Golden Advice That Suits Any Investor

August 22, 2011

I receive a lot of press releases, but few are as useful as the one that hit my inbox on Friday. It arrived after the markets closed, so I wasn’t able to act on it, but I’m sharing it with you today in the hope that you’ll benefit, too. According to a Toronto investment firm, gold may be overvalued based on the gold-to-decent-suit ratio.

This breaking news, which was picked up in Friday’s Financial Post, revealed that “the cost for an ounce of gold in 1967 was $35, exactly the same price as a decent suit from Eaton’s,” while in 1975, “gold weighed in at $100 an ounce, a 1:1 ratio with a decent suit from Eaton’s during the same year.”

However, with the shiny metal now at well over $1,800 an ounce, the gold-to-decent-suit ratio—let’s call it the GDSR—is way off. Today, says the investment firm, “a Burberry London men’s black wool two-button suit” costs a mere $1,150 at Holt Renfrew. “Although no one knows for sure, we believe that the price of a decent men’s suit and gold will converge to the same level.” Personally, I’m just grateful I didn’t invest in Eaton’s.

In any case, you can take advantage of insights like this by investing in the firm’s Canadian equity fund (MER 2.53%), which has underperformed the S&P/TSX Composite by 2.6% annually since its launch, or its balanced fund (MER 2.31%), which has lagged its own custom benchmark by 3.3% annually since 2002.

Taking comfort in good ideas

In turbulent times like these, it’s good to know that active managers are handling your money using robust ideas. Now that buy-and-hold is dead, “stay the course” is for chumps, and asset allocation has been exposed as a lie, investors need strategies like the GDSR when deciding where to put their hard-earned cash.

The notion that an ounce of gold is correlated with the price of dapper duds is one of the most revered in the academic literature. Even as far back as Roman times, an ounce of gold was enough to get you an Armani toga—although you could have saved XXV% to L% if you’d looked for after-Saturnalia sales. In Shakespeare’s day, a fine doublet and matching breeches would also have set you back one shiny gold piece. (However, interest rates were unusually high: borrowing  3,000 ducats cost you a pound of flesh.)

We know all of this from the centuries of data collected by the Centre for Research in Sartorial Prices, which tracks several well-known financial benchmarks, such as the “stocks-to-nice-hat ratio,” and the “real-estate-to-fancy-shoes ratio.” The CRSP’s research also tracks the price of large caps, small caps, and baseball caps.

Admittedly, sometimes the GDSR is just a wee bit off. From 1981 through 2004, the inflation-adjusted price of gold declined more than 67% in Canadian dollars. This information was omitted from the press release for space reasons. According to CRSP data, a decent suit actually did cost more in 2004 than it did in 1981. However, the ratio would have held up if you went smart casual for 24 years.

The other side of the gold coin

Friday’s Financial Post article on the GDSR included some healthy skepticism. That came in the form of a comment from a prominent gold bug who says the ratio is no longer relevant, because “suits are being made in Third World countries and distorting the price. Had that not happened, better tailors in London, U.K., would be charging two or three grand.” That means gold is actually undervalued.

The gold bug (who coincidentally manages precious metals funds with MERs over 3%) is about to publish a book called  Gold $10,000: Will it happen sooner than you think? He has said recently that the yellow nuggets could hit that price within five years. To get from $1,800 to $10,000 over that period would require a 41% annualized return, but because hyperinflation is a certainty and the world is on the verge of economic Armageddon, this is entirely reasonable.

Whatever suits you

With so much good advice out there, it’s hard to know just what to do. But one thing is certain: this is no time for a long-term investment plan.

How are you implementing your own panic strategy? What long-held principles are you abandoning because the TSX is up just 2.4% over the last 12 months? Have you identified a key asset ratio in a department store flyer? Or have you just loaded the minivan with bullets and butter and headed for the hills?

Please share your ideas below: I’ll choose the best one and send the winner a copy of the classic 1999 book Dow 36,000. This popular volume argued that stock prices would quadruple in three to five years because the old ideas don’t work anymore. It should prove to be a beacon of wisdom in these challenging times.

{ 19 comments… read them below or add one }

Preet August 22, 2011 at 9:36 am

Blog post of the year.

Jim August 22, 2011 at 10:04 am

Great comments!

In all the recent movies and TV shows that show what can happen at the end of the world, it quickly becomes obvious that the one thing that is most important is … SHOES.

You gotta have shoes. The van will run out of gas eventually and you will run out of bullets eventually. Your canned food will give out at some point. You will have to leave your bunker and look for things to help you survive. That is when you need good shoes.

J from Ottawa August 22, 2011 at 10:07 am

I think everyone’s missing the point, it’s not that gold is overvalued, it that’s suits are undervalued, with this critical information now properly analyzed and released by the Financial post, I suggest investors everywhere get themselves to Winners and stock up on discount suits…….soon you’ll be able to trade each one for an ounce of gold……thanks for the excellent post :).

