AFTER THE US ELECTIONS: STOCKS, GOLD AND THE MONTECARLO METHOD
by Gianluca Errico NEW YORK CITY. Surprising events — like Trump’s win — has lead to some pretty wild moves. Of course, the initial reaction was a bit extreme, with gold up as a hedge against fear of global instability, and bargain-hunting buyers, the big money, stepping in to make a fortune on futures, literally overnight. Yep, that’s the same big money that has been saying for months that a Trump win would be bad for stocks. They fanned the flames, and when Trump did actually win, they swooped in, bought the panic sell-off, and laughed all the way to the bank. It may not be the lesson most people want, but the rich always get richer. About gold, the fact of the matter is if you were to ask any of the world’s richest people how they made their fortunes, not a single one will tell you they did it with gold. Most of them probably own gold in some form as a hedge, but none of them have leveraged it to reach such enormous levels of wealth. Anyway, before discussing the outlook for gold, some context is important. First above all let’s speak of “The Uniqueness of Gold”: while gold tends to be highly correlated with silver, gold is really a metal like none other. It has a long history of being used as worthy money, a characteristic that only silver shares. But gold is much different than silver in several ways. Gold is used for industrial purposes, but to a lesser extent than silver. Gold is far less volatile than silver, which makes it better to own during a roller coaster economy because the bumps are a bit smoother. Silver is typically better to own during bull markets, but you don’t want to be stuck with silver in a bear market. Perhaps the biggest difference between the two metals is that gold is owned by central banks. We don’t hear about central banks holding silver reserves. Second, before getting to predictions, let’s take a brief look at the history of gold prices. The late 1970s was good to gold investors, especially if they sold before 1980. It is easy to forget that owning some forms of physical gold was illegal in the U.S. from 1933 to 1974. It became legal again after the dollar was broken from its link to gold. Nixon officially ended the dollar as part of the international gold standard in 1971. It is no coincidence that we saw the worst price inflation in modern U.S. history after the 1971 break from gold. The fear and inflation of the 1970s led to a bubble in the gold market. Gold briefly peaked above $800 per ounce in 1980. From 1981 to 2000, gold was an overall terrible investment, at least for people buying and holding. From 2000 until the present, gold has been an excellent investment if you bought it and held it in 2000, despite the roller coaster ride. From 2000 to 2012, gold ended the calendar year up from the year before every time. It is almost unprecedented for anything to go up for 12 straight years, even in nominal terms. Some might mark the beginning as September 11, 2001.
Some mark that the beginning was when Gordon Brown (future GB Prime Minister) sold about half of the United Kingdom’s gold between 1999 and 2002. Anyone who bought gold below $300 around this time has done very well, even with the bumpy ups and downs. In fact, in terms of owning gold there are two purposes. It is always good to have some gold holdings in a portfolio and who has 20% of his portfolio in gold-related investments then he really doesn’t need to change a thing. Especially a European who owns gold, he has done okay in terms of the price of gold in euros. The second purpose for owning gold is like any other investment. It is to make a profit. That is where the predictions come in. It is impossible to make predictions of these kinds with any certainty or accuracy in regards to timing. While we have seen bullish times for gold, we are likely to see more bullish times ahead. It is not so much a question of “if”, but questions of “when” and “how much.” If you’re an investor looking to buy gold in 2017, you must know exactly why we’ve become so bullish on gold, how high we think it will go in 2017, and why we should be rushing to get our own gold bullion today. Anyway, we have seen the winds change here over the last decade. As by now it is pretty difficult to make predictions, better be cautious and have not more than 20% of the portfolio. Well, to refresh the soul, let’s shift gears to a kind of curiosity, shifting about the probabilities ‘sector. If you have never heard of the “Monte Carlo Method”, well, the Monte Carlo simulation has been named in honour of the famous Monaco district, Monte Carlo, for its casino, where games of chance, especially roulette, involve repetitive events with known probabilities.
Of course, the method is so complex that it is impossible that the players are able to make use of it in front of the croupiers…Indeed, although there were a number of isolated and undeveloped applications of Monte Carlo simulation principles at earlier dates, modern application of Monte Carlo methods date from the 1940s, during the works on the atomic bomb, when the mathematician Stanislaw Ulam is credited with recognizing how computers could make Monte Carlo simulation of complex systems feasible. Today, the business world can rely on software companies, dedicated to delivering software and services to help people understand complex systems and make better decisions. These companies have adopted the Monte Carlo simulation software to develop programs, i.e. like the Environmental Systems Modeling. This program is especially interesting for the Principality of Monaco, with regard to Ecological and natural resource management, water resources, hazardous waste management, and environmental restoration. Other programs regard Engineered Systems Modeling (Reliability and risk analyses, throughput analysis, and decision support for conceptual design and/or operations); and Business Modeling (Strategic planning, risk management, portfolio analysis, cost modeling, project planning and financial engineering).