Gold vs. BR

I really admire and respect Barry Ritholtz.  But I disagree with him about gold.  He claims to be a “gold agnostic,” and not to engage in “Goldenfreude” (describing a “delight in gold bugs’ collective pain”), but by using the terms “gold fairy tale” and “gold bug,” he reveals his position on the metal as an investment.  If you buy it, you must be a gullible child, or some kind of insect.  Any good gold bug would retort that, yes, they are cockroaches, which have survived long before humanity and will be here long after we are gone.  LOL.

Anyway, his old column from last year gives 10 lessons that we should have learned from the trajectory of gold over the last 45 years or so:

What lessons can investors take from this debacle? Some of the following relate specifically to gold, but the bigger concepts are applicable to any investment.

1. Beware the Narrative: Humans love a neat tale with heroes and villains and conflicts that need resolution.

Barry’s most recent gold bug squishing column sums up the gold narrative nicely:

As we discussed almost a year ago, the most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time.

More recently, the narrative has shifted. Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77 percent to 23 percent, by the electorate.

This is the same argument Paul Krugman uses to tell us how much smarter he is than anyone who disagrees with him.  That is, hey, we did all this, it’s been 5-6 years, and the sky has not fallen.  In fact, everything is aces.

It’s true, having a good story does not mean you have a good investment.  However, there are very few good investments out there without a good story.  Personally, I don’t follow the daily narratives on why to own gold.   I am not convinced that we have exited from the first of the above described problems.  Specifically, possible increased inflation (not necessarily hyperinflation).  All that money from QE is still out there – just because they stopped adding more does not mean that they have started bringing any back in.  The Fed balance sheet has increased from under a trillion dollars before the crisis to over $4.5T now.


It hasn’t gone down since October, it just stopped going up.  That means that they are still buying to compensate for bonds that mature.  So just because we haven’t seen any problems to this point doesn’t mean we won’t, going forward.  I don’t know if we will see any inflation related to this.  But I would like to see the balance go down significantly before I consider that story to be false, and cash in my gold (which I will be happy to do).

This graph of excess bank reserves held at the Fed is starting to go down, so I do consider that a good sign on the side of BR and Krugman.  $300B down, only $2.4T to go:


Here are some of the other things BR would like us to take note of for future reference, that we should learn from the gold “debacle”:

2. Take Note of New Investment Products: One of the fundamental changes in this gold cycle has been the creation of a variety of new gold-related products. The mac daddy has to be the gold exchange traded fund (GLD). Called the “innovation that opened gold investing to the masses,” it allowed people to invest in gold without opening futures accounts.

The World Gold Council is an organization created by global mining companies for the purpose of promoting the sale of gold. The gold ETF was their brainchild. Following “two decades of depressed prices and a growing glut of the yellow metal,” they faced the possibility of having their funding withdrawn. So in November 2004 they threw a Hail Mary called the SPDR Gold Shares exchange-traded fund. It was a game-saving touchdown.

In November 2004, GLD wasn’t the only new ETF.  Pretty much ALL of them were new.  There was less than $200B in all ETFs combined at that point.  Today, there are 5 or 6 times that much money invested in ETFs.   But even so, Barry is correct:  this fund really opened up the world of gold investing to people who were not interested in trying to secure coins in their home safes.  And he is also correct that this is a way to see what the trendy investment of the day is.  Just look at all the new MLP and “liquid alt” ETFs that have been popping up (also currency hedged anything, bank loans, etc.).

3. Ignore History at Your Own Peril (or, Everything Eventually Becomes a Trade):

You cannot be in the market very long and grow attached to anything, as everything will eventually disappoint you. I call this my universal entropy theorem of investing, and it’s why everything — from Microsoft to the 10-year bond, from Apple to gold — eventually goes to hell. (Just look at the stocks tossed from the Dow Industrials for more evidence).

Gold has run up only be to trounced in repeated massive selloffs: 1915-20, 1941, 1947, 1951-66, 1974-76, 1981, 1983-85, 1987-2000 and 2008.

True.  That’s why in stocks, it’s often best for investors to purchase index based products.  For gold, you have to know what circumstances will cause you to exit the position.

4. Leverage is Always Dangerous

Yes.  But I think that the credit crisis was much more instructive on this point than gold.

5. Maintain Situational Awareness: The concept of situational awareness comes from military theory, particularly aviation, representing the idea that a pilot needs to be fully cognizant of all the elements occurring in three-dimensional space, as well as those about to occur in the near future. For the investor, situational awareness means not getting too caught up in the moment, and understanding the continuum of time. Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video. Doing so forces the investor to think of the big picture, the 30,000 foot view.

Yes, see note for point 3.

6. The Danger of One-Way Trades: What would make you reverse your biggest present holding? What facts or situations would force you to change your views and sell? If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.

Again, yes, see note for point 3.

7. What’s In the Price Already?: One of the differences between professional and amateur traders is recognizing what’s in the price. By the time most rumors, whisper stories and headlines reach the average investor, the impact of the news is already reflected in the market. The expectation that well-known news might somehow be a price catalyst always surprised me.

What’s that you say, the India wedding season was going to drive prices? Only if you believe this tradition dating back thousands of years is unknown to the gold market. Wait, China’s central bank’s gold reserves are growing rapidly? Who exactly is surprised by that?

Genuine surprises that are unknown to the market can move prices. Most of the narratives (See e.g. this or this) do not.

This is a really interesting point.  BR is absolutely correct, but when there is a correction, suddenly a new story has to be made up as to why, and what new news just got added into the pricing (for anything, not just gold).  Almost like a new narrative.  So although this is generally true, it’s like momentum.  It’s true until it’s not.

8. What Are the ‘Fundamentals’ of Gold, Anyway?: Gold has no fundamentals.

True.  And this is what I hate the most about gold, as an investment.  It should NEVER work.  This is where you say, why not Bitcoin, or ceramic beads, or seashells, or beaver pelts, or (hahaha) Yen?  And the answer starts with “past performance does not guarantee future results” and then goes on to retell the narrative.  But as for anything else, I’m not sure that this is a takeaway.  Pretty much everything else people invest in does have fundamentals.

9. End-of-World Tales, Conspiracy Theories and Other Such Nonsense: More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse.

Not sure how this applies out of the context of gold.   I agree with the “nonsense” category.  My role as a fiduciary does not extend to societal collapse.  I’m not interested in being queen of the thunderdome.

10. Attacking the Skeptics: The response to rational argument is often a revealing tell.

Agreed.  This is true for gold as well as other possible investments.  The problem we run into for everything is asymmetrical information.  Is China a good investment?  Is smart beta indexing really smart?  Depends on who you believe.  The believers of almost any investment (or other) philosophy tend to get pretty defensive about their choice.  Read a Krugman article.  Or Rick Ferri.  Or John Hussman.   I’m not saying any of them are right or wrong (except Krugman. He’s wrong).  I’m just saying they can be pretty emotional in their arguments.  I think this just speaks for the need to do as much and as thorough due diligence as you can.  And diversify, in case you get one wrong.  Gold can be a good diversifier.  😉



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