Monday, May 3, 2010

Are You Ready to Gamble?

First off, I want to make it clear that I am not heckling the following article. I think it is pretty good.

Are You Ready To Trade Futures?

Many people begin trading without fully understanding the fundamentals of the contract. Futures trading is a zero-sum game. For each trade there is a winner and a loser.

That alone should tell you that you better know a lot more than the next guy if you are interested in futures trading. I am not interested. I assume I know no more than the next guy. The last thing I want to do is go head to head with a computer algorithm running in some large investment bank that's being tweaked by PhD's in mathematics. I might win, but I would tend to bet against me.

When you trade futures for their own sake, it is like playing in a casino. The floor traders, futures exchanges and a few experienced traders with deep pockets win in the long term. Most other traders end up losing their capital and leave poorer and disappointed.

That's exactly what I don't want to do.

For example, the contract size for gold futures is 100 ounces. That means when you are buying one contract of gold, you are really controlling 100 ounces of gold. If the price of gold moves $1 higher an ounce, that will affect the position by $100 ($1 x 100 ounces).

That's a fascinating example on so many levels. I've been trying since 2004 to avoid leverage in any way that I can.

For those who think they have avoided leverage by buying physical gold, there might be a slight flaw in the logic.

I personally avoided leverage with real estate. I owed nothing on my home when the real estate bubble popped. That did not mean that my home's price was immune when the leverage of others was unwound though.

If you are buying gold as an inflation hedge (even at these prices), then you might want to consider buying extra basic necessities first (toilet paper and canned goods come to mind), then buy gold with the remaining money. What's the harm?

If you are buying gold because you think it will go up in price much faster than inflation and therefore see it as a money making opportunity, then I would consider that to be a form of gambling. You have to ask yourself how many others might be doing that exact same thing.

Gold is too expensive for me these days. I was fortunate to have picked some of the lowest lying fruit from that tree in 2004. As of 2006, I no longer own gold. I clearly could have done better had I continued to hold it, but I cannot complain about the ride. In any event, right or wrong, I'm done.

I should also mention that I thought gold was overpriced when it hit $1000 and stated so on this blog. I thought toilet paper would outperform it. I've been wrong on that so far but I do continue to believe it. Time will tell.


EconomicDisconnect said...

I still like the metals gold and silver here. With bailout bonanza starting up first in Greece and expanding from there the money presses are running full time. When it becomes clear printing will not help anything but buy a little time, I will really like the gold/silver angle then. If issuing money by the trillions to offset mega deflation keeps a collapse from occurring, is that not a form of inflation?

I am biased anyways; long gold, silver, toilet paper, SPAM, aluminum foil, and charcoal for my new grill, HA!

I put up a bunch of pics from my trip if you want to check them out.

Stagflationary Mark said...


We're clearly in different camps here but that does not mean that we both can't compromise. Hahaha!

In all honesty, I only care what toilet paper, SPAM, aluminum foil, and charcoal prices do.

Even if you are ultimately wrong about the reasons gold might go up, you still might be right to own it even at these prices. There's really no telling what people will pay for something they want. Clearly that very thinking could make me ultimately wrong too of course.

I'll be sure to check out your deflationary pictures. I say deflationary because you are pushing down the prices of all vacation pictures by posting your pictures on the internet for free! :)

EconomicDisconnect said...

You are right! I am putting up a donation button soon.

I am wrong most of the time so I would not be surprised if I am on the metals angle. Just seems to me the wheels of confidence are coming off and Greece is but a warm up. 140 Billion for that tiny country? Seems like overkill, seems like trying too hard to keep CONfidence.

Stagflationary Mark said...


You are certainly not wrong most of the time!

There's been an "economic disconnect" since you started your blog. :)

One of us will ultimately be wrong on gold and silver though. It's not like I am putting my money where my mouth is. You don't see me shorting GLD or IEF.

I think there are lots of ways gold and silver could struggle. There are also lots of ways it could do better than I expect too though.

Here's an easy one. If top marginal tax rates go to 90% again someday AND inflation is a problem, then gold would definitely be an option for the very rich. At least the taxes on gold can be deferred until you sell it, unlike Treasuries you'd be taxed on each and every year.

That doesn't really apply to us more than likely. Our taxes might become painful, but I doubt they'd ever become that painful.

EconomicDisconnect said...

Well it is a little late in the evening for this debate but one of the major issues in Greece (sound familiar) is that the rich escape taxes all the time. If US tax rates approach that high there will be an underground economy and revolution.

GawainsGhost said...

Well, I'm late to this debate, but I've never really understood what the deal is with precious metals.

People like Mish say gold is money, because it acts like money. Oh, really? The real money is making money. Gold is a commodity. It's price may go up or may go down. So it depends on where you are in a transaction whether you make or lose money.

This is what I do not understand. People say buy gold because paper currency is worthless. Okay, say the price of gold is $400/oz. You buy it with paper currency. Then the prices rises to $800/oz. You've doubled your money! Only if you sell. But then what are you going to sell it for? Paper currency. I thought that was worthless.

Am I the only one that sees this conundrum?

I maintain that the only real investment is in real estate. But I'm not talking about housing here, I'm talking about land. The people I know who have made millions in real estate, and I know several, all did it the same way. By buying acreage on the outskirts of small towns, zoning it agricultural (lowest tax rate), and waiting for growth and development. When that happens, and the land is worth ten times what they paid for it, they sell.

This is a serious money business. Serious people with serious money invest in real estate seriously. That's what I've observed.

There is a reason why McDonald's is so successful. Because it targets corner lots in high traffic areas and puts franchises there. Location, location, location, as the old saying goes.

Most people do not get this, because they don't understand how money works. If it's not making money, then it's not money. It's merely wasted cash.

Assets generate income. Liabilities generate expenses. There is no asset without liability, but as long as the income generated exceeds the expenses incurred, money is generated.

This applies to all investments, be it precious metals or any other commodity or real estate, stocks, bonds, whatever. The smart money goes to where money is to be made. It's as simple as that.

Stagflationary Mark said...


We're pretty much completely on the same page here.

This is my main concern with precious metals. In order for me to want to invest in them then I must think they will go up faster than inflation overall. Over the long-term, that's a risky bet.

GLD vs. SLV vs. Aluminum Foil

As for real estate, location, location, location... and as you infer, a decent dose of timing doesn't hurt either.

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