## Tuesday, September 11, 2012

2 sqrt(-abs(abs(x)-1)*abs(3-abs(x))/((abs(x)-1)*(3-abs(x))))(1+abs(abs(x)-3)/(abs(x)-3))sqrt(1-(x/7)^2)+(5+0.97(abs(x-.5)+abs(x+.5))-3(abs(x-.75)+abs(x+.75)))(1+abs(1-abs(x))/(1-abs(x))),-3sqrt(1-(x/7)^2)sqrt(abs(abs(x)-4)/(abs(x)-4)),abs(x/2)-0.0913722(x^2)-3+sqrt(1-(abs(abs(x)-2)-1)^2),(2.71052+(1.5-.5abs(x))-1.35526sqrt(4-(abs(x)-1)^2))sqrt(abs(abs(x)-1)/(abs(x)-1))+0.9

And that's how you map complex functions my friends!

## Monday, September 10, 2012

### Sam Harris on "Life Without Free Will"

He is on top form in this one.

Here is a passage that resonates particularly strongly with my own meta-views of morality:
If we cannot assign blame to the workings of the universe, how can evil people be held responsible for their actions? In the deepest sense, it seems, they can’t be. But in a practical sense, they must be. I see no contradiction in this. In fact, I think that keeping the deep causes of human behavior in view would only improve our practical response to evil. The feeling that people are deeply responsible for who they are does nothing but produce moral illusions and psychological suffering.
Indeed. For more on these ideas ideas, see this old post which quotes liberally from an outstanding article by Frans De Waal.

Back to Harris, there's some dark humour mixed in with the profundity:
[M]y wife and I recently took our three-year-old daughter on an airplane for the first time. She loves to fly! As it happens, her joy was made possible in part because we neglected to tell her that airplanes occasionally malfunction and fall out of the sky, killing everyone on board.

## Friday, September 7, 2012

### Are charts of oil priced in gold really that impressive?

Okay, one more gold-related post before I go home...

Following on from my last post, I've just clicked through to Chris's website and seen a post titled, Petrol Price in Gold Terms, in which he argues that the recent rise in South African petrol prices are "not owed to higher petrol prices, but a much weaker Rand, caused by the Reserve Bank". [I assume by petrol prices he obviously means oil prices.] He continues, "In hard currency terms, the price of petrol is unchanged since 2002."

Chris isn't alone in making this argument, which is a favourite among gold fans. That said, I've never found it as persuasive or profound as others seem to do. If you read my previous post then you may already have guessed why, but here is the key passage:
Looking at [gold] prices first, we can see that these have been undeniably impacted by the rising costs of producing an ounce of gold. This can be put down to a number of things, but chief on that list would be rising energy costs (since mines are incredibly energy consumptive)...
Energy is a fundamental input in mining activity. Gold mines, which are deeper and more complicated to run than virtually all other mining operations, are clearly no exception. In that light, why wouldn't we expect the price of gold to track what is happening in the oil market? It would be roughly analogous to me saying that cupcakes have stayed at a constant price... in terms of flour.

Now, if you're about to argue that what I've said would hold for coal but not oil... Fuggedaboutit. The movements of coal and oil movements track each other very closely. So much so that oil prices are widely used as a proxy for coal prices when forecasting and hedging in the electricity industry (since they are also more liquid). This is true even in countries where oil plays an insignificant role in power generation. And, of course, mining companies still consume vast quantities of oil during their day-to-day operations regardless of which energy source fuels their electricity needs.

Anyway, to illustrate here is the price of gold per per barrel of oil since 1971, followed by the same for several commodities. These series were picked more or less at random and are taken from the World Bank's Data Centre. (Click to enlarge.)

Not much to choose between them, if you ask me. The point here is that virtually all commodities exhibit some kind of long-term mean relationship with oil. Indeed the increasing linkage between energy and non-energy goods was a driving factor in the commodities boom of recent years. Now, of course, scale matters here and it might be misleading just to eyeball separate charts. As one last treat then, here is a single chart containing the above commodities plus a few extra, normalized in terms of their respective units. (I pick 2002 = 1 for no better reason than this is the year that Chris used in his initial post.) Again, I think the message is pretty clear.

THOUGHT FOR THE DAY: All this talk about gold, but when are we going to have a serious discussion about the Fertilizer Standard, or the Soy Bean Standard?

### Gold: Demand, supply and price

My old school friend and unashamed proponent of all things gold, Chris Becks, has left a few comments underneath this post in which I criticized misleading statements on the relationship between money supply and gold prices. After a bit of back and forth, I hope that we can at least all agree on the fact that it is simply wrong to claim "there is a 93 percent correlation between M2 and gold". However, Chris does raise a valid point about looking at both supply and demand factors. So I'm going to take the chance to do that and hopefully clarify my views on gold in the process.

First things first, here is a graph of the overall demand and production of gold from 2001 to 2011, which coincides with the gold bull run of the last decade. I've taken this data from the World Gold Council and have also included the gold price on the right-hand axis.

A few things immediately stand out. Demand and production are remarkably constant over the period despite the sustained price increase. Both  grow at an average rate of less than one percent per year over the full period. Demand exhibits a modest cyclical pattern, while production is almost flat. In fact, production even decreases slightly for a time -- even though, again, prices are rising![*] During these periods, additional demand must be met by recycled or "scrap" gold that is traded in second-hand markets. Of course, what we see here are simultaneous price-quantity combinations that clear the market, so we should avoid making direct comparisons with the classic demand and supply curves that one finds in text books. That said, it is undeniably striking that quantity is virtually unchanged over the same 10-year period where prices increase by over 450%. In technical jargon, this points to some extremely inelastic preferences.

