Math and Money: Index Construction For the Saints

The stock markets of the world make up a vast "money network," accessible both by the traditional means through a stockbroker, and online by way of various kinds of trading accounts one can open for a relatively small sum.

The notion "economic value," the idea that this piece of paper is "worth" four of those cans on the grocery store shelf has its origin in the distant past. We have already seen how the need to measure the value or worth of one kind of thing in units of another kind of thing -- how many pounds of wheat is my car worth -- gave rise to a medium of exchange we simply call "money."

Money enables us to measure all kinds of things against others using the same units of value -- dollars, yen, pounds, dinarii, quarters, nickels, or what not. This comparison of relative values -- 3 cans of fish for five dollars -- takes place in quantified units ("5" dollars, not yummy dollars), for "3" cans of yummy fish. For that much money they had better be.

This means that math can go a long way in enabling our study of money ("economics"). Math provides a way of comparing the relative values of all kinds of things against other things we might we to know about. These are value comparisons.

The stock markets thus thrive on numbers, plottable charts, fundamentals (a numerical way of describing the particular features of a company -- market capitalization, price to earnings ratios, earnings per share, and the like, whose stock one might wish to purchase. Just WHO is selling this stuff? Fundamentals -- basic company characteristics -- put numbers to the answer to this question. It is a company with the following traits .... [Then the listings of numbered characteristics begins].

So as India and China gobble up gold, and the Saudis tighten OPEC production, what am I going to do about it? I am working on a project which attempts to create a system of real-time market feedback using the "index," several indices working in tandem to tell me the most covenantally relevant features of the markets in shorthand -- or "at a glance."

How the market "really" works. Large numbers of people interact to buy, sell and appraise a host of different kinds of instruments people use to make money. These include options, futures, stocks, bonds, and "warrants" among others. There are peripheral or adjunct markets which have grown up around the others, which second markets service or cater to the needs, wants and wallets of traders and investors. These offer all kinds of software programs for better market clarity, trading platforms for faster execution times and custom-trading parameters you can automate (i.e. "when any stock matches these specs, buy or sell it when I am out golfing"), information devices, trading strategies and systems, and a host of other ways to give traders and investors "the edge."

This means that the markets are "intersubjective." These rational interactions cause the markets to follow sets of determinable "trends," patterns that emerge from the chaotic mix using numbers to describe them -- sometimes very fancy numbers. Fancy or no, numbers rule the day. We count money in numbers.

At first I thought the way to defeat the markets -- make good money by trading -- would be to obtain OBJECTIVE data from the real world to better the competition which uses more often than not relative judgments rather than the sort Christians would recogize as the more absolute kind. By thinking this through, however, I have come to correct this somewhat misguided view.

Investors and traders act as they do because of what the believe. Many of their beliefs find root in real word data -- supply and demand figures, total amount of gold now in existence, number of employees at a given company, etc.

But it is their BELIEFS about these numbers, not the data themselves, which determine the "averging effect" upon the market as they interact. In other words, how investors feel, and what traders believe -- I will call this collectively "investor pyschology" -- about the market data they consume governs their behaviors ultimately.

In principle, there is an unlimited amount of information one might glean from the objective world about this or that economic possibility -- a purchase or sale of some commodity or stock. This means that we need to isolate those most important to most investors from all the many which do not actually figure into the more important equations.

Think of it this way. The tautology should help: "The markets always do what the markets are going to do." Now imagine you could do the same thing -- moving exactly as the markets do -- but only slightly ahead of them. This would make you rich very quickly. It matters little if the reasons for market movements are rational or not -- and they are primarily (but not entirely) rational.

The intersubjective decisions of the marketmovers combine highly specific -- not all -- sets of data from the real world and interpret it within a set of frameworks or value systems not shared by all other traders. Some of this simply results from the fact that different traders come from around the world, from different cultures and life situations. This means they are bound to think differently about what kind of world this is, how we know what we know, and who we should live our lives, make our money, and save, spend or invest our assets.

The intersubjective markets average conflicting worldviews, economic philosophies, and trading strategies. It's a Van Til thing. This means that in a strict sense, you do not need to have more or special "objective data" (though this certainly could help) that the others do not in order to defeat the markets.

Trend forecasting -- using numbers -- which explain in advance the "averaging effect" which falls out into particular trajectories (trends) can be enough by itself to win handsomely. Other helps come from how one manages his purchases -- trade management strategies. For instance, you can use devices which limit your risk -- trailing stops form a good example of these. But if you gain, you can let your profits RUN.

I believe the most relevant market data can be summarized using a set of biblical (objective) values to zero in on which factors most important tells the trends. Covenants rule the world according to the Bible because God is covenantal and so if all of life. God governs by way of covenants, which have both blessings and curses associated with them (sanctions).

