Blog My Brain

Recently I had a conversation with a friend, who asks me, “why is gold valuable?  It is just a metal that people dig it up and bury it again underground.  It is not income-generating.  You can’t eat it or use it in any productive purpose.  Then why do people buy it and invest in it?”

I think he is right in that gold does not have much value as a productive asset.  The value of gold, however, comes from it being a globally recognized hard money.   Money is what makes trade and division of labor possible.  Without money, trade breaks down and society would go back to bartering.  That means, if you want food, you have to produce some type of goods or services and trade them with the farmers directly.  Therefore, money comes to existence to support indirect exchange.

Being a medium of exchange, there are some attributes that any form of money should have:

1.  Durable.  Meaning it should last a long time without changing or corroding.  Therefore metals like iron would not work because it rusts.

2.  Portable.  Meaning people can easily carry it.  Therefore assets like real estate would not work because one cannot carry land with them to trade.  And oil would not work because to carry $700 dollar worth of money in oil means carrying 10 barrels of it.

3.  Divisible.  Meaning it must be easily divided into small pieces.  Therefore valuable stones like diamond would not work because it takes a lot of technology to cut a diamond into smaller pieces, and the value of a diamond decreases exponentially when it is divided.

4.  Has limited supply.  Meaning that it must be rare and difficult to be brought into existence.   Therefore sand would not work because there are abundant amount of it easily accessible to the public.

Throughout human history, gold has been the ideal form of money because it satisfies the above requirements.  In modern society, paper money has replaced gold as the medium of exchange.  Paper money is fairly durable; it is certainly portable; it is divisible into paper money of smaller face value or coins.  The only problem with paper money is that its supply is artificially controlled.

Central banks controls the monetary supply in modern economies and they have the rights to print money.  Therefore with undisciplined central banks, the supply of paper money can easily get out of control.  When the supply of paper money in an economy increases, the value that existing paper money holds are diluted.   This means inflation:  prices go up and the same amount of paper money cannot buy as much stuff as before the dilution.  When inflation gets out of control, as inflation usually breeds more money printing and more inflation, trading with paper money breaks down.  Who would want to offer their products or services for pieces of paper that lose value the next day?  But then, how can anyone survive in today’s society if trading reverts to bartering?  And thus, people would start to use gold and would only accept gold as payments.

That’s the value of gold.  Even though it is not used as money today, it reflects the risks of a complete break down of the paper money currently in circulation.

admin :: Oct.14.2009 :: The World, Finance/Investment :: No Comments »

Here is a list of the fruits in the IPhone games “papaya farm” sorted by the profitability per hour.

Using the table below, the game player can easily determine which fruit to plant to maximize her wealth growth.

To find out which fruit to plant, simply go down the list and find the highest “Profit Per Hour” value for your level.

admin :: Sep.29.2009 :: Fun :: 523 Comments »

If you are wondering about where the U.S. economy is going for the next 20 years, you can bet on that it would become more and more socialistic.  Nationalizing health care would only be a matter of time.  And the government will take a larger and larger role in our lifes.  How do I know that?  It is simple, we have the following demographic drivers:

1.  Baby boomers are starting to retire.   After the recent crisis, most of them do not have enough wealth to keep their lifestyle.   Would they vote for the government to take care of their health care and social security?   You bet.

2.   The shrinking of the middle class.  The only classes that would oppose socialism and any form of wealth transfer would be the middle class and the wealthy.  Unfortunately, the middle class in the U.S. is shrinking and we are seeing a concentration of wealth to the small rich class.  This leaves a large segment of the population broke and wanting redistribution of wealth.   And in a democratic system, they will vote their way to socialism.

3.   The inability of the law makers to distinguish capitalism and crony capitalism.  Government intervention causes crony capitalism (ie. easy monetary policies, debt guarantees, bailouts, etc) and thus enables excessive risk taking with other people’s money.   Therefore, it is very easy for the law makers to attribute the fault to capitalism and try to “fix” the system by passing socialistic laws.

4.   The tendency of the government to expand.  With a diminished understanding and respect of the constitution, the government is finding its way to limit our liberty in the name of taking care of us.

admin :: Sep.24.2009 :: The World :: No Comments »

Here is a comparison of the amount of searches in google for “economic recession” and “economic recovery” with the stock market (QQQQ is the nasdaq index fund).   A peak in interest about economic recession along with a peak in interest about economic recovery calls for the March bottom in stock prices.  This makes sense in that the crash stops when lots of people is worrying about a recession and more people start to see recovery.

You can access the most updated comparison Here.

admin :: Sep.10.2009 :: Market Analysis, Finance/Investment :: No Comments »

Today I developed a new tool to identify potential investment opportunities.  The idea is to use Google Insights for Search to identify increasing popular awareness for a product.   Then I compare the trend of increasing searches with the stock price of the relevant company.

In the above picture, I compare the interest in “IPhone” vs Apple Inc.’s stock price in a five year basis.

The tool can be accessed here: http://www.blogmybrain.com/stock_apps/GI/

At the top of the page there is a 24 month comparison.  At the bottom of the page there is a 5-year search history.  All you have to do is click on the “5y” button in the stock chart to compare it to the 5-year search history.

admin :: Sep.09.2009 :: Investment Tools :: No Comments »