SirL and djp have raised an interesting issue in a parallel thread (I reference their posts below to avoid taking that thread even further off-topic):

SirL says in http://boards.fool.co.uk/Message.asp?mid=11490432
I have a problem thinking of stamps as investment assets. To me, they are bubble-type ego-trip stuff of no intrinsic value, that strongly remind me of tulips. The rare stamp market seems to me one that's due a very severe crash as people see the emperor isn't actually wearing any clothes - rather, he's just got a few old small bits of paper.
Could you explain how people paying however much for some rare stamp in boom times differs from people paying however much for a rare tulip? Is the argument just that they held up in 1973-74 or some other historic recession?
I suppose exactly the same argument might be made against investors buying gold. What is the intrinsic value of gold, if everyone were to see it is essentially pointless? Is it just a matter of which assets retain credibility?

and djp adds in http://boards.fool.co.uk/Message.asp?mid=11490551
Gold will always have it place in times of uncertainty due to history.
IMO pointing out selective periods like you have is not that practical. You may as well point out that Beaney Babies were a great asset class back in (when was that again - early 90's??) Or Cabbage Patch Kids
SirL was, AFAICS, making a wider almost philosophical question. In reality it has been agreed that Gold is the "flight" store of wealth. What if it had been decided to use another commodity? There's just as much rationale behind it.

IMO this is a REALLY important question to get to grips with, given that governments have taken to printing money and thus devaluing the paper in your wallets! I read that the Ernst and Young ITEM Club forecast is that the UK government borrowing will hit £180bn in 2009/10:
http://business.timesonline.co.uk/tol/business/economics/art...
This weekend the Ernst & Young Item Club, which uses the Treasury’s economic model, warns that government borrowing will hit £180 billion in 2009-10, a record 12.6% of gross domestic product. Alistair Darling’s budget is due on April 22.

.....work out what that number is per household in the UK.....around £7,300 or so. And see how it compares with the legacy left by the Tories: http://www.bankofengland.co.uk/publications/quarterlybulleti...
In March 1998, the nominal value of the public sector’s net debt stood at £352 billion, virtually unchanged from the March 1997 level of £350 billion.

So, essentially, E&Y are forecasting that next year's borrowing will be over 50% of the aggregate debt that G Brown inherited when he became Chancellor (yes I know about the impact of inflation - but still!).

So.....how does one protect oneself in terms of storing value?? Obviously just keeping (sterling) cash in the bank is unlikely to do it - not only does it pay near-zero interest rates, but if public borrowing will really be £180bn next year (versus recent Government estimates of £118bn) then sterling assets of any sort sound rather vulnerable to depreciation.

Those who follow Jim Rogers will know he's a big bull of commodities, especially agricultural commodities.....and he's not a big fan of sterling. I confess that I can see where he's coming from!

Noting the comments above from SirL and djp, it is true that rare collectables have no intrinsic value (other than the utility to be derived from looking at them or boasting about them etc). Neither does gold have an intrinsic value anywhere near its market price - it has simply enjoyed the perception that it is a store of wealth ....it hasn't been a REAL store of wealth since currencies went off the gold standard! Gold has its uses as an industrial metal and as a luxury good for people who like jewellery - but you can't eat it....and it doesn't help you live either....so the intrinsic value is IMO far below its over-inflated market price! [nb......I didn't always think that - but owning gold-mining shares at the time of the 1987 crash helped me conclude that the "store of value" argument for gold was largely illusory]

So.....my take on this is rather Rogers-esque:

The best store of value seems to me to be related to those commodities that have an essential function in supporting "life as we know it". This would clearly include agricultural commodities (or more specifically the means of producing them, as they are perishable). [It would also include water, of course, though availability of water isn't in doubt on most places!] Unsurprisingly, I would also argue that it includes oil and gas, without which the modern world would have limited transport and heating options and no plastics etc etc! It may have an additional benefit in that world prices are in US dollars rather than sterling....and again having the ability to produce oil and gas in the future may turn out to be quite an efficient store of value.....

....thats been my theory for a while anyway - we may see if it gets tested.

No doubt Fools can come up with other ideas....

emptyend

IMO this is a REALLY important question to get to grips with, given that governments have taken to printing money and thus devaluing the paper in your wallets!

Why is printing money devaluing the paper in your wallet ? This money supply was being increased automatically by the system and this is now not increasing as quickly as it was. Therefore the government has stepped in to try and make it grow at the previous rate.

Is the situation any different to how it was ?

Inflation will only be a problem if the aggregate demand in the economy is not well managed when the recovery begins.

Personally I can't see the money supply expanding that rapidly when the recovery begins because of restrictions being placed on financial instituions if for no other reason. I think the bank will have plenty of time to manage the recovery.

At any rate I am not going to sell my house to buy canned food just yet.

At any rate I am not going to sell my house to buy canned food just yet.

...wouldn't expect you to....

