Fundamentals? We Don’t Need No Stinkin’ Fundamentals! (Part 1)

(Restarting the New Gold Supra-Theory Series)

Truth to tell it wasn’t Dean James’ persuasive arguments that finally convinced me to join the faculty at STFU. GM Jenkins sealed the deal when he kindly let me in on the secret behind the ape-leitmotif scam here i.e. the stuff you can get away with if you adopt a cutesimian persona.

Hence the baby orangutan disguise I adopted in my first post here at Screwtape Files. As you can see I have had my hands full recently with student orientation but it’s publish or perish in academia and a restart of the New Gold Supra-Theory series of papers is long overdue. The beacon of fundamental golden light has not shone forth during my absence from these pages.

I'm sure Uncle costata isn't the only screwtaper who was horrified by the heresies in this post by GM. By way of example (my emphasis):

I believe price charts have become more important than any fundamentals-based arguments (e.g. of the "1001 reasons the dollar is doomed" variety you see on Zero Hedge once a week). My goal being to make money in 2014, my resolution is to avoid letting the bone-crushing stupidity of the American population, the knee-weakening asininity of the mind-bogglingly corrupt politicians, and the eye-watering chutzpah the Wall Street scumbags influence my investment decisions (especially short- and intermediate- term decisions).

Somebody hand me a cake of cocaine-scented soap! Someone needs their mouth washed out. GM your role in these markets isn't to "make money" it's to take the wrong side of trades with Goldman Sachs and JPM and to vote for people who facilitate the thievery.

I also noted this recent scandalous post from Jeanne d’Arc, Director of STFU's A. G. Silverman Memorial Centre For Brain Trauma Research, where she let fly at Turd Ferguson and his Turdites. Par exemple:

I pointed out the simple, almost trite, fact that anyone - ANYONE - who had advised you to buy gold during 2012 had been wrong. Not maliciously wrong, perhaps, but wrong anyway. 
(Personally nowadays I think it’s pointless penning insulting posts to people who lack reading comprehension skills but, hey, that’s just my 0.02.) Jeanne d'Arc, GM Jenkins CAN read and comprehend (in the early part of most evenings). I note his departure from the path of fundamental righteousness seems to have started after he read these honeyed words in this comment from you back in November 2013 (my emphasis):

GM - an entirely sincere question (and perhaps a good title for your next Screwtape post): why are you still attached to gold?

.... Really. Bollocks aside. What is it that is so special about this lump of metal? There are so many other alternatives. I know you're not a free-golder, so why gold? Instead of bitcoins or the Dow or housing or mattresses or acorns? And any response starting with 'gold has been a store of value for 3,000 years' can be instantly discounted.

ORLY?? Technically I don’t care who or what has moved your averages GM, both you and JdA have thrown down the gauntlet to Team Gold Fundamentals and I'm picking it up. GM Jenkins et Jeanne d’Arc - en garde!


Warren James said...

In the current economic paradigm, this seems to be the most important question, if I may distill: - 'do fundamentals still matter'? For the most part we argue they do based on our real world experience, but I guess that's the problem with today's finance system - it's like a surrealist painting. Just my two cents worth to this new debate. Rgds,

Elmer Habavilo said...

The most important price in the economy-- the price of money, I.e. interest rates-- is rigged as a matter of policy. When price-fixing and rigging is made policy, it creates a lot more bubbles in markets than would otherwise exist. A bubble is essentially a situation where at some point, for years on end, it can appear that "fundamentals don't matter" for years on end in a particular market or markets.

I think we're in a world where the masses' political opinions are getting harder to control because of the free flow of info... It's getting harder to pull the wool over people's eyes when it comes to things happening in politics and geopolitics... But in the economic world, which involves more math and numbers, it's the opposite. People are clueless, stupid, and averse to math... Therefore its a lot easier to influence all markets and make it appear that fundamentals don't matter for years, because even many of the supposedly brightest have the wool pulled over their eyes

Gary said...

Only traders care about 'bottoms' and price movements in the short-term.

I focus my study on central banks and the BIS, especially the ECB, and hence I buy physical gold with the knowledge that (there is an incredibly high probability) the monetary world is going to change in the 2015-16 period in a way that no chart could possibly predict.

But each to their own, dollar collapse is c.18 years away yet, time moves slowly as empires die.

GM Jenkins said...

Well, costata, take solace in the fact that you have Billionaire Eric Sprott on your side. He is "absolutely convinced we are going to go to new highs this year," based purely on his speculation that 2014 is the year the "truth comes out" and we find out "everything has been manipulated."

