Golden Arches

I sure ain't one of them hi-falutin tradin fellers y'all should look to for advice, but this here looks like one of them fancy pennants I've heard so much about.
Gold in Swiss Francs

Actually, it appears to have a cup and handle in place of a flag pole. But good enough for me.

The sideways movement of gold measured in Swiss francs obviously reflects the franc's growing strength vs. other currencies over the past year or so. Peter Schiff (and others) believe this is a sign the Swiss franc is replacing the dollar as a safe haven. I'm not so sure, though, that this isn't just a short- or intermediate term trend. Fact is, these are all fiat currencies we're talking about. None are backed by gold, but the US dollar is at least psychologically (and potentially more than psychologically) backed by the US military. Who needs gold when you have daisy cutters. All those unfunded liabilities and stuff we hear so much about, well, they'll probably just never be paid when push comes to shove; until then, we'll surely watch the median standard of living here slowly decline. But, something tells me the US military will survive any economic eventuality just fine. Probably come out stronger, when all is said and done.

But that's just depressing. So, let's try to find some other way to tell if the Swiss franc is presently overvalued: by using that infallible economic indicator, the Big Mac index. Let's say I buy a Big Mac at JFK airport on my way to London. When I get to Heathrow, I sell it (properly refrigerated during the flight of course) for X pounds to a Londoner (who's unwilling to pay more than the market price). Well, that should set the exchange rate between the currencies. If I can sell the Big Mac for a profit (i.e. sell it for X pounds, then convert the X pounds into more dollars than I paid for it) then the dollar is undervalued relative to the pound. And vice versa.

Using that criterion, it's amazing to see how seemingly overvalued European currencies are, especially Swiss and Scandinavian ones. If I go into a McDonalds in Norway with a Big Mac I bought in America, pretend I work there, and sell it to a Norwegian ("Sold to you, sucka" as Kid Dynamite might say), I can convert my kroner back into dollars and buy 2 Big Macs when I get home, plus maybe even a little something from the evil Mickey D's dollar menu.

Below is a the % profit I'd make in various countries (blue bars) via Big Mac arbitrage. I also adjusted for the Gini coefficient, which measures income inequality in the nation, as a way to account for the fact that some nations have poor underclasses that are more willing to work for dirt cheap (red bars). When I do this, the Swiss franc seems the most overvalued of all.

Maybe that's why McDonald's is hiring?


victorthecleaner said...

GM Jenkins,

the market may be more efficient than you think. Historically, the order was often as follows (Bernholz's Law): (1) money supply increases; (2) exchange rate goes down; (3) consumer price inflation picks up.

If Bernholz applies, the US are somewhere between (2) and (3).


GM Jenkins said...

Are you saying, victor, that you don't find the Big Mac index persuasive? :P

So I'm wondering how to play the metals here. The gold chart (esp. in euros and as above in swiss francs) looks very bullish, but I don't see gold popping to the upside in any currency without silver following suit, and the silver chart looks like it needs to stay range bound for awhile (probably test the low 30's again?) ... Then there's the summer doldrums argument and the QE3 decision at the end of the month. Suggestions welcome. I'm half in cash currently and glad I have a day job...

Warren James said...

It's tricky trading in non-USD, nearly all the investing news is US-centric so GM I have been pondering your chart all day. Getting anxious about this QE3 stuff then realised that in AUD, if he prints then silver + gold up, if he doesn't then USD goes up as markets possibly tank.

The only way I lose is if they print behind the scenes without announcing it, so that's probably what will happen ;p The metals in AUD have not been that exciting (says me).

It's interesting to watch this pregnant pause where everyone is not sure what to do (KD stirring up pigeons at the watchtower for those missing their daily silver fisticuffs).

Yukon Cornelius said...

Stay in cash imo. I'm 25% cash and thinking about if I was 50% cash like yourself gets me all tingly inside. I still think there's a little disbelief on the street that the debt fueled free liquidity ride is over. You're going to see a lot of red days as June gets closer and after it some REALLY red days.

I would wait until things deflate a bit and the big players get back from the Hamptons, Maldives, etc in mid-August. I wouldn't even think about playing the metals until then. When I did gold and only gold would be in my top category with copper, manganese, and possibly rare earths.

There are going to be some amazing buying opportunities and you're not going to miss anything until at least the first of August. Sit back and enjoy the ride until then. Broad market front month or September puts might be worth putting a small cash into to help pass the time.

You guys ever see a fox around a henhouse? The smart chickens stay quiet while the dumb chickens start squawking. Makes me think of Kid Dynamite over in T.F.'s comments. It's definitely good for entertainment value. I will say this though. For all the ignorance that board has shown in the past there really is starting to be some glimmer of hope over there. People are starting to question things and not dismiss contrary viewpoints quite so quickly any more. That's a good thing.