Job: Property

;-)

ee

ps... see http://boards.fool.co.uk/Message.asp?mid=11491002

I think the price of Aluminium will shoot up, once everyone starts to realise that the tin-foil hat brigade weren't that far off the mark ;)

With regard to gold in particular, as a result of the crisis, and potentially the end of the dollar as reserve currency, there is a risk that some countries will wish to gold back their currencies, or at least increase their gold reserves in place of the dollar - which I'd imagine would drive further the investment demand for gold.

I think you've got to look at what the choices are for governments and central banks (the well run, non-western, ones at least!) in a situation where paper currencies are being continually devalued .. do they continue to hold a "basket" of paper currencies, inflating away by their associated printing presses meanwhile earning little or no interest, or do they hold something else as an alternative? Oil/Gas isn't easy to store, neither is food, what else is not perishable with (perceived) high value to volume ratio which cannot be printed by out of thin air by a desperate government?

BTW I can understand why you didn't buy the goldbug arguments in the 80s... but wasn't the situation a great deal different during that period of time? Certainly I don't recall seeing exceptionally low interest rates and the printing of money to buy government bonds!

Oil/Gas isn't easy to store

....'tis if you leave it underground ;-)

BTW I can understand why you didn't buy the goldbug arguments in the 80s... but wasn't the situation a great deal different during that period of time? Certainly I don't recall seeing exceptionally low interest rates and the printing of money to buy government bonds!

Yes of course - radically different environment, but goldbugs deployed the same argument (store of value at a time of instability) whilst asserting it was also an inflation hedge. I bought that argument at the time - but the investment rationale for gold has continued to weaken over the last 20 years and if it doesn't "work" under the current scenario either then there could be a very serious plummet IMO. Leaving aside gold demand for jewellery (which has been the major price support until recent months), it is only the fact that it is perceived to be a store of value that has kept its price up - and it might just be waiting for an "Emperor's Clothes" moment? I don't see it happening soon - but I don't see it as an investable commodity either, unless one is taking the view that jewellery demand will continue to grow.

ee

The best store of value seems to me to be related to those commodities that have an essential function in supporting "life as we know it". This would clearly include agricultural commodities (or more specifically the means of producing them, as they are perishable).

I agree. Which would lead one to countries such as New Zealand, where food-related produce accounts for some 40% of exports. As a tiny peripheral country to the big boys of world trade, the NZ dollar has been hit hard by the current risk-averse environment. But it means that NZ assets are looking cheap now. Although NZ was one of the first into recession, it has so far been quite shallow. And the Australian banks that dominate the NZ financial scene seem to have avoided the worst of the excesses of their international peers. Worth investigating.

BTW I live in NZ :-)

Arguably such thoughts are of value to a longer-term investor only: a medium term investor might take the attitude that he'll watch the market price of the commodity in question and sell whatever producer equities he owns if the outlook for the commodity price worsens. I am currently long gold producers, but I don't have a long term view on the gold price (just as I wasn't an advocate of peak oil) - my approach is simply to watch the commodity price and sell the producers if the outlook worsened. There's usually something somewhere else with upcoming prospects - eg whilst many industries are currently suffering, I like the outlook for the wind power industry in the near term thanks to the impact of the Obama stimulus package on that sector, and by the time the stimulus wears off I'll have moved on to invest elsewhere.

The question also ignores the issue that, whilst a commodity might have intrinsic value, it might be currently overvalued by the market. Arguably land in the centre of a major city qualitatively has intrinsic value just as much as agricultural land or oil and gas, but it might be argued that land in the centre of most major western cities is currently overvalued. If the price of agricultural land or oil were now very high, that would negate the argument of this thread for investing in them. Thinking laterally as well, competitive advantage in a chosen industry might suggest investing in pick and shovel makers rather than the actual producers of commodities or owners of strategically desirable assets.

Surely it's necessary for the supply of a desirable commodity to be reducing, as is argued is happening in the case of oil? However, it's necessary to watch out for demand for any commodity substituting into another if prices diverge. I'm currently reading about and comtemplating investing in salmon farms quoted on the Olso market, as a play on the reducing supply of fish, but of course it is necessary to have a view on chicken prices as fish demand might substitute into the latter.

Agreed re oil and gas.

...and a quickie on the matter of government debt.

I wrote recently to HMRC to ask for a new tax code, as the previous one assumed that I would earn £280 in untaxed interest, whereas this year it is more likely to be £10!

That's not all just about reductions in savings rates, as I've changed some accounts, but it did remind me that the tax take on savings, on stamp duty, on a whole host of things that have been propping up the HMG revenue must be in a downward spiral of massive proportions.

Redundancies, business closures and personal cutbacks on spending seem all likely to create further havoc with government income.

No wonder Brown and Darling have been desperate to get the markets moving again.

I don't have an answer on preserving value, apart from commodities. But I am glad that I can fix things. I've been doing some plumbing and joinery of late and have also been fixing a friend's PC. I reckon the best survival strategy is to keep ones skills alive.

I support the Boy Scout economy!


KMcK

Surely it's necessary for the supply of a desirable commodity to be reducing, as is argued is happening in the case of oil?

