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Weekend reading: Goldenfreude

Weekend reading

Good reads from around the Web.

A lot of stock market pundits have been dancing on the grave of gold bugs recently.

I’d warn: Not so fast.

The key fact: The price of gold has fallen by as much as 38% from its peak in dollar terms – from over $1,900 to below $1,200 – before a slight ‘dead metal on a trampoline’ bounce took it back above $1,200 again.

So that’s a big fall that’s happened fast. A genuine plunge! And since the most vocal of the Internet’s gold promoters boasted of only owning gold (with perhaps a smidgeon of silver to make their gold look golder) it must have been a 2008 experience for many goldinistas.

Even more diversified portfolios have struggled with gold. The permanent portfolio asset allocation – which became far more popular after gold’s five-fold rise – was negative in 2013. (It wasn’t helped by having a 25% allocation to government bonds, as well as 25% in gold.)

In contrast, those invested primarily in shares made out like bandits. Given how often shareholders were called ignorant fools by gold bugs in the past few years for believing the economic world wasn’t about to end, you can understand why there’s some schadenfreude.

The danger of being ‘all-in’ anything

One reason not to dance on the grave of gold bugs, however, is because most of them aren’t dead.

A 38% decline is not a 100% decline. Unless they were leveraged up into gold (and I’m sure some of the vocal minority were) then they still have nearly two-thirds of their money left.

Gold has had a terrible year, but it hasn’t been evaporated.

And that’s important, because the critical thing is not to make the same mistake that the 100%-in-gold crowd did.

Sure, it’s easy to feel gold bugs earned their comeuppance. As Barry Ritholz put it in his 10 Reasons the Gold Bugs Lost Their Shirts on Bloomberg this week:

More than any other investment, gold seems to involve a stream of fantastic tales of imminent societal collapse. Every potential problem gets blown up into a coming apocalypse. Fiat currency leads to worldwide collapse, as the dollar falters and hyperinflation appears. All paper money is going to be worthless, so you better have some gold if you want to feed your family.

Except that the fear-mongering is always backward looking. The dollar had already collapsed by 41 percent from 2001-2008; we had very strong inflation in the 2000s, and much more moderate inflation after the financial crisis.

Here speaks a man who has clearly encountered the most devoted investors in gold – and I speak as one who knows from experience.

Yet the rest of Ritholz’ article is an excellent primer on why nobody should get too besotted with any asset class.

He discusses how people create narratives that they believe no matter how the facts change. How they ignore prior price moves and assume it’s a one-way bet. How they attack the skeptics and construct elaborate theories to explain it when things don’t go exactly as predicted. And so on.

He could be talking about the late 1990’s Internet bubble as much as the recent gold rush.

Beware becoming an equity bug

For me, the takeaway from 2013 is not that it was wrong to own any gold, or even that it was wrong to put 25% of your money into gold, as with the permanent portfolio. That particular asset mix has seen negative years before, but it’s done perfectly well over the long-term.

The lesson is don’t put all your money in any one asset class – or at the least don’t do so without knowing you’re taking a big risk.

After 2013’s blistering run in the stock market, that’s something for equity investors to think about, not gold bugs.

As for the yellow metal, I think I’m a buyer now. Small amounts, for the long term, for diversification.

Or, heck, and for trading with Mad Max for petrol in the desert.

Is this how it starts? 😉

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Holiday destination of the week: The pound has been strengthening against other currencies, as signs of spunk in the UK economy increase the odds of an interest rate hike. Bali tops The Telegraph’s list of places your pound goes furthest abroad, followed by Portugal and the Czech Republic. Bottom of the list: Australia and New Zealand.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Swedroe: Take the plunge or drip feed with a lump sum? – CBS
  • A bull market in passive investing – Morningstar
  • What did we learn from 2013? – NY Times

Active investing

  • Investment trust discounts at a 40-year low – Telegraph
  • US stocks look over-valued versus GDP… – Business Insider
  • …but emerging markets appear cheap on a CAPE basis – WSJ
  • Hedge funds’ fat fees are basically a tax on the 1% – MarketWatch
  • Hedge funds (attempt) to justify themselves – FT Alphaville
  • Top 100 list of hedge funds in 2013 [Hands up if your own returns beat most of them!]Bloomberg

Other stuff worth reading

  • Beware: The past is not the future – WSJ (by Mike)
  • Why we should give free money to everyone – De Correspondent
  • What if you’ve still got all your money in cash? – Forbes
  • How to tackle your late tax return – Guardian
  • Classic cars, watches, and art beat shares [Search result]FT
  • 5 economic reforms worth fighting for [Warning: Essentially communist agitprop, but a sign of the times]Rolling Stones

Book of the week: If you Google “Amazon Investing Books” you get this list. The entire top 10 are for active traders, with many concentrating on the dubious art of technical analysis. There’s not a single passive investing book mentioned, so fans of Smarter Investing or Investing Demystified can at least be happy they’re like Nirvana fans before the release of Nevermind.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 38 comments… add one }
  • 1 ermine January 11, 2014, 11:56 am

    agitprop – now there’s a word I haven’t heard for a long, long time…

  • 2 The Investor January 11, 2014, 12:24 pm

    @ermine — I say again: What goes around, comes around… 😉

  • 3 Art January 11, 2014, 1:32 pm

    I think you’re being a bit harsh on the Rolling Stone article. I was expecting to see the usual economically illiterate guff like rent controls, minimum wage, etc.