Ah, the King World Krew. Never a day's rest. (No, seriously, has Eric King ever taken a day off? True, the "weekly metals wrap" is apparently still "on vacation" ... though the holiday season is well over, which tells me he hasn't been at all happy with Trader Dan's recent bearish straight talk and hype-deflation. Perhaps he has been deep-Ricks'd, after the Ever-Popular Jim Rickards.)

Re: student orientation, continue enjoying it, but keep your head. I mean literally, there are some femme fatales on the STFU campus. Verbum sat.

costata said...


I agree that there is a valid debate about the importance of fundamentals in markets and economies that are subject to so much intervention and distortion.

As Elmer points out interest rates are routinely manipulated. Jim Grant has been banging the drum for years about interest rates being price signals. If those price signals are distorted then economic calculation is corrupted.

Yet even here fundamentals do intrude on the plans of the statist central planners. They can set official rates at close to zero for their bank clients but they cannot fix the rates charged to bank customers or force their customers to borrow at any rate.

BTW what is up with Blogger at the moment? It seems to be malfunctioning.


Wise campus counsel but I have to say it gives me no comfort to have Billionaire Eric Sprott "on my side". BTW I can't see any evidence that he undertakes any fundamental analysis. His own funds management company have tossed him out due to the losses he has created in their funds.

Elmer Habavilo said...

to think like a billionaire for a second...

Sprott wants to herd people into his funds... So to me when he says the metals will go to new highs this year, he only feels that metals will bottom this year or have bottomed already,.. so that people, if they invest in his funds, will either be flat or up on the year... He may very well not believe what he is saying (that metals will go to new highs this year), but he knows that if metals bottom and are up even 10 percent on the year, the great majority of investors who do decide to invest in his funds won't complain... Unlike most people who make public predictions, HE DOESNT CARE AT ALL ABOUT THE RELIABILITY OF HIS PREDICTIONS except when it comes to how those predictions affect what his investors and to-be investors do with their money.... If god told Eric sprott on January 1 of each year that gold would be up 10 percent that coming year, he would make predictions that the "truth will come out and metals will explode this year" on January 2 of each year, to herd as many ppl into his funds as possible...

So I think this is probably an instance of sprott pulling out the big guns when he knows there can't be much more downside... If gold ends the year at 1300 , he'll say the same thing next year and be like "c'mon you made 7 percent this year, stop complaining",... For him, There's not much downside in saying the metals will explode when he feels like they are near or at a bottom

Jeanne d'Arc said...

Welcome back, Costata. Nice to see you posting again.

My view: if one genuinely cared about fundamentals so much, one should have sold all one's silver and gold two years ago and bought Lloyds TSB (or some other bank stock) when it was at 20 BPC. It's now trading at 85 BPC. That's a gain of over 400% in the time that gold has lost 40%.

Nice hindsight? Not at all: that's what I advised almost two years ago to the day: here.

As an aside: why does everyone get so hung up about the terms 'trading' and 'investing'. As far as I can tell, for most readers an investment is simply a trade gone wrong...

Regardless, when everything I've said over the last three years is proven wrong in some way, I'll be happy to come back to STFU and admit my mistakes. Until then, all I can see is a case of those who bought badly trying to justify their bad decisions in retrospect.

Gold and silver fundamentals were awful and are still awful. And their charts are awful too. So there's not much of a debate worth having, as far as I can see.


Gary said...

'why does everyone get so hung up about the terms 'trading' and 'investing'. As far as I can tell, for most readers an investment is simply a trade gone wrong...'

I think most people view the difference as the timescales involved. Specifically, with regard to gold, it is also the key aspect of owning physical rather than playing the price, and that comes from understanding the accelerating evolution in the global monetary system, or not as the case may be.

JdA's ignorance of monetary evolution is very commonplace (despite plenty of comments and posts here on the subject, and elsewhere online), and hence her knowledge of 'fundamentals' is flawed, and she is right, debate would be pointless.

Gary said...


gold&silver in one sentence discussing fundamentals, there's the clue as to depth of knowledge.

costata said...

Sorry folks,

Blogger has decided it doesn't like me at the moment. I ran a scan that detected and removed some malware but I'm still getting messages claiming that these pages are "unresponsive". I'll respond to comments at the earliest opportunity.


Elmer Habavilo said...

JdA- that was a good call on Lloyds stock you made. I appreciate the acumen there. To clarify though, as to where you think debate should not be engaged in because it's pointless-- your premise is that the metals' fundamentals are awful and their charts are awful, so the conclusion is that silver at $20 and gold at $1250 are a poor investment to make here in Jan 2014? I just want to clarify what position you say shouldn't be debated any further.