I should have covered that point. It is partly correct to say that - because the other side of the coin is demand. All that is needed is that demand is increasing faster than supply or, alternatively, supply is falling faster than demand......or that the market considers such conditions to be realistic/probable outcomes.

This remains the case with oil, despite the recent fall in demand (especially over a medium term 5 year timeframe) and is also probably the case with agricultural commodities, given the continued growth in mouths to be fed.

...necessary to watch out for demand for any commodity substituting into another if prices diverge

This is certainly true - but that is why I focused on things that modern human life deems to be "essential". I can't see a substitute for food in aggregate, even if there may be (indeed will certainly have to be!) alternative energy sources available in the longer term to plug the gap between supply and demand for oil and gas.

ee

"Buy land, they don't make it any more."

The assumption you need to make (and seem to be making) if you are concerned about stores of wealth is that the current environment is inflationary.

As Kimboy points out an increase in money supply in the short to medium term is unlikely given the problems in the fractional reserve system. The Gubmints are pumping it in but it isn't getting pushed through.

What's happening right now is deflationary IMHO. In a deflationary environment cash in the bank earning nothing is a great investment. For the near term I don't think stores of wealth are a problem. As the various fiscal stimuli make their way into the economy we may see inflation and at that point it may be worth thinking about stores of wealth. However Japan is the counter argument, They've been doing this for years and there is no sign of inflation there.

B4T

Surely it's necessary for the supply of a desirable commodity to be reducing

Honey

Fascinating thread. Here's my ill-thought out and disjointed musings -

I've been thinking along the same lines after the realisation slowly dawned that my Sterling assets had been devalued by ~25%. However I've been in a fug of indecision.

Long term studies have shown that currencies follow purchasing power parity and reflect relative inflation. I occasionally browse the Economists Big Mac Index because it just about matches my level of understanding of the subject ;-)

http://www.economist.com/markets/bigmac/index.cfm

It showed up Sterlings ~30% overvaluation before devaluation.

Soros has said the risk of shorting Sterling below $1.40 rise appreciably.

There's also the issue raised by long term currency traders the ECU Group that Sterling may merely be the first coach of the train to fall off the bridge, with other countries following. So jumping ship to another currency may get you involved in another devaluation. In this age of globalisation that sounds plausible.

Judged on their market reports, the ECU Group seem a sensible bunch, trading only occasionally in an effort to capture the fundamental moves. Unfortunately they're only interested in people or institutions with at least $10m to invest.

Wikipedia has a list of countries current account balances -

http://en.wikipedia.org/wiki/List_of_countries_by_current_ac...

The currency issue was bought home to me when I recently performed a currency analysis of my portfolio -

43% Gilt TR17
15% GBP cash
15% USD earning equities RBS-R AEX EO. FRR GKP MOG SIA
21% FTSE100 equities (average FTSE100 earnings 40% USD, 30% GBP, 30% other) AAL AV. BP. NG. RBS ULVR VOD UU.

I'm invested in the two currencies with the worst trade balances in the world.

Lacking the knowledge to hedge my portfolio and since there don't seem to be any currency funds available, I've been looking at developed world and emerging market bond funds, which, presumably make judgements on currencies as part of their strategies.

Since their currency troubles and World Bank intervention in '98, I've heard it said that the emerging markets have much more balanced economies than most of the developed world. Brazil is an oft mentioned case in point. Unfortunately EM bonds look overvalued according to the insightful commentary from the chaps on M&Gs Bond Vigilantes blog -

http://www.bondvigilantes.co.uk/blog/2008/02/14/120299694000...

As a contrarian I was simply unable to bring myself to purchase gold after it's exponential rise, backed by the fact that it has a low 'usefulness' value and appears to be influenced too much by emotion and psychology. I've read seemingly intelligent arguments to support both a rise and a fall in prices.

ETF Securities Physical Gold appears to be a sensible choice for those interested. It holds physical gold rather than derivatives, which caused the other ETFs to suspend when AIG hit trouble last year.

Uranium may be worth a look given that currently renewables will only be able to supply a maximum of ~15% of current energy needs. Only two thirds of the current demand is being met from mining (the rest from store) and that demand is predicted to increase 40% in the next 20 years. I believe that BHP Billiton is the largest player. [3]

I feel that oil should be a far more useful store of wealth and dipped my toe in the water last July buying some small cap. oil shares with 11% of my portfolio. Although the oil price was approaching it's height I felt the shares were compelling value based upon valuations at half the oil spot price and the fact that they had fallen significantly from their peak. I've lost 59% to date. I was intending to double up, but instead spent the money on some seemingly cheap FTSE100 big caps. on a bad day last October (now down 15%).

For some years some large investors such as Slater and Soros have been buying up large tracts of arable land in South America. The game appears to be to avoid prime land, instead purchasing sub prime land which can be improved. Agrifirma http://www.agrifirma.com/ is Slater's main vehicle, Adecoagro is Soros's. [2]

I haven't found any retail investments which enable you to follow this policy. There is a general agriculture fund the CF Eclectica Agriculture Fund -
http://www.eclectica-am.com/fundsummary.aspx?target=fundlist...

At 19th March 2009 the top ten holdings were -

Rank Security Strategy Market Value %
1 MONSANTO CO (UN*) Long +9.0
2 SYNGENTA AG (VX*) Long +6.5
3 POTASH CORP OF SASKATCHEWAN (CT*) Long +6.3
4 ARCHER-DANIELS-MIDLAND CO (UN*) Long +6.0
5 BUNGE LIMITED (UN*) Long +3.6
6 AGRIUM INC (CT*) Long +3.3
7 MOSAIC CO/THE (UN*) Long +3.2
8 TERRA NITROGEN COMPANY LP (UN*) Long +3.2
9 WILMAR INTERNATIONAL LTD (SP*) Long +3.2
10 YARA INTERNATIONAL ASA (NO*) Long +2.9

Currency summary -

USD 44.5%
GBP 13.9%
CAD 11.1%
EUR 4.6%

and of course, the commodity ETFs such as ETFS DJ-AIG Agriculture Sub-Index tracker http://www.etfsecurities.com/csl/etfs_agriculture.asp

If I could find some mechanism of preserving the global spending power of my portfolio, perhaps with some kind of matching long-short, that would be the ideal. My fundamental strategy remains since I sold up in October 2007 - preservation being more important than risking capital for gain. Getting the fundamental long term move right rather than being concerned with catching any equity bounce. Waiting to commit the majority of my capital until the most obvious signal of the loose credit environment, housing, stabilises. I think it was the Rothschild philosophy to get the large fundamental moves right by waiting for the market to inform you of turning points - buy 20% up from the low and sell 20% down from the high ? Seems sensible to me.

Daytona


[1] Jim Rogers commentaries
10th March 2009 ABC transcript -
http://www.abc.net.au/worldtoday/content/2008/s2511938.htm

Investors Chronicle interviews, Nov 2008 -
http://www.investorschronicle.co.uk/Columnists/GuestColumnis...
http://www.investorschronicle.co.uk/Columnists/GuestColumnis...
http://www.investorschronicle.co.uk/Columnists/GuestColumnis...

[2] Slater commentaries
http://www.minesite.com/fileadmin/content/pdfs/December_Brok...

[3] http://www.mineweb.net/mineweb/view/mineweb/en/page72103?oid...

Gonna stick my neck out here. I've been thinking about this all day and it just isn't right.

Oil is definatly not a store of wealth over anything but the short term. Some oil companies may well be good investments over the medium to long term but oil itself is not a store of wealth.

For whatever reason and whether we like it or not, gold is the worlds chosen vehicle for wealth storage in times of trouble. It may not make any sense and it may be frankly bonkers at times but that's the way it is. The principle reason gold is a good store of wealth is because there isn't very much of it and it isn't going anywhere. All the gold ever mined is still on the planet somewhere and all of it could fit into just two olympic swimming pools. As a store of wealth it has the basic fundamentals pretty much sorted.

Oil on the other hand has a whole host of things that make it unsuitable. First of all, you pump it out of the ground and burn it. That doesn't say wealth preservation to me. Secondly it has no intrinsic value that won't at some point become substituded. People will never buy oil just because they like the look of it (some of you oddballs might :-) ). Most importantly all over the world, individuals, schools, universities, companies and governments are busy trying to find a way to make oil worthless. With such a huge movement to end the worlds dependance on oil it seems foolish to consider buying it as a store of wealth. One day we will wake up and find the Bussard reactor worked or the latest Lithium iron phosphate battery that MIT students have been working on is viable. At that point all the oil in the ground suddenly becomes a lot less valuable.

Oil companies are valued on reserves in the ground as these represent future production. Any of those reserves that represent production in more than ten years time need to be valued at next to nothing IMHO. The idea that the end of oil will play out in some crazy Mad Max type environment with the last few barrels of oil changing hands for millions is not the way these things happen. As Shiek wotsisname said "the stone age didn't end because we ran out of stones".

The recent falls in the POO show how sensitive it is to the law of marginal supply. A couple of decent alternative energy breakthroughs and oil will be at $20 or less untill we stop using it. Not exactly a mainstream opinion on the Fool but it's mine and I like it :-)

That doesn't mean I think oilcos are a bad place to invest but it's on a case by case basis and certainly not as a "store of wealth" investment.

B4T

I think you can add fertiliser to the argument but otherwise I agree. I have a farm that is organic and we grow most of what we need and barter the rest, as you rightly say Diesel and Fertiliser are the main expenses more by the way than electricity lately. Incidently I have hedged Electricity by buying their shares such that my Bill is equivalent to the Dividend that they have to pay me !.

cheers CzechDaveC

Hello B4T,

For whatever reason and whether we like it or not, gold is the worlds chosen vehicle for wealth storage in times of trouble. It may not make any sense and it may be frankly bonkers at times but that's the way it is. The principle reason gold is a good store of wealth is because there isn't very much of it and it isn't going anywhere. All the gold ever mined is still on the planet somewhere and all of it could fit into just two olympic swimming pools. As a store of wealth it has the basic fundamentals pretty much sorted.

There isn't a vast amount of it - but then, despite the fact that it has been viewed as a store of wealth for a couple of millenia or so, there isn't anything instrinsic that supports that belief. One might argue that gold (and diamonds etc etc) are a sort of Emperors Clothes Ponzi scheme......everyone admires them from an aesthetic standpoint - and indeed it is de rigeur to do so - but they don't actually have a value that is related to their actual usefulness (industrial diamonds are useful but much cheaper than gem diamonds etc)...and so if they are to rise in price then more and more people must be sucked into believing that they are really a useful store of value.

Oil is definatly not a store of wealth over anything but the short term. Some oil companies may well be good investments over the medium to long term but oil itself is not a store of wealth....
Oil on the other hand has a whole host of things that make it unsuitable. First of all, you pump it out of the ground and burn it. That doesn't say wealth preservation to me.

Plainly I was mostly considering in-the-ground stocks.

Secondly it has no intrinsic value that won't at some point become substituded. People will never buy oil just because they like the look of it (some of you oddballs might :-) ). Most importantly all over the world, individuals, schools, universities, companies and governments are busy trying to find a way to make oil worthless.

Thats as maybe - but they haven't succeeeded and indeed there is no economic solution in sight that "works" with oil at $50. At $100 or so there would certainly be substitutes in some areas over time (if such prices were sustained), but it is reasonably likely that substitution effects would do no more than compensate for depletion in oil production over anything but the very long term (say 40 years+).

With such a huge movement to end the worlds dependance on oil it seems foolish to consider buying it as a store of wealth. One day we will wake up and find the Bussard reactor worked or the latest Lithium iron phosphate battery that MIT students have been working on is viable. At that point all the oil in the ground suddenly becomes a lot less valuable.

I'm not considering it as a perpetual store of value/wealth......the next decade would be ample. Ever since I invested in the oil sector 10 years ago, there have been mutterings about this or that technological advance. None of them match the convenience of oil - and most are unviable at any price.

Oil companies are valued on reserves in the ground as these represent future production. Any of those reserves that represent production in more than ten years time need to be valued at next to nothing IMHO.

Well you're entitled to that view but it isn't one shared by the futures market - nor one shared by the buyers of strategic oil assets. It is the long tail of production that is important, especially since the Saudi Ghawar field (which produces c 5mn barrel a day) will eventually be seen to decline.

As Shiek wotsisname said "the stone age didn't end because we ran out of stones".

Sheik Yamani? Perfectly true, of course, but supply and demand is a delicate balance - and geologically it is absolutely inevitable that oil production will eventually start to decline (UNLESS very substantial new fields are found and developed).....so when you say:

The recent falls in the POO show how sensitive it is to the law of marginal supply.
....I'd point out that this effect cuts both ways. 1mn barrels a day is a lot of oil to be producing in excess of demand - but it is also a lot of oil if there is a supply shortfall of the same amount.

That doesn't mean I think oilcos are a bad place to invest but it's on a case by case basis and certainly not as a "store of wealth" investment.

I suspect we'll have to differ on at least part of that ;-)

Like it or not, much of the world's economic system depends on oil (and gas) - and will do so even if there was a revolutionary news technology invented tomorrow, because it would take at least a decade or two to develop and substitute. And, if that were to happen in the sort of major revolutionary way you envisage, people would stop looking for new oil sources ......and production would be allowed to decline along with demand - with much less impact on price than you might suppose.

rgds

ee

Hi Daytona2 et al,
Thanks for post. I have been trying to get my head around the abs (anything but sterling) problem for sometime and other than commodities i.e. dollar denominated assets/dividends, gold - overseas reits have been looking now at currencies linked to resources as also posted here...I still have some gold and it has done me very well but have been taking profits as it could go down more than it will probably go up relative to where I am with it now - plus insurance/storage costs, lack of income etc..So where to put it.

Other than a new roof some of it has gone into a few oil stocks and bhp but would now like to get more diversified and also have some exposure to soft commodities.

Mr Hargreaves (Hargreaves Landsdown fundmanagers)in Sunday Times talking about the same problem and his more attractive recommendations for me were:
German bunds - Euro could fall apart
Norwegian Government bonds (oil backed currency and sovereign wealth fund)
US Treasure bonds (not sure about this especially now but it Is a reserve currency)
Canada - resources again and no bank crisis
Further down the line Singapore reit (not because Jim Rogers lives here)
and a basket of better run Asian currencies

Have always avoided funds but am now tempted also to etc/f's and have been attracted by (I think relatively new)
the new etfsecurities Agricultural Business fund which has a lot of what Hugh Hendry's Eclectica one you mention has, Monsanto, Syngenta etc. but not the high fees (and huge entry limit - think it's £50k).

http://www.etfsecurities.com/fund/etfs_fund_agri_business_en...

Sorry it doesn't seem to link - but it is under etf's not etc's. London code is supposed to be AGRI but this doesn't work and I have emailed etfs today to see if it has a different code or whether only buyable thru U.S.
Would love to hear from other fools if they have any comments ref AGRI and if anyone knows if it is quoted on the LSE.
Great discussion
f

I want exposure to oil and natural gas, because energy is fundamental.