Jeanne d'Arc said...

Nice post, GM.

I have to say, I'm with Yukon on this. I went flat on silver towards the end of April, with no regrets. I now have half my fiat in fiat and the other half in gold. If gold starts to look even a bit more shaky, then I'm going all cash.

But I have no fears about hyperinflation being upon us next Tuesday, so this makes sense to me. I am, however, looking forward to lots of bargains over the summer, and I've been getting my cash ready for a couple of months.

If I'm wrong - the worst that can happen is that I don't get any bargains, and I might have to buy back in to a few things at a slightly higher price. That seems like pretty good risk-reward to me.

victorthecleaner said...

GM Jenkins,

if I were able to predict what is going to happen this summer, I would probably be lying on the beach and certainly without a computer.

On the Big Mac index. Yes, purchasing power parity is a fundamental valuation argument, but arbitrage against any deviation from parity is slow and expensive.

Take a look at the British pound from 1990 to 2007. It was grossly overvalued all the time. Sure, people took the ferry and went shopping in France or in the Netherlands, sure, a number of companies moved their factories abroad, but all this was not enough to remove the overvaluation. Effectively, Britain lost a good part of its manufacturing sector during that time.

Another example is the inflation in Germany 1919-23. The mark wend down in the FOREX market before the rise in consumer prices. During that time, people from all over Europe went to Berlin in order to have a cheap party.

On QE3. I think the key vulnerability of the Fed's strategy is consumer price inflation at home without any job growth. So it would make some sense for them to scare the market and try to bring commodity prices down. Whether that is going to work out and what other surprises might happen, no idea.


Robert LeRoy Parker said...

Jeanne d'Arc,

Why do you have no fears of hyperinflation next week? Do you have no fears of hyperinflation at all?

What difference is the timing if all it takes is the right trigger event? What theory of hyperinflation do you subscribe to?

GM Jenkins said...

Thanks for the comments, all.

I dare say I'm cautiously bullish on gold in the near term, excpet for the QE3 wildcard, the effects of which I guess everyone's awaiting. But gold in Euros, SFrancs, and even Aussie dollars looks very promising right now, if you ask me. In dollar terms, gold can drop $50 this week and i don't see serious "technical damage," but in the above currencies, it seems to me like we've reached a critical point, and the economic climate right now doesn't lend itself to a massive gold correction, IMHO. Perhaps what Warren says is right, and what we'll see is a strong rally in the dollar, which will cause gold to have a moderate correction in dollar terms while it rises in the other currencies (this week I actually took a small position in the triple leveraged dollar bull ETF (UUPT) to go with my small current position in double gold (DGP), which so far has been a wash.

I agree, Yukon, that having sufficient dry powder for the summer is wise and comforting, which I've had since late April when Kid Dynamite spooked me into selling my large position in PSLV in the nick of time (I owe that dude a chicken dinner).

I second RLP's question to JdA. I'm persuaded by Victor's idea that the falling USD exchange rate portends rising prices in the not too distant future. I guess it depends on your definition of hyperinflation. I think an important point though is that if inflation even shoots up to 10%, that won't be sustainable. I could see it hard to control at that point, since faith in fiat is purely psychological, and the psychological climate seems ripe for panic, f you ask me. John Williams of Shadowstats, who's highly respected and whose numbers many mainstream commentators (as well as economists and businesses) says inflation is already at 5-8%, if i'm not mistaken. Maybe that's why he has gone on the record to say hyperinflation is imminent - one of the few nearly mainstream guys to say so. (Marc Faber, whom i wouldn't want to bet against, has said it's a 100% certainty, but he projects it well into the future).

The most compelling argument against hyper or even massive inflation is that then the NIA would be right. Can't imagine those pump and dump bozos to be on the right side of any major issue. I say that only half jokingly :P

Jeanne d'Arc said...


I'm not sure you should read too much into my comment. As it happens, I don't think that hyperinflation is a very realistic prospect for the world's reserve currency, not least because it would be against the interests of every country on earth and great efforts will always be made to stabilise it. However, the point I was making above was simply that even if hyperinflation occurs, it's not just going to happen overnight.

I'm not an inflation denier - I think 5 - 8% inflation in the US sounds about right at the moment, and it's a similar story in the UK and Eurozone. Although damaging to an economy (and a good reason to buy gold as an inflation hedge) this is actually peanuts compared to inflation scenari which have played out in many countries and time-periods WITHOUT leading to melt down. Hyperinflation is actually a very rare event that needs a precise set of triggers. I simply don't think those triggers are there or even over the horizon - go ahead and shoot me for saying it!

Anyway, I can't address such a complicated issue in a comment here, so maybe I'll write an article on exactly what I mean, and try to post it this week. I'm sure it will attract some forthright debate... ;-)