    You certainly can’t argue with land value tax.

  • 4 The Investor January 11, 2014, 2:28 pm

    @Art — I don’t think communism is economically illiterate, it’s just a different way of running an economy (and one I reject! 🙂 )

    He wants the government to provide jobs and an income for all, and he wants to nationalize private assets, albeit by stealth. He wants communism, so he should just state that.

    I don’t disagree with his diagnosis though, and understand why some young people feel disenchanted and driven back towards the disastrous communist doctrine.

  • 5 gadgetmind January 11, 2014, 3:52 pm

    Communism has been tried many times and in many places. I’m all for repeating experiments once or twice if they fail, just to be sure, but surely it’s time to accept that communism simply doesn’t work?

  • 6 mucgoo January 11, 2014, 4:30 pm
  • 7 ermine January 11, 2014, 6:35 pm

    If we are going to try communism again, I quite like De Correspondent’s wrinkle on it. I haven’t quite worked out what’s wrong with it – apart from there’s no money left/the 1% have run off with it all/it never existed in the first place, which presumably wasn’t the case pre 2007.
    It has striking similarities with ‘Economic Possibilities for Our Grandchildren’ and also great similarities with Martin Ford’s The Lights in the Tunnel.

    We seem to be trending to a point where the economy finds less and less productive work for fewer and fewer people. The sort of thing that IDS’s DWP is doing to people seems ghastly – hounding them to search endlessly for jobs that just aren’t there. At least digging holes and having others fill them in again kept people fit, whereas making them piddle about with Universal Jobmatch 35 hours a week seems a waste of everybody’s time and money. I’m warming to DC’s thesis, though I suspect that it can’t happen until the entire world has been brought up to average first world living standards because otherwise the keen lean and mean workers of the rest of the world will eat the lotus eaters’ lunches.

  • 8 neverland January 11, 2014, 6:44 pm

    Replace “gold” in the post above with “central london property” add leverage and a few years = trouble

    just sayin’

  • 9 Ben January 11, 2014, 7:48 pm

    Hi Monevator,

    First, congrats on a brilliant personal finance blog.

    You however have a bit of a blind spot for gold IMHO.

    I think you have made an excellent case for rebalancing out of overvalued ZIRP and QE inflated equities, bonds and property into a hated, undervalued and underowned asset.

    My view is that manipulating interest rates, encouraging subprime borrowing and printing money to inflate asset prices is not sustainable, and will end badly for those buying the assets concerned at today’s prices.

    Here is a neat little trick for assssing if value is higher or lower than price. The trick is to look at which direction the government wants to influence any price. If the government is attempting to manage a price upward, then it is a safe bet that the value is lower than the price. And if the government would like to keep a price down, then you can be pretty sure the value is higher than the price.

    Here are some links to help you decide which direction  Central Planners would like different asset to go in, and which asset classes are overvalued currently.



    Real Estate:



    If you believe in Central Planning and Central Planners, keep buying equities, bonds and levered real estate.

    If you believe the current trends are unsustainable, buy some insurance in the form of gold.

  • 10 The Investor January 11, 2014, 8:09 pm

    @Ben — You appear to have not read my article. 🙂 I quote:

    “As for the yellow metal, I think I am a buyer now.”

    Unless you mean “only buy gold” — and you seem a tad too rationale for that, despite hints of ZeroHedge commentor around the edges… 😉 — then I don’t see we’re in disagreement?

    Perhaps on the degree (I will probably aim for 1-3% for now I think) but not on the substance?

    Thanks for the kind words about the site.

  • 11 Ben January 11, 2014, 9:25 pm

    Hi Monevator,
    Sorry, missed that bit!
    5%-10% is about right for portfolio insurance to hedge the risk of a bond bubble bust and currency crisis. The rise in value of physical gold should offset losses in equities, real estate, currency savings and bonds.

    My estimation of the likelihood of a currency and sovereign debt crisis is higher than most folks’, so my allocation is a bit more “aggressive”.

    Did you know that the price of gold is set on the highly levered LBMA and Comex paper markets, and that physical gold has been draining from these markets to the East as prices have dropped? Comex, GLD and LBMA inventory has been dropping like a rock as investors flee paper into physical. China alone has imported the entirety of last years’ mine production.

    I personally expect paper prices to keep dropping until the cupboard is bare, and until paper receipts to the contents of the cupboard are worthless, both in terms of value and the ability to set prices.

    Very few Western investors will be strong handed enough to hold onto a depreciating asset they do not understand, and will likely sell at the worst possible time.

  • 12 ermine January 11, 2014, 10:53 pm

    > My estimation of the likelihood of a currency and sovereign debt crisis is higher than most folks’

    So is mine – but I fail to see how gold helps you against that. