and Gold's Resilience

The 2020 COVID-19 pandemic and its subsequent economic fallout also highlighted gold's enduring appeal. As stock markets experienced extreme volatility and governments implemented massive economic stimulus packages, investors turned to gold as a hedge against the devaluation of fiat currencies. Gold prices hit record highs, exceeding $2,000 per ounce in August 2020.

Throughout history, the price of gold has consistently shown an upward trajectory during times of global distress, including wars, economic crises, and political upheavals. Gold's remarkable performance during these tumultuous periods underscores its role as a proxy for the perception of the importance of negative events. When the world faces uncertainty and instability, gold's value tends to surge, reflecting the collective sentiment of investors seeking a safe haven for their wealth.

As the world becomes more interconnected and vulnerable to various forms of unrest, gold continues to be a valuable asset for those seeking stability and a refuge for their investments. While gold prices can be influenced by a variety of factors, its role as a store of value during turbulent times remains a testament to its enduring appeal in an uncertain world.

Shrinkflation: when less is hidden in more

In the world of consumer goods, appearances can often be deceiving. One such deceptive trend that has been garnering attention is the phenomenon known as "shrinkflation." At first glance, the term might seem like a playful linguistic invention, but its implications are far from harmless. Shrinkflation is a cunning practice employed by manufacturers to maintain profit margins while discreetly reducing the size or quantity of a product, all while keeping the price constant. This crafty maneuver leaves consumers paying the same amount for less product, sparking concerns not only about financial fairness but also its environmental consequences.Imagine the scenario: a long-beloved chocolate bar that used to satisfy your sweet tooth suddenly feels disappointingly small, yet its price remains unchanged. Or a bag of chips that once overflowed now barely manages to fill your palm, but your wallet feels just as light as before. This is shrinkflation at work. Manufacturers resort to this strategy as a way to tackle rising production costs, such as raw materials, transportation, and labor. Rather than raising the price outright, they downsize the product, hoping consumers won't immediately notice the difference.

Shrinkflation doesn't only affect our wallets; it also contributes to an increase in waste and packaging materials. As containers remain the same size while the contents shrink, a concerning gap between perception and reality emerges. This mismatch often leads consumers to purchase more than they need, believing they are getting the same quantity as before. Consequently, more goods are consumed and more waste is generated, resulting in a negative impact on the environment.

The link between shrinkflation and waste is rooted in psychology. Known as the "size-contrast illusion," our brains tend to judge the quantity of a product based on the package's size rather than the actual contents. When these packages appear unchanged, we unconsciously assume they contain the same amount as before. However, this optical illusion doesn't just affect our purchasing decisions; it also fuels overconsumption and unnecessary waste generation.

In light of these practices, consumers are encouraged to adopt a vigilant approach. While it may be challenging to spot shrinkflation immediately, there are steps one can take to make more informed choices. One strategy is to verify the price per unit, weight, or volume. Focusing on these metrics allows consumers to compare products more accurately and gauge whether the product's value has genuinely changed. Additionally, it's essential to remain skeptical of drastic changes in packaging design or brand positioning. These may signal an attempt to divert attention from the actual reduction in content. Staying informed about the products you regularly purchase and their typical sizes can also help you quickly recognize any subtle alterations.

Navigating the changing World order

Allow us to provide a brief overview of the projected changes in country rankings by 2050, based on various sources including PwC's "The World in 2050" report. According to these projections, China is expected to ascend to the position of the world's largest economy by 2050, surpassing the United States. This shift is driven by China's ongoing economic growth, population size, and increasing productivity. India is also anticipated to rise significantly and potentially become the third-largest economy globally, following China and the United States.

Furthermore, other emerging economies such as Indonesia, Brazil, and Mexico are expected to experience substantial growth and climb the rankings. Meanwhile, developed economies like Japan and those in Western Europe may see a relative decline in their positions. It is important to note that these projections are subject to various factors and uncertainties, and future outcomes may differ from these estimates.

Nevertheless, recognizing the potential changes in country rankings provides retail investors with valuable insights for identifying investment opportunities and adjusting their strategies accordingly. In this article, we will explore practical ideas for retail investors seeking to profit in the stock market amidst the changing world order.

1. Embrace Emerging Markets:

With the projected rise of emerging economies like China, India, and Indonesia, retail investors can consider diversifying their portfolios by investing in Exchange-Traded Funds (ETFs) that focus on these growing markets. These countries boast substantial consumer bases and expanding middle classes, offering investment opportunities in various sectors.

