Jon Stewart on gold

When gold prices plummet and folks like G. Gordon Liddy and Glenn Beck start advising investors to hoard like Yosemite Sam, there's a voice that cuts through the commodity fever to the heart of the matter: Jon Stewart's.

Back on April 15, gold prices dropped to $1,321 per ounce and hit their lowest point since cresting $1,920 per ounce in September 2011.

As convicted Watergate conspirator Liddy shilled for gold in commercial breaks and Beck blamed the slide on a shadowy cabal of government, media and otherworldly forces bent on stripping Americans of their precious gold and damning them to a life of slavery, Stewart used the pulpit on Viacom (VIA -0.74%)-owned Comedy Central's "The Daily Show" earlier this week to suggest it might just be a market correction.

The market wasted little time proving him right, as prices climbed roughly 7% by Wednesday to $1,453.10 per ounce. Still, that didn't prevent Stewart from flogging Beck for his assertion that investors should listen to God by quoting decidedly anti-gold passages from the Bible's books of Exodus and Job.

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[forwarded from Buddy]

The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver.  All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price.  So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.

Will this massive run on physical gold and silver soon lead to widespread shortages of those metals?  Instead of frightening people away from gold and silver,the takedown of paper gold seems to have had just the opposite effect.  People just can’t seem to get enough physical gold and silver right now.  Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce.

If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly.  And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world.  But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.

[so doesn't this mean that that gold has bottomed?]

CAPE

There are three popular P/E ratios:

• Forward P/E (on subsequent 12-month earnings forecasts)
• Trailing 12-month (TTM) P/E (on most recent 12-month past earnings)
• Robert Shiller's Cyclically Adjusted P/E (CAPE)

The CAPE uses earnings from the prior 10 years and has become a widely followed valuation measure. Yale professor Robert Shiller defines the numerator of the CAPE as the real (inflation-adjusted) price level of the S&P 500® Index and the denominator as the moving average of the preceding 10 years of S&P 500 real reported earnings, where the US Consumer Price Index (CPI) is used to adjust for inflation. The purpose of averaging 10 years of real reported earnings is to control for business-cycle effects. The CAPE is also sometimes referred to as the P/E10.

There are several problems with the construction of the CAPE, detailed in a terrific report by Steve Wilcox for The American Association of Individual Investors posted on the Seeking Alpha site in 2011, from which I'll pull some data.

The problem with using a 10-year period for earnings is that the average business cycle only lasts about six years. More recently, recessions have become shorter and expansions longer (notwithstanding the long "Great Recession" which ended in 2009), as you can see in the table below. As a result, CAPE tends to overestimate "true" average earnings during a contraction and underestimate "true" average earnings during an expansion.

In the present bull market, the first month the CAPE crossed into overvalued territory (i.e. went above its median) was May 2009, just two months after the market's bottom, since which time the market has more than doubled. Even more dramatic was the cross into overvalued territory by the CAPE in February 1991, a mere nine years shy of the top of the great 1990s' bull market.