.. I've seen a lot of attacks on the monolithic perma bulls in the metals here, and I think thats a great thing because being monolithic or being wedded to most ideas, and certainly any investments, is a bad idea. So I appreciate the agnostic or atheistic investment tone that I hear here often. Being a skeptical sort, my ears perk up a bit though when I hear that a non-trivial issue has been decided, so further debate is futile.

costata said...

Hi JdA,

Thanks for the welcome. I'm trying to post but I'm having problems with the browser when I access comments at this blog. For example the scroll bar won't work in preview mode for comments for me at present. These problems don't appear to be happening with other blogs.

I think it's a mistake to treat gold and silver as a pair or in some way comparable. FWIW I view silver as a trade. Your argument that on fundamental grounds we should have sold our physical gold 2 years ago doesn't wash. We hold it as insurance and a quasi call option on a reset of the international monetary and financial system. Using the same logic we should also have sold our home and everything else that didn't go up 400% in the past couple of years. Who invests like that?

Granted selling gold and buying bank shares a few years back would have produced capital gains in the hundreds of per cent. With the benefit of hindsight we could have sold out and gone back into gold today. But this presents a few problems for us.

Firstly the share market is a zero sum game. I'm not confident I can beat others at this game. Second there was no way we could be sure two years ago of buying back in today. So that would have been an unacceptable risk to us. Lastly in order to realize the profit on those bank shares we would need to exit to currency. If we don't want to be in currency at all what are our options?

As an aside: why does everyone get so hung up about the terms 'trading' and 'investing'. As far as I can tell, for most readers an investment is simply a trade gone wrong...

None of the successful investors I have met over the years would agree with this assertion. Where it came up in conversation the advice to me was to decide whether I'm an investor or a trader because it requires a different approach, skill set, temperament and so on. Others suggested dividing capital into core holdings (investments) and a trading component for speculation/trading if I want to accept more risk and potentially higher returns.

...all I can see is a case of those who bought badly trying to justify their bad decisions in retrospect.

I don't know if this is aimed at me but it shouldn't be. For years I have been consistent and explicit about the reasons why I own gold.

Gold (and silver) fundamentals were awful and are still awful. And their charts are awful too.

As far as the fundamentals for gold are concerned they look just fine to me. I'll worry if central banks start dumping it and not before. From a TA perspective if people who understand this stuff tell me the "charts are awful" I believe them. If I decide to trade I would certainly respect TA and the charts because other players clearly do and game theory suggests this would be wise.


costata said...

A little food for thought as we discuss the merits of trading on TA versus investing on fundamentals (my emphasis):

Harry Browne's "Permanent Portfolio"

25% stocks
25% bonds
25% cash
25% gold

The Permanent Portfolio: Using Allocation to Build and Protect Wealth
by J.M. Lawson and Craig Rowland
AAII Journal December 2012

Simple, safe and stable: These are the three tenets of the Permanent Portfolio, a strategy invented by the late Harry Browne to help investors grow and protect their life savings no matter what was going on in the markets.

Over the last 40 years, the strategy has returned 9.5% compound annual growth. The worst loss, a drop of 5%, occurred in 1981. In 2008’s financial crisis, the portfolio was down only around 2% for the year. We think that’s pretty impressive for a strategy that appears so startlingly simple on the face of it.

Simple and it takes very little time away from whatever you do to accumulate capital. But this is where it gets interesting, the Permanent Portfolio strategy assumes: You buy these assets all at once and hold them at all times.

That last bit doesn't look like a great idea at this point in time does it? Anyone care to argue the pros or cons of this assertion with me? I'm happy to take either side of the debate.

Elmer Habavilo said...

Marc faber has been saying similar for years-- 25 stocks, 25 bonds and cash, 25 real estate , 25 metals (he prefers gold over silver)

Gary said...

Hello Costata,

For the non-expert investor that equally weighted portfolio will no doubt serve them very well over the next 40 years too.
Ironically it will probably perform better than c.85% of all other investors' portfolios, for the simple reason that gold is included.The 1981 example is a good one, where a non-gold portfolio would have lost a lot of money.

For those aware of matters pertaining to gold, and perhaps also aware of long-term c.17 year cycles, a tweaking of that portfolio would make sense along the way. That's what Warren Buffett does, at least via his cash holdings, which were very high in 1999, and even higher right now.

Finally, on gold's fundamentals, I view them as simply the inverse of the fundementals for the world. Therefore right now, gold's fundamentals couldn't be better!

Anyone buying the S&P today, well, good luck with that over the next 3 years or so. (Hussman produces excellent research on market risk BTW).