The structure of the covenant can be applied to markets to create a highly successful trading strategy which creates a network of indexical feedback indicators -- these tell you "what the markets are REALLY doing -- and enable you to see the forest for all the trees first, and then to analyze the trees in their real-world (market) context.

To win, in other words, you do not always need "more information," you need more of the right kind of information -- covenantally relevant information -- isolated for you by a system constructed according to the dictates of covenantal demands.

In other words, we must see in the dark using special glasses [covenantally-structured indices] which others do not have, and then we can "move faster" than the competition -- efficiently placing the right buy and sell orders at roughly the right times. The indices, if properly constructed, isolate the right numbers, which tell a story (give much information in few letters and numbers).

This should enable us to transfer wealth, in the form of numbers, from their accounts to ours. Joseph did something similar on behalf of pharaoh in Egypt.

So far, I have come up with a trial version of the first index to be used in a system of many such indices working together. As I have already described elsewhere, the Bible teaches that God is the source of all value, whether you count that value in numbers, or compare it to qualities -- like courage, love, justice, mercy and the like. God is the source of ALL value, including economic value.

He produces profitable servants like the Proverbs 31 woman. All hard work brings a profit, and the skillful worker will serve before kings - those who pay the most -- not before obscure men. Work is a form of trading, the exchange of time and skill or effort for money. All businesses trade to get ahead. So do all employees.

God has appointed gold and silver -- I would argue by implication also platinum (though I am aware this may prove controversial) -- as the immanent expression of fundamental value from the transcendent world. As the Sabbath of the new creation in Genesis was "made for man," so also the gold and silver of the lands of Havilah and Ophir -- for "the gold of that land is good."

One man in particular, the Lord Jesus Christ and Second Adam, is worthy to receive all wisdom, knowledge, honor, power, RICHES, glory and strength." This means that God created the vast wealth of the earth FOR Jesus from the beginning. Psalm 24:1 says "God gave to men the earth," and the Chief of all men now holds the title deed (Psalm 2, "Ask of me and I shall give thee then nations for thine inheritance").

"Worthy is the Lamb that was slain to receive all .... riches....."

The transcendent value of God, which has as its ultimate source His goodness in particular -- thus do we call merchandise "goods" and services (work) - so that God's original good work -- the created order has real (objective) value. The earth is good because 1. God MADE it good and 2. God CALLED it good 3. God has redeemed it - all of it in principle -- in Jesus. He holds the title deed.

Now God has chosen that certain precious metals form the basis of expressing economic value, the value of God's goodness reflected in all good things -- goods and services -- which in the Bible are cleary gold and silver, as was used in the former covenanted "holy land," the home of God's people of old. Peter, refering to money said, "Silver and gold have I none ....".

Thus, the Bible compares gold to the faith of the saints, and silver to redemption and grace. The Lord was betrayed for 30 shekels of silver, the price of a common slave. This was the "blood" money, which blood of the Lord Jesus - His once for all sacrifice -- saves His people from their sins.

The Bible sees salvation -- which is by God's grace alone then -- as holy or special and special -- uniquely precious metals, He has chosen for such symbology in the Word for their INHERENT value. These are not mere commodities like all others. They have unique characteristics, which make them uniquely suitable as the foundation of all real money, or basic economic value.

Thus, my first index constructed by the demands of the covenantal structure, consists of precious metal values, those of platinum, silver and gold. Now covenants are forward-looking in the Word. Their sanctions specify who inherits and who does not, but this is future. First the covenantal vow (or oath) is taken, then later the sanctions imposed. This is why heaven or else hell await one's demise.

This means several things for the purposes of constructing this index.

1. I will be using platinum, gold and silver prices in the markets currently. These are called the precious metals "spot prices."

2. I will be using the price of platinum, gold and silver FUTURES contracts six months forward. These are the estimated "future prices" of the precious metals.

3. I will be using the stock prices of the ten largest gold and silver producing companies.

Here is how my formula will look. I will construct it step-by-step, so that math types can follow the number crunching, and see how I adjust it as I go. Are you ready?

Okay, first we must represent the price of platinum as it is now (Platinum spot price). For this I will use the symbol for Platinum found on the periodic table of elements, and likewise gold and silver. If you do not know what that is, no worries. It just makes our venture oh-so-scientific.

Platinum = Pt. Gold = Au, and Silver = Ag. Platinum is a Latin word; in Latin, if you wish to say gold, you say "Aurum," (Au) and if silver, "Argentum" (Ag). Get it?

So the spot price of Pt today, we call the variable "Pt."

The price of platinum that is scheduled to be delivered "six months from now" in futures or options contracts -- promises to buy or sell and deliver the goods -- we will call for short "June 08 platinum." Make sense? Six months from now it will be June of the year 2008. So we call the Pt which must be delivered from the seller to the buyer in June of this year "June 08 Pt."