2. Technology and Innovation:

Technological advancements continue to disrupt industries worldwide. Investors can focus on companies at the forefront of innovation, particularly in sectors like artificial intelligence, renewable energy, biotechnology, and fintech. Investing in technology-focused ETFs or individual stocks within these sectors can offer opportunities for substantial growth and profitability.

3. Infrastructure Development:

As countries invest in infrastructure projects to drive economic growth, retail investors can explore opportunities in construction, engineering, and related sectors. Investing in ETFs that track infrastructure indices or individual companies involved in large-scale infrastructure projects can potentially yield favorable returns as governments allocate resources to develop vital transportation, energy, and communication networks.

4. Diversification through Global ETFs:

In an increasingly interconnected world, diversification remains crucial for mitigating risks. Retail investors can consider investing in globally diversified ETFs that provide exposure to a broad range of international markets. These ETFs can help balance portfolios and capture opportunities across different regions and sectors.

5. Long-Term Focus:

Given the projected changes in the world order, it is essential for retail investors to maintain a long-term perspective. Rather than succumbing to short-term market fluctuations, adopting a disciplined investment approach and staying informed about global trends can help navigate the evolving landscape successfully.

Property, an alternative to university education

In today's rapidly changing world, it is essential to explore alternative paths to traditional higher education. One such alternative that holds tremendous potential is redirecting the substantial funds typically allocated towards university tuition fees towards purchasing a small, well-located flat as an investment. This article aims to shed light on the advantages of this approach, highlighting the benefits it offers to both students and their families.

1. Long-Term Financial Investment:

By opting to invest in a small, well-located flat, parents can make a sound long-term financial decision on behalf of their children. Instead of spending a significant sum on tuition fees that may not guarantee future financial security, investing in property can provide a tangible asset that has the potential to appreciate over time. Property investment offers the opportunity for steady rental income and capital growth, making it a financially prudent choice.

2. Rental Income and Return on Investment:

A well-chosen flat, strategically located in a high-demand area, can generate a steady rental income. This income can be utilized to cover expenses such as rent, living costs, and potentially even mortgage payments. Over time, as the property market appreciates, the investment can yield a favorable return on investment, providing a solid financial foundation for the student's future.

3. Flexibility and Diversification:

Investing in property offers flexibility and diversification compared to the more linear trajectory of university education. While a university education offers a specific set of skills and qualifications, owning an investment property opens up opportunities for multiple income streams and potential business ventures. It provides the student with a wider range of options and the ability to adapt to the changing needs of the job market.

4. Real-World Experience and Practical Skills:

Instead of spending years solely focused on academic pursuits, investing in property allows students to gain practical experience in the real estate industry. Managing a property involves learning essential skills such as financial management, property maintenance, tenant relations, and negotiation. These experiences contribute to a well-rounded education and can enhance the student's professional development and employability.

5. Potential for Future Education Funding:

Should the student decide to pursue further education in the future, the property investment can serve as a potential source of funding. It can be used as collateral to secure loans or as a means to generate additional income for education-related expenses. The property investment offers flexibility and the ability to adapt to changing circumstances and aspirations.

Top to bottom

 

Check New Zealand, Canada, Australia…, but also India, Indonesia, Saudi, China.

If we had to invest in their stock market, which countries should we choose?

USDJPY

 

What you see here is a point-and-figure chart. I love these charts because they remove the noise and time other charts show so that you can focus on the break of support and resistance levels. Volume can be displayed as well.

The one above shows the evolution of the USD/JPY from the 70s till today. Why are we writing about the Japanese yen? We have received many questions about this pair. Some asked us because they were thinking of moving there, and others in relation to buying real estate in Japan.

The most important aspect of the chart is marked with a square: a powerful bear trap. After that we can see the beginning of bullish movement that will very likely continue. Our target prices are first 160 and then 180.

Gold 2023

Gold has long been considered a safe haven asset, a reliable store of value in times of economic uncertainty. And with the global economy facing a number of headwinds in the coming year, many experts are bullish on the outlook for #gold prices in 2023.

One of the main drivers of this bullish forecast is the ongoing COVID-19 pandemic and its impact on the global economy. The pandemic has caused widespread economic disruption, with governments around the world implementing lockdowns and other measures to slow the spread of the virus. This has led to a sharp decline in economic activity, with many businesses shutting their doors and millions of people losing their jobs.

In response to this economic turmoil, central banks around the world have implemented a range of monetary stimulus measures, including low interest rates and quantitative easing. These measures have helped to prop up the global economy, but they have also led to concerns about #inflation and currency devaluation. As investors seek to protect themselves from these risks, many are turning to gold as a #safehaven asset.