I own my house, so energy is the main basic external need I have, so I want to be invested in it.

You can make the same argument about food, but in fact food is really made for oil and natural gas ( the other bits, such as water and land being in fairly abundant supply ).

Oil pretty much drives the whole economy.

This is not a get-rich-quick concept, it's about making sure my needs are catered for.

Very interesting post, Daytona.

Long term studies have shown that currencies follow purchasing power parity and reflect relative inflation....

http://www.economist.com/markets/bigmac/index.cfm

It showed up Sterlings ~30% overvaluation before devaluation.

Soros has said the risk of shorting Sterling below $1.40 rise appreciably.

There's also the issue raised by long term currency traders the ECU Group that Sterling may merely be the first coach of the train to fall off the bridge, with other countries following. So jumping ship to another currency may get you involved in another devaluation. In this age of globalisation that sounds plausible.

Looking at the Big Mac Index, http://www.economist.com/markets/indicators/displaystory.cfm..., which I haven't looked at for some time, I'm surprised by the number of currencies undervalued vs the USD on implied PPP.

Ones that stick out to me are:
Hong Kong -52%
Australia -38%
New Zealand -30%
Singapore -26%
Japan -9%
UK -7%
Canada -5%
Eurozone +24%

I happen to have the big mac index for April 2004 (need a subscription to view prior BMIs on the Economist site). Here's how the under/overvaluation was then:
Hong Kong -47%
Australia -22%
New Zealand -8%
Singapore -34%
Japan -20%
UK +16%
Canada -20%
Eurozone +13%

Looking at this, Australia's currency was always undervalued in Big Mac terms but it's got about 15% worse. The UK, Singapore, Japan and the Eurozone have all changed about 10%.

The NZD seems to be the one that has got hammered with a 22% difference.

In fact most currencies in SE Asia seem to have suffered significantly.

So given sterling isn't too far off what the Index says it should be and since GBP - NZD exchange rates are presumably cross-rates then are the NZD and perhaps the AUD the ones to buy? Citibank offer NZD and AUD accounts.

hi EE, I guess we will have to differ on the outlook for oil. That's what makes a market.

I will just comment on the last point you make.

And, if that were to happen in the sort of major revolutionary way you envisage, people would stop looking for new oil sources ......and production would be allowed to decline along with demand - with much less impact on price than you might suppose.

This is why I see it differently. When (not if) the various technological breakthroughs occur (doesn't need to be revolutionary) and our dependance on oil starts to decline, the idea that nations whose wealth is derived from oil will happily run down their assets at a sensible pace as demand falls is not realistic. I suspect there will be an almighty pumpathon as producers get as much out as quickly as possible in order to not be the last dancer at the disco.

B4T

hi B4T

This is why I see it differently. When (not if) the various technological breakthroughs occur (doesn't need to be revolutionary) and our dependance on oil starts to decline, the idea that nations whose wealth is derived from oil will happily run down their assets at a sensible pace as demand falls is not realistic. I suspect there will be an almighty pumpathon as producers get as much out as quickly as possible in order to not be the last dancer at the disco.

Guess you're moving to here then.... http://users.nsula.edu/sinclaird/utopia.jpg

;-)

There's something in what we both say - I doubt either of us will be entirely right.

cheers

ee

Daytona2 added to your Favourite Fools list.

Thanks for an outstanding post. (119749). Can't believe I hadn't 'luvvied' you before!


KMcK

...the stone age didn't end because we ran out of stones...

I've always found that glib soundbite rather irritating. It seems to me that it completely misses the most important lesson we can draw from a study of history.

The "Stone Age" started about 2.5 million years ago. Stone age technology was not fixed but evolved over time with crude lumps of rock (early stone age) being chipped into shape (middle stone age) and then flaked into sophisticated tools (late stone age). That process of technical evolution and refinement took more than 2.4 million years.

Radical change arrived in the form of the first metal tools around 6-7000 years ago when copper based technology was developed. It took another 1000 years for bronze technology to emerge. It then took another 2000 years for iron based technology to arrive around 3000 years ago.

In every case the arrival of new technology did not lead to an immediate replacement of the older technology. It took a long time for the new technology to achieve a high degree of penetration.

Now if I want apply the lessons of history to our use of oil, and I am considering the way in which a dominant technology gets over-taken by subsequent advances, I don't reach a conclusion that alternative energy is likely to replace oil
a) any time soon
b) overnight

Rather I conclude that development of new, more advanced, technologies can take an awful long time and even when advances are eventually made, they take a long time to roll out.

Now, who wants to invest in oil companies?

RG

Rather I conclude that development of new, more advanced, technologies can take an awful long time and even when advances are eventually made, they take a long time to roll out

I concur with RG's view.

The whole transport industry is wedded to oil, and its ability to cope with radical change seems to me to be exemplified by the response to such developments as the Torortrak transmission system.