I will represent it this way -- Pt (F6) -- which means the price of platinum six months in the future. Pt (F4) would be the price of April 08 Platinum. And so on. What then -- following our trend -- is Au (F9)? This is the price of gold scheduled for delivery in September of this year on a futures or option contract. So here we go now. Fasten your seatbelts.

(Pt x Pt (F6)/ 2) x (Au x Au (F6)/ 2) x (Ag x Ag (F6)/2)/ 3 = Z

Do NOT let this equation scare you. Do not be intimidated by symbols. These are no different than the letters you are reading right now (which are also symbol combinations). But you have been trained to read these: you know the rules instinctively, so you see the effect of their combinations almost "at a glance." You can and should learn to do the same with numbers and letters like the ones above. It takes a little time, but anyone can do it. You did not learn to read all at once either. It took work, yes? (oops, I said the "w" word again).

This will be modified by the next equation which will:

1. Multiply the prices for each component in the gold and silver indices of the final price of each stock at day's end. For instance, Each of the last ten days for the stock "NEM" (Newmont Mining) has a "last" price listed. I will multiply these ten numbers together and then divide by ten, to provide the average price for the last ten days of NEM. I will do the same for each of the other components.

2. Then I will multiply those ten-day "recent price averages" together, and divide by ten (or five in the case of the silver index since it has only five components). This will give me an overall -- representative -- "10 day moving average" for the price history of the gold-and silver mining markets. This is the average price for precious metals in the market for the last ten days. This is a number which represents "what's happening now."

3. I will then use this number as a basis to compare to the "Z" above to see if the present trend is expected to continue, rise, or fall in the near term. If it rises, I will argue for a buy signal. If it falls, this means "go short." If it remains roughly the same, this is a "hold signal."

We can represent this series by using D10 x D9 x D8 x D7 x D6 x D5 x D4 x D3 x D2 x D1/ 10. This simply means the last ten days' "last price" we will multiply together -- for any one stock (like NEM) -- and then divide by ten. This averages the price for the last ten days of Newmont Mining. D1 represents "today's last price." You can look these up on any good stock website.

Suppose that ten days ago, NEM ended up the trading day at exactly $45.00. This would mean that D10 would be $45. We would then multiply this by the last price for day 9 -- say $42. And so on down the list until we get finally to today's last price. Then we divide that total by ten ot get our average "last" for the past ten days for NEM.

Then we use this final average for each of the ten stocks in our gold index, and average them too, by multiplying THEM together, and then dividing by ten.

With the silver index, we will go ten days deep also (following the same multiplication series), but when we average these together at the end, we only divide by 5 since the silver index has only 5 component stocks (listed below).

Then we will average the gold and silver indices together, giving twice as much weight to the silver index, since it only has half the number of components that the gold index does. This will make them representatively equals in our final trifold "precious metals index."

Now according to our first equation, what does the number "Z" represent? It is not as hard as it looks. The first number Pt x Pt (F6)/2 combines the spot price of platinum (which is about $1500 today for one ounce) with its price 6 months out and then divides their compound by 2 to get an average "3-month out" price for Platinum. Then I do the same for gold and silver. Then, finally, I avergage the 3 "averages" of each metal to get a combined "3 month out precious metal index."

This is a form of forecasting by averaging spot and future price estimates. This is a short-term forecast, you will notice. I have used -- and will be using weather forecasting as a model to compare with what I am here doing, and these work best with short-term forecasts.

Here are my top gold companies and silver miners, which I intend to use in making up my price components for the proposed gold-silver indices used [as subsets] to figure into the precious metals index (which I started with the above formula just now):

[Watch for updates, as the gold company list may change a little. These are listed only by market capitalization and general viability. I intend to figure into the equation also some version of the price to earnings growth projections, since the PEG represents a forward-looking indicator, like futures prices.

1. Anglo American plc (AAUK [ADR])
2. Barrick Gold Corporation (ABX)
3. Newmont Mining Co (NEM)
4. Goldcorp Inc. (GG)
5. AngloGold Ashanti Limited
6. Gold Fields Limited (GFI)
7. Rangold Resources (GOLD)
8. Agnico-Eagle Mines Limited (AEM)
9. Kinross Gold Corporation (KGC)
10. Yamana Gold Inc. (AUY)

Silver Company Index Components

1. Compania de Minas Buenaventura SA (BVN)
2. Pan American Silver (PAAS)
3. Silver Standard Resources (SSRI)
4. Apex Silver Mines Ltd (SIL)
5. Coeur D'Alene Mining (CDE)

If any of this seems "over the top," please be patient. When I put some numbers to it, it should get easier. I have other modifications to make too, so stay tuned.