Gold has a long history of maintaining its value in times of economic uncertainty, and it is not subject to the same inflationary pressures as fiat currencies. As a result, many experts believe that gold prices will rise in the coming year as investors flock to the precious metal as a hedge against inflation and currency devaluation.

Another factor that is driving the bullish forecast for gold prices in 2023 is the growing demand for the metal from central banks and other institutional investors. Central banks around the world have been increasing their gold reserves in recent years as a way to diversify their #portfolios and protect themselves from currency devaluation. This trend is expected to continue in the coming year, as more and more central banks look to gold as a safe haven asset.

There are also other factors that are expected to boost gold prices, such as rising geopolitical tensions.

Overall, the outlook for gold prices in 2023 is highly bullish, with many experts forecasting that the metal will reach new highs in the coming year. Whether you are an individual investor looking to protect your wealth or an institution looking to diversify your portfolio, gold is an asset that is well worth considering.

Take into account that gold prices fluctuate frequently and are affected by a wide range of factors. This article should not be considered as financial advice, it is important to do your own research, consult with a financial advisor and consider your own risk tolerance before making any investment decisions.

EURUSD forecast

Remember this post? November 2021. Under parity happened this year, but as we always say, big movements have drawbacks. Our perception for the coming year is the rebound might not be finished, perhaps reaching around 1.1, but eventually the dollar is going to keep on strengthening and target 0.8.

We will see if we are right…, meanwhile have a beautiful 2023.

Follow the hedge funds

We, mortals, have some tools to track what hedge fund managers do. Have you ever wondered how Bill Ackman is investing? Would you love to track a mix of trendy stocks in the hedge fund community?

Let us give you a couple o tips in case you are interested in tracking these famous managers:

1. Web hedgefollow.com It is still beta, but it works beautifully. Here you can track managers, stocks… with a very easy intertace.

2. ETF: GURU directly invests in highest conviction ideas from a select group of hedge funds.

Super dollar, till when?

DXY is the common reference for USD against the rest of the currencies.

Historically, we have seen a movement from around 165 in the 80’s to 70 (A to C) stopping at B. The natural target now would be B, 120. If you want to change USD to EUR, for instance, it makes sense to start changing there.

Some colleagues think the target should be 150, however. Currencies are complicated and they can be moved by governments’ hidden agreements.

In any case, if you are not sure, just do partial purchases of other currencies if you need them. USD will probably continue behaving upwards. Small weak currencies will suffer (check Turkish lira, for instance, or even the British pound).

Inflación en España

En las noticias de hoy vemos que el IPC en España se dispara al 10.2%. Nosotros internamente utilizamos el doble de la inflación oficial pues los gobiernos en general tienden a buscar medios para bajarla, generalmente cambiando cíclicamente la cesta de la compra que usan como referencia.

Esta vez no vamos a ser tan conservadores y vamos a suponer una inflación anual del 15%.

La causa de la subida de precios es la increíble creación de dinero que hemos vivido los últimos años y que se ha acrecentado con el Covid. No creemos que vaya a remitir el próximo año como sugieren la mayoría de los analistas.

Solo como ejercicio vamos a ver qué sucede con nuestros ahorros si tenemos inflaciones del 12% durante los próximos 5 años. 

Capital inicial: 100.000 EUR

Equivalente en dinero de hoy dentro de 5 años: 56.742 EUR

Esto es, casi la mitad de los ahorros desaparecerían en 5 años.

Inflation III. Personal inflation and retirement

When there is confusion in a system because of the excess of variables or its possible distortion, it’s advisable to try to look closer at the origins of the problem trying to find more clarity. From this comes the concept of personal inflation (PI).

Although all the parts of the economy are interrelated, they don’t have a prefect correlation. Thus, if you can estimate the inflation data that directly affects the retired person, precision will be enormously improved. Most likely, the price increase in university education isn’t a relevant factor for someone that isn’t going to start their studies, in the same way that the increase in housing prices isn’t to those who already own their own house and who intend to leave it to their inheritors.

A borderline case happens with health costs. For some, not being included in any type of public protection system is nearly their greatest worry, while for others it’s contemptible to find themselves under the state’s umbrella. Therefore, as a first step, it would be necessary to calculate those areas that can affect retirement and obtain specific historical data. As an example, you can imagine a couple that decides to retire to the Philippines. They rent, don’t have a car and have global health insurance. This couple will need to know the details of their last few years of rent in the Philippines and the evolution of health insurance in a global way. The rest of their expenses such as: food, telephone, Internet, electric, and water; affects them to a lesser extent and the average could be used to calculate them.