Eric Original said...

I'm with JdA. So-called "fundamentals" all pass through the prism of preconceived ideology first, and are therefore suspect. Price, on the other hand, is truth.

In short, the charts are bad, the trend is down, stay away. It really IS that simple.

Gary said...

Thanks for sharing your pre-conceived idealogy there Eric!

Price is simply the sum of everyone's pre-conceived idealogy.
And so often, the herd is wrong.
So, good luck to chart watchers.

Eric Original said...

Price is what determines my gain or loss. That's as real as it gets.

"Would Have, Could Have, Should Have, Might Someday" doesn't put money in my account. I've tossed all those fuzzy theoretical belief systems overboard.

But good luck to all anyhow...

Elmer Habavilo said...


You say "fundamentals... are suspect", but "price, on the other hand, is truth"... "Price is ... As real as it gets"

It seems to me though that its a basic principle of investing that precisely price is suspect too. I mean wasn't there something suspect about the Nasdaq at 5000 in march 2000? Or something suspect about any of the other stocks in the dotcom bubble? To me, the whole game, if one is going to play it of course, is which prices are the MOST suspect? (in either direction obv). .. And yeah any "fundamentals" one relies on are going to be suspect to some greater or lesser degree too..

Also, not sure if this has been covered on this site, but I've seen a fair amount about deutsche bank exiting the gold-fixing process in London... Coming hard on the heels of supposed investigations in Germany of gold manipulation.... Not that I have any faith that any politician or regulator anywhere in the world would take it upon himself to investigate such a thing out of the blue... But I could see a scenario where a regulator gets the ball rolling a bit because things are falling apart anyway etc... I'm just wondering if this business about DB will have more relevance in hindsight, say a year down the road.

Elmer Habavilo said...

.... Or to paraphrase Nietzcshe's Thus Spoke Zarathustra, "It is the stillest words that bring on the storm. Thoughts that come on doves' feet guide the world. Big banks exit the gold 'business' during lulls in the market."

costata said...
This comment has been removed by the author.
costata said...

I'm posting some links to something I may want to explore in the next part of this post. It concerns the high correlation between gold (as represented by GLD) and the 10 year Treasury since the ETF was launched.

CHAPEL HILL, N.C. (MarketWatch)

— If the 10-year Treasury yield rises to 5%, gold will fall to $471 an ounce.

And if that yield rises to just 4%, from its current 2.8%, gold will still plunge — to $831.

Those sobering forecasts come from an econometric formula based on the last decade’s relationship between gold and interest rates. Assuming this past is prologue, the only way for gold to make it back to its all-time high above $1,900 an ounce is for the 10-Year Treasury yield to fall to 1%.

To be sure, a comprehensive model of gold’s price needs to include more than just interest rates. But, according to Claude Erb, who conducted these statistical analyses, we should not be too quick to reject his simple “behavioral” model relating gold’s price to the 10-Year Treasury yield. Erb is a former commodities portfolio manager for Trust Company of the West and the co-author (with Campbell Harvey, a Duke University finance professor) of a recent National Bureau of Economic Research entitled “The Golden Dilemma.”

The analyst whose work is quoted acknowledges that causation could arise from a third source that drives both:

In that paper Erb observes:

Both gold and rates were highly correlated, but it is hard to believe –That one drove the other
•Gold was a fear of hyperinflation play
•Bonds were a fear of deflation play

He concludes that both are simply evidence of a "fear trade" - a term the author ascribes to Warren Buffett.

NBER paper:

costata said...

A bookmark for Part 2.

Jon Strebler is the Editor of Richard Russell's Dow Theory Letters.

In this post I think he sums up the shortcomings of both the fundamental and technical approaches to investment.

“Pick your poison.”

"Whichever “school” floats your boat, there are some big downsides to your choice. The fundamentalists tell us what should happen, but have a tough time identifying when. So their baggage includes predicting that such-and-such is going to happen — but they’re 3 or 9 or 24 months too early! And during those intervening months, the market can ignore what it “should” do long enough to bankrupt the fundamentalists. Not to mention that sometimes fundamentalists get it wrong, believing something “needs” to happen when, by golly, it really doesn’t after all; ya got it all wrong!

Technicians, on the other hand, interpret what the market itself says is going to happen. An easier row to hoe, right? Sure, except that the markets, via the charts technicians rely on, do not always speak truth, or speak it in ways that only the most astute can interpret correctly. So we get things like the 70% chance that such and such will happen, only to find that it doesn’t happen three times in a row — enough to, you guessed it — bankrupt the technicians."