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Quantitative easing, damned lies and statistics

by The Wrinkle | October 15, 2010

The Wrinkle recently came across an interesting article from David Potts, the SMH business writer profiling some research from a company called FinaMetrica at one of its websites

The Wrinkle has talked before about the business risks contained in lies, damned lies, and statistics. One of the main aspects of the report profiled (you can see the full version here: is the use of so called “fairy floss" mountain charts to promote performance. There is also some commentary around real vs. notional returns and allowing for inflation, however the Wrinkle thinks most of us are smart to allow for this in our deliberations.

The marketing approach is to allow for straight line “ever upward” accumulative growth a la the mountain, whereas the real life perspective is obviously one of volatility as nothing ever goes in a straight line. The contrast in the charting styles is interesting if you’d like to have a look. I won’t go into a full run down here.

Aside from the odd side show in relation to sovereign debt in Ireland, the current buzz all seems to be about US QE (Quantitative Easing) and gold prices. How many people do you know who have given you gold stock tips in the last few months?

Let’s start with QE, the US economy continues to struggle to find sufficient growth to lower the unemployment rate. For a country built on consumer spending they have little choice but to continue to push up the volume of money in circulation in the hope that some of it will be spent. The UK is an interesting contrast as they are going on a “slash and burn” austerity drive.

Conventional economic wisdom would say that the middle ground is to go for moderate sustainable growth to protect the government’s tax base, control inflation, and more importantly the interest rates on the debt mountain, and work your way out of the hole. It will be interesting to see how effective the UK will be in the approach it’s taking.

Still the US is the big player, and there is little option but for it to go into another round of QE. Ergo there will be a continued flight to safety (read gold) and the Aussie dollar could well end up at 1.10 to the USD, particularly if interest rates continue to rise here, which again is highly likely.

While the gold run looks impressive, other metals including silver have out performed it recently, and when you look back to historical all time highs there could be still more room to run. If you are looking at gold stocks, then the ones that are good takeover targets are obviously the pick of the bunch. With recent gold prices being so high most of the major producers are cashed up and looking at potential targets. The Wrinkle will look to profile a few of these potential takeover targets next week.

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