If they estimate a monthly payment of $500 on rent, $400 on insurance, and $800 on the rest of their expenses, and on average in the last few years rent has risen 8% annually, health insurance 7% and the country’s inflation is 2%, the following calculation can be made to obtain the personal inflation data:

PI=(500x8%+400x7%+800x2%)/(500+400+800)=4.9%

Calculating future monthly expenses isn’t complicated; in fact, it is where less uncertainty appears, despite the fact that uncertainty is always found in the future. What is not as trivial is estimating an average inflation for the retirement period. Perhaps rent in Manila has risen a lot in the last few years, but you encounter an unsustainable situation and it’s nothing more than the reflection of a real estate bubble that is on the brink of bursting. Or maybe the historical data on housing rentals in the last 30 years didn’t take the current situation into account. The solution to this problem doesn’t exist. Once again, you can make a reasonable approximation. If we call the average increase in rent in Manila in the last 30 years IA30, 3%, and IA5 the average increase in the last 5 years, 10%, as an example the following could be used:

i . If the couple is young, you can give more weight to the historical data, IA=(2xIA30+IA5)/3=5.3%.

ii . If the couple is old, then the recent data is overvalued, assuming that they have fewer years to live and there won’t be time for inflation to return to the average, IA=(IA30+1.5xIA5)/2.5=7.2%.

iii . The age of the couple is omitted and you simply use 1.5 times the official inflation of the rent history, IA=1.5xIA30=4.5% (you don’t use double, as in the general case seen previously, as in specific areas the distortion between the actual inflation and the official is less).

Logically, this is only an example. The weight of each type of inflation varies according to the particular scenario of the person making the calculations. In any case, prudence requires leaning towards a high inflation figure as a more restrictive situation. Therefore, it’s possible to calculate personal inflation without knowing more than the areas of expenditure that each one has and finding average inflations specific to each. Estimating these average inflations is an art, which can be used for future inflation. This applies as much to the historical data exclusively multiplied by a coefficient of security (for example 1.5), as to a combination of these historical figures with the more recent ones.

DYNAMIC MODEL

It’s healthy to make an estimation about future inflation through the methodology that is considered appropriate. However, to remain only with the initial calculation and never make a periodic follow-up during the retirement years would be a shame. This will be a constant in all the variables that affect retirement.

Recalculating the estimated future inflation each year or every other year upon retirement diminishes carrying forward previous errors and permits correcting the rhythm of expenses (or possible extraordinary income) to the new situation of corrected inflation. It is, therefore, a dynamic model, a process that doesn’t end during the whole of retirement.

Inflation II

After “printing money”, the rise in prices isn’t as direct as many economists predict. It depends on the mechanism utilized and the utility attributed to it.

Since the fall of Lehman Brothers, and now because of the Covid, a spectacular increase of the popularly phrased “money printing” has been used. In reality, there aren’t more bills circulating, but it is rather the Federal Reserve (FED) and other central banks expanding their balance with the objective of deleveraging financial entities. The idea is that since that money doesn’t affect the balance of commercial banks, it hinders a rise in prices. This mechanism was reproduced year after year in the golden age of leverage. The recommendations of the Basel Accords seem to want to level the risk of the sector. These agreements were motivated by the Financial Stability Board (FSB) and the G20 upon observing how the 2008 crisis could have, among other causes, its origin in the excessive growth of the banks’ balance sheets and the leverage of the by-products.

Returning to the topic of measuring inflation, faced with the fragility of the official data and the necessity of having accurate figures, there are private entities that try to independently calculate the data of price increases. Some are very wellknown and respected such as Shadow Government Statistics (www.shadowstats.com). This company, created in 2004 by the prestigious economist John Williams, follows a non-manipulated American CPI. As we could have guessed, this one is different from the one presented by the authorities. Another good initiative, in what would be considered the Wild West of Argentina, comes from a group of economists that in 2007 wanted to start to provide alternative price indexes, www.inflacionverdadera.com. From that point on, their work evolved together with the Massachusetts Institute of Technology (MIT), creating The Billion Prices Project and, later on, PriceStats, www.pricestats.com.

The doubt that can arise regards whether you need to estimate the value of inflation to prepare for retirement. The terrible answer is: yes, but it’s very difficult to calculate. If you aren’t aware of the evolution of inflation, you could estimate the necessary money for future expenses and “bring them to the present” in a precise and reasonable way. The explanation of the expressions “bring to the future” or “bring to the present” are related to the equivalent financial concept.

Example:

With 500 euros today, Peter can buy a certain basket of goods at his supermarket. Supposing a homogeneous inflation of 3%, while omitting the possibility of depositing money in an interestbearing account, Peter would need 515 euros to be able to buy that same basket in a year. In this context, you can say that 500 euros today is financially equivalent to 515 euros in one year.