Let's disaggregate things a bit to get see if we can get a better handle on what's really happening. The second graph that I'm going to show is gold demand broken up by major category: technology, investment and jewellery. I'll keep the gold price on the right-hand axis and will also include a line that captures the cost of mining gold.[**]

Things are starting to become much clearer. Looking at prices first, we can see that these have been undeniably impacted by the rising costs of producing an ounce of gold. This can be put down to a number of things, but chief on that list would be rising energy costs (since mines are incredibly energy consumptive) and the increased exploration and drilling costs that come with diminished supplies. Rising wage costs and depreciation costs are also factors.

We also see distinct trends emerging on the demand side. Gold use in the technological sector is extremely flat. The real change has occurred in the jewellery demand that has been displaced by investment demand. This is much more in line with what economic theory would predict; the demand for gold jewellery is (generally) decreasing in price. Economic theory would obviously also support the notion that demand for an investment good should increase as its value (i.e. price) increases. There is a complication, however, exactly because investment is fast becoming the primary force in maintaining overall demand for gold at record prices. Here are two ways of looking at it:

1. People are buying gold because other people are buying gold. This is classic bubble behaviour.
2. People are shifting towards gold because they believe that it has taken on a new level of intrinsic value. They regard it as providing a hedge against (tail) risk such as government insolvency or hyperinflation. They may even believe that it will gain increasing prominence in the international monetary system.

Of course, the two cases above are not mutually exclusive. Different people have been purchasing gold for different reasons. However, it is important to understand what you are betting on when you buy gold. For example, do you really still believe that we are at risk of hyperinflation after our experiences of the last four years? (I say this even as there is growing consensus that we should encourage higher inflation to bolster the economy.) Alternatively, your position may simply be that central banks will accumulate more gold reserves and thus put upward pressure on the price. The latter notion strikes me as infinitely more reasonable than the idea that we are going to return to some kind of gold standard. (I don't just mean the likelihood that it will happen, but also the idea that it will somehow solve our problems and not create a host of new ones.)

In sum, I don't deride gold, but neither do I think it has any mythical qualities. This includes the ability to properly regulate the present-day international monetary system. I advised those close to me to invest in the stuff immediately after the crisis and this has obviously turned out to be a profitable decision. I also believe that current economic conditions will support a relatively buoyant gold price for some time to come. However, I recognise that gold is subject to market vagaries and uncertainties that no-one can properly claim knowledge of. That is why I regard gold as an important component of any investor's current portfolio, but would never recommend increasing your overall exposure above, say, five percent (and perhaps even half that). Moreover, what worries me is that the people who are really bullish on gold are staking their claims on events that my economic logic can only regard as pretty remote probabilities. I may be wrong, but I'm very nervous to load up on any asset whose value appears to be increasingly driven by long-shot bets.

NOTE: Comments disabled because of the inordinate amount of spam getting through. Spambots appear to love gold even more than libertarians.
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[*] I have discussed the negative short-run supply elasticity for gold in more depth previously. Scroll down to the bottom of this post if you are interested in that phenomenon.
[**] This is based on the authoritative "all-in" cost metric produced by precious metals advisory GMFS, which incorporates things like deprecation in addition to normal cash costs (per ounce). Unfortunately, I don't have information over the full period and had to piece together the figures from different sources. Still, I hope the general message is unaffected.

## Saturday, September 1, 2012

### Starting a new blog...

A group of us at my university have decided to start a blog dedicated to tackling environmental issues from an economic perspective. Things are still very much in the development phase, but we've managed to get the basic structure up and have also decided on a cunning name: The REConomics Hub... as in Resource Energy Climate Economics. (Take that Freakonomics!)

The ultimate goal is to showcase the research that we are doing, as well as fill the gap in providing dedicated economic-based commentary on issues like climate change, energy use, resource depletion, etc, etc. I hope that some of the things I've written about here at Stickman's Corral will give you a flavour of things to come, though this will obviously be improved by the additional coverage and the possibility for divergent opinions.

Now, the site isn't "live" yet because we've still got a lot of things to sort out. However, we have written one or two test posts to give an idea of the format, etc... And I link to them here as a special treat to you with love from the Corral! Here is one written by my friend Patrick the compares solar PV to other energy sources. And here is one by yours truly[*] that looks at whether the concept of self-reporting in environmental economics has any relevance for drug cheats in sports. A snippet:
There are many parallels between the world of sport and environmental economics. In this case, you are dealing with “bad” behaviour that some regulatory authority is trying to eradicate (or at least discourage) through punishment. Compare the doping agency with, say, a fisheries ministry that wants to ensure that each boat sticks to its “quota”… You are effectively faced with the same problems of imperfect information and limited enforcement abilities. You don’t have the resources to check all the boats (or athletes) and, even if you did, there’s a chance that you wouldn’t find the illegal catch (or substances).
To help overcome these issues, one concept that has become popular in the field of environmental regulation is self-reporting. To continue with our fisheries example, boats would have the option of reporting a catch in excess of their quota — provided they are subjected to a reduced fine as a reward for their honesty. The main idea here is that self-reporting allows the regulator to focus its scarce resources on agents (i.e. boats) that don’t self-report and thereby increase overall compliance rates within the industry…. And, indeed, this is what the literature suggests will actually happen.
If you have any comments or suggestions, please let me know.
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[*] At this stage, I'm inclined to think that my identity is a very poorly guarded secret anyway. As such, you can follow me here on Twitter if you are so inclined...