Tuesday, 10 July 2012

End-game Sinks and where you should be putting your money

I've been getting a few messages asking me where I would put my gold in the current Diablo environment. To avoid all the claims of "pump n dumps" and "trying to influence price runs," as was the case with  Flawless Square Emeralds post a while back, I will fully disclaim all the positions in which I am invested. This is where I am personally invested.
  1. Exquisite Essences - I'm currently invested here to the tune of about 20 mil. I bought in at an average price of $1570, and will break even at $1850. These are currently at $1920 on AH. This is not my favorite investment, and I plan on liquidating my position around $2000 - $2100.
  2. Firey Brimstone - I'm currently invested here to the tune of about 20 mil. I sold out during the bubble at around 300k a piece, netting about 20 mil, of which, about 12.5 mil was pure profit (had previously bought in at an average price of about 100k). I then re-bought back in at an average price of 217k after the prices fell from their 300k highs. I buy these as a hedge against inflation.
  3. Tome of Secrets - I'm currently invested here to the tune of 25 mil. This is by far my favorite investment, and has generated the most accelerated return of any of the three commodities. Bought in on an average price shy of $1,100. This is also the only commodity in which I've been increasing my position over the past few days.
  4. UNID armors/weapons. I've bought about 10mil worth at various prices, and am still increasing my position. I won't really talk about this one, because it's traded on a "gray/black market" and doesn't influence any of the AH markets.
  5. BIS armors/weapons. Again, won't talk about these, as they don't influence any of the markets, but these are the best safe-havens for large amounts of gold (~80-100mil+)

In this post specifically, I will talk about my favorite investment, Tome of Secrets. Anybody who's been sitting in the trade channel over the weekend, probably had to put up with my insufferable spam of "WTB: TOMES OF SECRETS AT XYZ PRICE - WILL PAY MORE FOR HIGHER QUANTITIES" 
But why are Tome of Secrets such a great investment? From an economics standpoint, there are several reasons I prefer the commodity over any of the others.
  1. Crafting is one of the largest end-game sinks, because it is one of the [currently] easiest ways to make money (COGS remains constant, while selling price of the product is going up, essentially profiting from inflation). People will pay 10s of millions of dollars for 6-prop armor plans, and sit there for hours/days/weeks on end just buying mats and crafting shit. There are literally streams of "top" players sitting there for hours on end just crafting hundreds of gloves/bracers/shoulders/etc. (go here and see just how many there are...). These people will lose money on 90% of their crafts, but they are hoping to eventually hit one big roll, in which they can recuperate all their previous losses. What this means is that every roll that is NOT a big-roll will likely get salvaged into 1 essence and 1 tear. Let's take one of the more popular crafts as an example, Exalted Grand Sovereign Vambraces (6-prop gloves). These things take 28 essences, 5 tears, and 8 tomes to create a single pair. This means that 90% of crafts are sinking 27 essences, 4 tears, and 8 tomes, taking these materials completely out of the economy forever.
  2. The supply of tomes is unaffected by drop rates. Unlike essences, where supply can rise and fall based on how Blizzard decides to change the drop rates of high i-level items, the supply of tomes has been relatively constant. Yet, we see a rising supply of essences and tears as drops were increased (and the market slowly re-reaching equilibrium after such a change) influencing the decision on whether to craft. Market forces can always react to changes in demand, via individual players deciding between vendoring or salvaging their items. This is not the case with Tomes, in that the supply is strictly what is picked up off the ground. This means that, if more people reach end-game and decide to go the crafting route, there will be more essences in demand (people will salvage more items as oppose to vendoring to meet this demand) however, there will also be an increase in demand in tomes, which will not as easily be met as a change in player behavior, ergo, prices will rise to react to this change.
  3. The supply of essences outpaces the supply of tomes. This is directly in line with point 2, but if one examines the absolute max supply of both commodities, you will come up short in tomes (and come up super-excessive in tears... which is why I'm surprised tears are still selling above 52g a piece). What I mean is this: At end of any given run, assuming one salvages everything that is ilvl61+, compared to the amount of tomes he picked up during the run, the amount of essences:tears:tomes ratio he will end up with will not equal the essences:tears:tomes ratio of many of the most popular crafts. Back when I was still manually collecting these commodities (as opposed to just mass buying in bulk on the AH), I had already noticed this discrepancy. I would end up with around 10 essences for every 1 tomb I picked up, and was able to get well over 20,000 essences, while only picking up less than 2,000 tomes over the course of my Diablo career. This would be fine, if a given craft required 10 essences for every 1 tome, but, going back to the 6-prop gloves example, one only needs 3.5 essences per tome, which means the prices are completely out of whack. Either essences price falls or tomes price rise, and I am betting on the latter.
  4. Both artisans sink tomes. Both the jeweler and the blacksmith use tomes in their crafts, and, as an example I keep going back to, radiant star gems are one of the best sinks in the end-game. One radiant star gem alone will sink 1,631 tomes, which is basically equal to the amount I've collected altogether in my 300 hr Diablo career.
  5. There are risk-free arbitrage opportunities in high-end gems. Essentially, if you found, or paid the barrier to entry for, a high-level gem design, you can basically buy flawless squares and tomes of secrets off the AH, combine them into Flawless/Perfect/Radiant stars, and, even after the 15% cut, you will make back more money than you put in in the flawless squares, tomes, and crafting costs combined. The only investment in this case would be time (and it's actually a lot of time... 2 mins to go from flawless square to star, didn't calc out how many iterations to go any higher). A lot of people are playing this game right now, solidifying the demand for tomes.
While prices of tomes are currently at or around 1,300, their is a decent amount of volatility associated with them, and they sometimes fall for as low as 1,000 or 1,100 per tome. This is the price at which I would recommend buying in. I re-iterate, just so those who will inevitably accuse me of trying to create a price run can read, I do not recommend buying in above 1,100 per tome, so, if people follow my advice, there should be no price-run above this level. While I expect (given no external catalysts) that tomes can hit 2,000 a pop, I always invest with a margin of safety, and it would be quite risky buying in at any higher price.
Again, this is my personal opinion, and what I predict may or may not actually pan out. Buy-in at your own risk. What I analyzed does not take into account external catalysts (major changes from patches) that could significantly influence the price in either direction.
TL:DR: Don't keep your money in gold. Gold loses money over time. Put your money in something... anything... that drops at a rate lower than a bot can bot for gold, otherwise you're losing value on a daily basis.