A similar reasoning can be made by adding the possibility of investing the original amount of money in risk-free assets. Another way to demonstrate the great interest that the inflation estimate has in the field of retirement is to know the deterioration of the initial assets over time (again, independent from the profitability obtainable from them).

It’s necessary to emphasize that inflation utilizes compound interest, and the increase in a year is “mounted” on the following year and so on. This process provokes a strong multiplier effect on the initial values. We should remember the famous quote by Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Thus, this implies that a minimum deviation in the estimate of inflation can signify an abysmal difference in results over the years.

It will continue…

Inflation I

The great enemy of “living off investments” is called inflation.

In the first place, it must be made clear for the purists that it has been stepped over the deeper digressions that differ between the Consumer Price Index (CPI) and inflation. The CPI is based on calculating the price of a basket of primary goods and watching its evolution in the future. This should serve as a comparison to know how much the cost of living has gone up. However, as it normally happens when there are political interests in the mix, the official CPI data isn’t consistent. To make the number seem less, in an almost generalized way, from time to time governments change the way they calculate it and the composition of the basket of goods. Taxes, leisure expenses and self-production aren’t usually included.

It’s curious, given that the CPI is a value that doesn’t have any intrinsic meaning and is only useful for the possibility of comparing it. Constantly changing the methodology doesn’t seem the most appropriate thing to do.

The logical chain that is camouflaged by inflation is the following:

1. In the quest to remain in power, leaders spend more than what they earn, thus generating debt.

2. Raising taxes to pay this debt is unpopular, so they resort to an “invisible” tax that consists of devaluing the money so that the debt is lower, although a simultaneous loss of citizens’ purchasing power comes with it.

It isn’t easy to realize this loss of purchasing power, because the basket used in the CPI isn’t always homogeneous and closed, such that governments can manipulate the data so that their citizens aren’t aware of the theft. Somehow many people think that inflation is like a drought or the ever-rising sun, a fact of nature. And perhaps that is true, because the lust for power is natural in human beings. Nevertheless, not by any means is it inevitable, given that it is a product of tangible and provoked economic actions. In general, inflation is understood as the continuous and sustained growth of price levels in an economy. The CPI would act as an added indicator.

The formal definition of inflation, however, can be more complex and depends on different schools of economic thought. The Austrian School considers inflation directly in its origin: the issue of paper money. That is, inflation is the increase of the money supply (once again, various definitions exist on what money supply is). From this point of view, it’s not possible to have a generalized growth in prices without issuing money. Obviously, there is a consumption of goods and a creation of new goods (with possible changes in productivity), but this variation is negligible against the issuance of money.

To sum up the concept in a simpler way: inflation is the increase of the money supply and the consequence is the hike in the prices of goods. This begs the highly topical question of whether it will always be true that, as long as the money supply increases, prices will necessarily go up.

It will continue…

How to calculate your freelance rate

We are going to go directly to the point, as we usually do here.

A) Should we charge by project, a monthly rate, a daily rate or per hour?

There is no good or bad answer. The main focus has to be, not how you want to get paid, but how your clients feel more comfortable.

If you clearly control the amount of work you are going to need for a project, billing for a full project makes sense. In general clients love to be able to anticipate their expenses and prepare a reasonably exact budget.

If you happen to work in several projects for the same company, and you feel you can adjust the number of hours as the projects are not time critical, negotiating a monthly rate could be a great idea. The client companies are expecting some kind of discount from the per-hour rate (around 30%).

We are not sure why someone will want to bill by days. We think it is more logical to bill by hours. There are some useful apps to track the working time, such as Clockify.

B) How much should we charge per hour?

Our rate is a reflection of our value to our clients compared to the value of the competitors. Again, our preferences don’t matter. There are some webs that recommend starting the calculation with our desired salary and then divide it by… Obviously, this is all wrong.

If we want to increase our hourly rate, we need to be more professional, faster and more experienced than our competitors.

Each day we see a shift from worked hours to value added to the project. The benefit of basing our rate on value is that it’s easier to start thinking about value-based pricing methods and transitioning away from trading time for money. Value-based pricing requires a huge change in mind-set. Even if we are thinking about our hourly rate as a reflection of value, it’s still tied to time. Some authors suggest to charge by week instead of hours to force the client into thinking about added value instead of worked hours.

In any case, the hourly rate will remain as the default method of pricing our work, so we just need to check the prices around: in the countries where we work, for our expertise, for our experience…, and try to find a fair value.