Historical Precedents are Important Lessons for Investing

The historian George Santayanna said, “Those who don’t learn from history are condemned to repeat it”. If you are investing on momentum alone you will not likely be successful in the long run. To be successful like a gambler at Las Vegas you need an edge. When it comes to investing, a knowledge of history may be that edge.

There are currently a number of anomalies that could make an investor nervous. The most glaring one is in the price of gold. There are adverts on TV and the internet to buy everywhere.

Currently the price of gold is about double that of platinum. No one worries about this. For years the price of platinum was at least 30% more expensive. In fact this is entrenched in everyday observation. American Express cards begin with a low tier green card and then move up to gold and platinum. Many airline frequent flier programs move from the bottom through gold and finally reach various types of platinum stage. Rolex platinum watches have always been more expensive than their gold counterparts and still are. Platinum is much rarer than gold and isn’t its scarcity which gives precious metals their value? One explanation is that platinum is not used as much to control emissions. Gold has few industrial applications as well but is supposed to represent money in some way. It did when everyone agreed a fixed price but this has not been true since 1971.

The answer lies in a bigger demand for gold for manufacturing jewellery in India and China, and in ramp speculation. A lessening of demand due to recession in these countries could see the price drop precipitously. Historically when the price of gold falls it does so very rapidly.

The OECD country which is most prone to inflation since WW2 is the United Kingdom whose politicians have always had a fiscal licentiousness about them in both the Labour and Conservative parties. If you are looking for a return of inflation in developed economies then this is the country to observe. Canadian politicians have this tendency as well which is probably why the previous Governor of the Bank of England was from Canada. Understandably then British and Canadian government bonds have traded at large premiums over US bonds. Currently they are trading at discounts to US bonds suggesting that their yields should rise substantially or that the yields on US bonds should fall. Given current conditions the latter is most probable.

Another fine way of separating yourself from your money is to trade Forex.

You trade according to ‘candlesticks’ and other simplistic nonsensical jargon. Supposedly people are making fortunes out there but for some strange reason you are not one of them. Remember a professional at Baring’s bank blew billions for them some years ago. So it’s a good idea to get some historical perspective. The longest traded currency pair, including during the era of ‘fixed’ rates is the US dollar versus the British pound, also known as ‘cable’. During the height of the civil war the pound bought over 16 US union dollars. I have no idea how many confederate dollars but I imagine very many. The pound has been on an approximately 150 year secular decline against the dollar with brief violent countertrend reactions. The pound rose strongly when the Brent oilfields began production in the 1980’s. I think we will see pound/dollar parity within 10 years.

Then there are the various ‘bubbles’. The South Sea bubble where even the smart Isaac Newton lost money, the Dutch Tulip bubble and the Mississippi bubble to name but a few. The problem is that all these bubbles burst eventually leading to problems. The problem as Charles Mackay wrote in his book on manias is that people become blockheads as a group but only regain their sanity one by one.

The problem with buying on momentum is that you are buying based on the “greater fool theory’. This theory states that there is a greater fool coming after you to buy what bought at a higher price. The problem with this theory is that there is no way of knowing when the greatest fools of arrived, and have bought at the highest prices. You might find out you are one of them.