I like anecdotal evidence in my investing, because it is often the most reliable for long term plays. One example was the growth of Nokia, something that didn't need anyone to rush to the market - the evidence of their success in building mobile network systems was there for all to see during the 80s and 90s. And the share price rewarded richly over many years.

In the same way Soco has been a get-rich-slowly play.

The best personal example I can cite is for videophones. When I was a child, which is back in the 1950s (yikes!!) my father took me to a technology exhibition at Earls Court. There, the GPO, (that's the precursor to BT!), were demonstrating a video phone, using analogue transmission technology.

It took four or five decades for the reality to arrive, and only after the world wide web was established.


As far as sterling and other currencies are concerned, I missed a serious opportunity to buy holiday money for US and Canadian $$ and €€, when all seemed good bargains, in autumn 2007. Annoyingly I even advised a friend who was buying property in France to convert his pounds to euros immediately, but then failed to follow my own advice! Rats!

Now, however, I'm staying in sterling. I can't believe that Spain and France are in such great shape, and the dollar looks over-bought to me, bearing in mind the state of the housing crisis there.

On a longer term basis, I make the argument as evidenced above, that selecting good equities**, and looking for long term technology trends through growing but well established companies, perhaps regardless of currency, can be the best way to preserve capital. Having written that I'm still heavily in cash right now, but that's because I fortunately foresaw the baby being thrown out with the bath-water. Nevertheless, if you aren't trying to time the market, as I am, then a share like Soco bought from below £1 has beaten the hell out of inflation, currency deterioration and all the rest.


KMcK


** Was LLoyds Bank a 'good' equity? And what about high growth small companies like Indigo Vision? On the banks, I would argue that they are always cyclical, and that they are in some ways too well established. Banking's been around for a long time, whereas mobile phones haven't. On small caps, the risk must always be greater, and maybe the reward. But look at the big holders of IND, compared say with Apple computers. Both have suffered but the smaller company shareholder has had the worst of it.
The growth of Direct Insurance was interesting. In the end it was bought by a bank, but it was an innovation in the banking/insurance sector, and its founders reaped their just rewards.
That was true innovation based on the arrival of the internet. What wasn't a true innovation was Northern Rock's 'new business model', based on 'no more boom and bust' and ever increasing property valuations.
I conclude that true technological innovation will always provide the best investment opportunities. If you can couple it with good cash flow and routes to market (which may imply the need for a large market cap.), then you've got a perfect share growth story. Even investment in the Oil and Gas sector (my main positions) reflects the use of increasingly sophisticated technology.

Come on RG you can do better than that. Using the early evolution of mankind to determine how a modern shift of technology will happen is about as usefull as a chocolate teapot.

A far better example would be to look at things that have happened in the last fifty years. Technology moves fast these days. Look at diesel motor cars taking over in just 15 years, try VHS to DVD, eight track to record to tape to CD to MP3. The internet, A global revolution of unprecidented scale in just 20 years. When technology is right it happens quickly.

I haven't said it will happen overnight and I haven't said it will happen anytime soon although it could with all the work being done.

The point I am making is that when the new technologies start to emerge they will dramatically effect the way oil companies are valued. Yes the technologies will take time and yes progress will be slow but oil in the ground will be worth less and less as they emerge.

If someone develops a solar home heating system that is cheap, efficient and easy to install it won't change the market overnight. But home heating oil for delivery in ten years will be worth a lot less than it was before it happened.

I'm not arguing against investing in oilcos, simply pointing out that for the purposes of "store of value", oil is not a good idea. The whole world is lined up to bowl against you and at some point they are going to pitch one in the right spot.

Now, who wants to invest in oil companies?

That's not what this thread was about.

B4T

The point I am making is that when the new technologies start to emerge they will dramatically effect the way oil companies are valued.

Technology is not a source of energy. More often than not complex new technology is more energy hungry than what it replaced. This is a concept that will have more than a few technologists and economists scratching their heads and wondering what's happening during the coming energy downturn.

lfc

There isn't a vast amount of it - but then, despite the fact that it has been viewed as a store of wealth for a couple of millenia or so, there isn't anything instrinsic that supports that belief

Imagine a complete loss of belief in the ability of govmnts and CB's to manage a monetary system based on trust. At the moment I don't find that too much of a stretch but that could just be me.

In such a scenario do you go back to barter or use something else as money? If something else then what should it be? Go back to basics, to what qualities would be required for money (also what it costs, in terms of human labour and investment, to produce that money), and see if you come up with the same answer that civilizations did after tinkering around with seashells, cows and salt ;-)

lfc

beans4tea

You castigate me for ...Using the early evolution of mankind to determine how a modern shift of technology will happen...

Excuse me old chap, it wasn't me who was doing that. It was you.

You compared the end of the oil age with the end of the stone age. ...The idea that the end of oil will play out in some crazy Mad Max type environment with the last few barrels of oil changing hands for millions is not the way these things happen. As Shiek wotsisname said "the stone age didn't end because we ran out of stones"....

I pointed out the weakness in your analogy/argument.

It seems rather odd for you to accuse me of doing exactly what you did yourself, particularly when I've just pointed out that you were wrong to do so....

