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Gold Data Science – Precious Metals Supply and Demand

by Keith Weiner, via Acting Man:

Numeraire Extraordinaire

The price of gold went up $12 last week, and that of silver $0.50. That’s not bad for gold and silver owners, and not good for the vast majority who are all-in on the dollar (though they don’t think of it that way).

“All in”: A legendary scene from “High Stakes Poker”. This was a straddled hand, with three players pumping up the pot to $14,900 pre-flop (Sammy Farha was in there too, with the ace of hearts and the three of spades as his hole cards). Guy Laliberte (the owner of the Cirque du Soleil) was first to act after the above flop was dealt and checked his top two pair hand. Farha bet $13,000 with his pair of threes, upon which former tennis pro turned poker pro David Benyamine quickly raised his nut-flush draw to $43,000, so as to thin out the field (this is known as a “semi-bluff”). Laliberte responded (also not thinking very long about it) by raising his two pair to $168,000, prompting Farha to insta-muck. As Gabe Kaplan (the most entertaining poker commentator of all time) noted while Benyamine mulled things over: “It’s hard to just call”. It took Benyamine 57 seconds before muttering “I’m all in” and shove $600,000 into the middle – at the time equivalent to approximately 500 ounces of gold. Laliberte thereupon announced “I have to think about it” and called precisely 30 seconds later (yep, he’s a fast thinker).* And so a 1,000 gold ounces poker hand came into being. [PT]

Since we began publishing this Supply and Demand Report four and a half years ago, there have been several constants. One, we have focused on the supply and demand fundamentals, and the mechanics of the market.

Two, we have tried to show that short-term price moves are usually random. For example, we have documented many spike ups followed by let-downs whenever the Fed Chairman went on TV. And we all know that the long-term price trend is up (the mirror of the falling dollar).

However, neither random short-term bursts nor the long-term trend are actionable for trading. In between, there is the fundamental price, which tends to pull the market price either up or down, depending on market conditions.

Three, there is no gain when the gold price goes up. This is because gold is not going anywhere. If you bought 100oz of gold 20 years ago, then you still have 100oz of gold now (minus storage costs). Sure, it’s worth more in dollars but those dollars are worth proportionally less (and if you sell, the tax man will take a big chunk).

This may seem like mere semantics, but it’s an important principle. It’s the dollar which is volatile. And its gyrations can only get worse.

Therefore, wealth should be measured in gold ounces or grams. We recommend you periodically take the dollar value of your assets, and divide it by the current price of gold. If the dollar value goes up, but the gold value is down, which are you going to believe?

One is the numeraire extraordinaire that man has valued for thousands of years, and the other is the elastic dollar managed by a central bank whose stated policy is devaluation at two percent per annum (a target they cannot accurately hit).

You can make gains in gold if you bet successfully on the price moves in both directions. If you buy when the price is lower and sell when it’s higher, you will end up with more gold. The trick is to make sure you buy the gold again, otherwise you will have given up your gold and gotten only paper in exchange.

And you can make gains in silver, as silver goes up and down as measured in gold terms. Most people call this the gold-silver ratio.

Four, we have included charts generated from software developed by Keith. The data was the highest quality possible in that environment, and the best available.

Launching a new Software Platform

The first three will remain the same, but number four is changing. We are now launching a software platform that is the culmination of Keith’s development of the arbitrage theory of markets since 2010, his model of the gold market, and four generations of software (two by him, and two by our VP of Software, Rudy Mathieu).

We had to solve some Big Data problems, as we licensed 21 years of tick history data from Thomson Reuters. It is over 2 terabytes — big enough that you can’t handle it with a conventional database.

Read More @ Acting-Man.com

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