Prior to this I had been buying large bags of popcorn whenever it is on sale and storing them in my basement…..corn is going to be the fuel of the future…….I’m going to make millions!

Paul G. August 22, 2011 at 10:48 am

I get the feeling you had a lot of fun writing this one. It’s fun to read, in any case.

Tom August 22, 2011 at 11:57 am

Highly enjoyable read! Laughed aloud when I hit “baseball caps.”

Raman August 22, 2011 at 1:38 pm

I’ve been hedging my entire portfolio by copying a strategy put forth by the CDC — that’s right, the Centers for Disease Control and Prevention — on how one can survive the coming zombie apocalypse. I reason that the only reason that my (fairly conservative) portfolio would ever go down is because all our world leaders were infected with a severe case of wanting-to-eat-some-brains (but how would we be able to tell the difference if it was the case?)
http://blogs.cdc.gov/publichealthmatters/2011/05/preparedness-101-zombie-apocalypse/

I keep one-quarter of my entire savings tied up in food, water, and melee- and ranged-weaponry. I also keep a map to the nearest Wal-Mart in my pocket _at all times_, which should make a great hideout to outlive my undead brethren, what with the extensive hunting department and massive 100kg bags of rice.

Canadian Couch Potato August 22, 2011 at 1:54 pm

@Raman: A prudent strategy—I especially like the diversified mix of both melee and ranged weaponry. I too am always on the lookout for zombies in decent suits: you can often spot them in Ottawa and Washington.

Sean August 22, 2011 at 3:35 pm

My suits are made by Chester Barrie in the UK although I have been known to try on a Brooks Brothers suit on occasion. By the prices I pay, gold is cheap, cheap, cheap!

Damyen August 22, 2011 at 3:43 pm

Gold-to-decent-suit ratio is like the Big Mac index : seems to explain everything, but it’s too simple to be acurate.

Mike Holman August 22, 2011 at 10:06 pm

Hilarious.

Those quotes from Sionna Investment Managers sounded like something I would expect to read in The Onion. :)

Canadian Couch Potato August 23, 2011 at 8:32 am

@Mike: I think the press release was supposed to be a bit tongue-in-cheek, but I’m honestly not sure. Certainly the FP article did not treat it that way.

A classic from The Onion:
http://www.theonion.com/articles/something-about-tax-cuts-or-earnings-or-money-or-s,18169/

NotScaredOf2012 August 23, 2011 at 10:09 am

My short term investment strategy:

1) 100 Acre waterfront property with a water wheel and mill.
2) 1000lbs of wheat seeds
3) 2 donkeys
4) farming equipment
5) guns and ammo
6) penicillin

Oh and a short wave radio so I can continue to listen to Alex Jones. :-D (kidding)

Canadian Couch Potato August 23, 2011 at 10:13 am

@NotScared: I really think you are underweight donkeys. You may want to reconsider your “ass allocation.”

anonymous August 23, 2011 at 6:49 pm

Time to transfer my gold to my underground bunker.

I’ve been playing L4D2 so I’m ready for the zombie apocalypse. Gold tipped bullets, anyone?

Mike Holman August 23, 2011 at 10:48 pm

Haha – nice Onion article. Economic and stock market analysis sound just like that after a while. :)

Atticus August 24, 2011 at 3:41 am

Great post. Worth its weight in gold.

My Own Advisor August 24, 2011 at 9:58 pm

$10,000 gold over the next few years? Uh-Huh.

I wonder if I have enough room in my bunker to hide a few of my bars?
On second thought, who am I kidding. My wife’s shoes fill up our basement storage area instead.

Maybe the aliens should take me now, save me the pain of the apocalypse. At least it will be quick, the crop circle is right around the corner from us.

Really great post Dan! Of course this goes in my roundup later this week.

Cheers,
Mark

Value Indexer August 25, 2011 at 9:34 pm

In all fairness to the Romans, they didn’t have electricity and I doubt any suits are made without it today. Even the high-priced suits are cheaper because of increased productivity.

To get away from shifting benchmarks like that, you need to turn to something that’s never a commodity and involves more human effort. For example you could compare the cost of a month of gladiatorial festivities to its modern equivalent, the election campaign. Or you could look at how many ounces of gold are required to repair public finances after hosting the Olympics.

A closely related classic is how much national treasure you can waste by invading powerless countries on the other side of the world in order to be the greatest leader in the world for a few years. Another good one would be how much gold it costs to have a leading soothsayer sacrifice a goat and tell you if you’ll make a profit buying Carthaginian grain and storing it until next year or if your ships will sink in a Mediterranean storm.

It takes a true sense of history to appreciate questions such as these! Now if only someone could tell me the numbers for the last millenium…

Ross Taylor August 26, 2011 at 8:45 am

Great post – funny, fresh spin on a tired subject. Well done

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