RG

Daytona2’s post pointed to a number of issues but the key sentence that struck a chord was “I’m invested in the two currencies with the worst trade balances in the world”

It seems to me that one of the attractions of oil and oil co’s as a store of value rests largely on the fact that OPECs focus on ‘value’ seems fairly aligned with non-dollar based oily investors generally, albeit over different time frames and some with inevitable political motives. OPEC have been discussing the issue of re-pricing crude on a more broadly based basket for a number of years. China already pays Iran in Euros and both Venezuela and Russia are participants in the "Euros-for-oil" party.

Alphaville ran a piece yesterday that was quite wide ranging and relevant if you subscribe to the headline – “Oil, the great inflation hedge”

Extracts:
“So could it be that dollar weakness — or rather the expectation of further dollar weakness – is driving this renewed uplift in oil and other commodity prices more so than anything else?”

Also – “Of course, the key point is: if there is nothing out there that can be reasonably be construed as bullish, inflation hedging must be the most logical driving force for higher prices.”
http://ftalphaville.ft.com/blog/2009/03/23/53869/oil-the-gre......


Some other reports that may be pertinent, if a little dated:

“OPEC to discuss creation of currency basket to price crude”
http://www.kuwaittimes.net/read_news.php?newsid=NDE4NzMzMjM1......

A “U.N. Panel says World Should Ditch Dollar” …..hmm!
http://informationclearinghouse.info/article22275.htm

“Eight ways to profit if OPEC dumps the dollar”
http://www.moneymorning.com/2008/08/11/opec-dollar/

B4T

and another thing - or a few more things....

You are wrong to say that diesel cars have taken over in just 15 years. About 25% of cars being sold in the UK are diesel. the rest are still petrol.

Even if you had been right, it would not have supported your argument. the main driver for choice of fuel is economic not technical. The economic argument is largely based on fuel taxation. in technological terms The comparative merits of petrol vs diesel are far from overwhelming for either side. That is why we have the two rival technologies co-existing. One has not superseded the other. That rather lines up behind my view that any new alternative would not replace oil in the short term.


...VHS to DVD, 8 track to MP3... There simply is no comparison between on the one hand the use of oil in our economies, our industries, our transport and every single aspect of our daily lives and the vast industries which support that in the form of oil exploration, development, production, refining, distribution, marketing....

...and on the other hand a trivial change of format for data storage. Storage media have been proliferating/evolving for 100 years or more, starting with punched cards for jacquard looms and wax cylinders for early audio. When I started computer programming in the late 60's the standard media was paper tape, then punched cards, then magnetic tape, then fixed magnetic disks, then floppies and so on. Each of these new technologies were relatively trivial innovations which were easily accommodated with data being migrated from old format to new format without any great difficulty. There was little or no strategic impact from these changes. They made life a little more convenient, but they changed nothing substantial about the underlying technological platforms.

In total contrast, switching to a radically different energy form for transport, such as hydrogen or rechargeable batteries or algal biofuel would require a gigantic investment across the entire world. It's not just about tankers delivering hydrogen to your local shell garage instead of petrol and you tootling along in the same old jalopy. Producing hydrogen or whatever is a non-trivial process. Storing it ditto. Transporting it ditto. Developing new engines ditto. replacing the world's fleet of cars/trucks ditto.

I have no illusions that doing this is ever likely to be quick or easy (or imminent). On the contrary it is going to be difficult, painful, slow and expensive. Unlike the introduction of MP3 players or 8 track stereo.

As the prophet said let he who is without sin cast the first stone-age-running-out-of-stones analogy

Imagine a complete loss of belief in the ability of govmnts and CB's to manage a monetary system based on trust. At the moment I don't find that too much of a stretch but that could just be me.

In such a scenario do you go back to barter or use something else as money? If something else then what should it be? Go back to basics, to what qualities would be required for money (also what it costs, in terms of human labour and investment, to produce that money), and see if you come up with the same answer that civilizations did after tinkering around with seashells, cows and salt ;-)

I imagine you would like me to say "gold"? However, in the greater part of the last 2 thousand years or so, it was widely accepted that gold was "the gold standard" way of paying for things....and people used to carry physical gold. These days nobody carries physical gold (certainly not in the sort of modest-sized quantities that would be needed for actual transactions!). Therefore gold exposures are just paper/electronic entries in accounts......

....rather better, I'd suggest, to be transacting in commodities that can actually be of some use in terms of eating, drinking, heating and transport etc.

There is no substitute, from a practical standpoint, to a modern currency for settling transactions....but what is needed is to have exposures to assets that have a relatively stable worth in terms of daily supply and demand in the economy - hence assets based around agricultural commodities or energy. Gold may well be considered attractive by many - but, when the flow of "believers" dries up, there is the risk that the conversion rate into actual currency will start to dramatically undershoot expectations.

ee
[last comment from me on this thread for now, in the absence of fresh suggestions]

I'm going to bow out here.

Obviously my talent with the written media is not sufficient that I am able to make what appears to me to be a fairly straight forward point without being misunderstood.

B4T