Wednesday, January 2, 2008

Gold trades at $850 per Ounce. And: How We Got There the First Time

For a couple decades (since watching the XMI action on Oct. 20, 1987) I mentally run market movements through a thought experiment.*
(Gedankenexperiment, coined by Hans Christian Ørsted)

I call the thought experiment The Grassy Knoll Theory of Investing.
This name tends to insure that I am left alone at parties.
The GKTI has as its postulate: "There is a THEY" and its corollary "They know".

Except sometimes they don't.
(or do they?)

I use it to explain the inexplicable.
First I adjust my tin-foil hat.
Then I pick up the FT or the WSJ.
And think.

For example, why on earth was the Bank of England selling the British people's gold reserves at announced (!) auctions between July 1999 and March 2002 at a weighted average price of $274.92? Here's HM Treasury's explanation.
(page 27 of a 36 page PDF)

In most cases the GKTI is about as useful as Riemannian geometry.
You don't need Riemann to walk around the block, but knowledge of Great Circles sure helps to get you to your destination before the jet fuel runs out.

Which perambulation reminds me: The pedestrian conspiracy theories have the Queen of England mixing it up with the Rothschilds in a New World Order/Bilderberger/CFR/Trilateral shindig to rule the world.

Selling the nation's gold at the bottom of the market (the lowest p.m. price fix of the last 27+ years was $252.80, if memory serves) and just prior to a tripling of the price was either extraordinarily stupid or treason. Either way, someone should have been executed.
There have been no reports of shots at the Tower of London, though.

Here's the story that triggered this ramble: Gold, 1980.

*Origins and use of the term "thought experiment" from Wikipedia:

Witt-Hansen established that Hans Christian Ørsted was the first to use the Latin-German mixed term Gedankenexperiment (lit. experiment conducted in the thoughts) circa 1812. Ørsted was also the first to use its entirely German equivalent, Gedankenversuch, in 1820.

Much later, Ernst Mach used the term Gedankenexperiment to exclusively denote the imaginary conduct of a real experiment that would be subsequently performed as a real physical experiment by his students — thus the contrast between physical and mental experimentation — with Mach asking his students to provide him with explanations whenever it happened that the results from their subsequent, real, physical experiment had differed from those of their prior, imaginary experiment.

The English term thought experiment was coined (as a calque) from Mach’s Gedankenexperiment, and it first appeared in the 1897 English translation of one of Mach’s papers. Prior to its emergence, the activity of posing hypothetical questions that employed subjunctive reasoning had existed for a very long time (for both scientists and philosophers). However, people had no way of categorizing it or speaking about it. This helps to explain the extremely wide and diverse range of the application of the term "thought experiment" once it had been introduced into English.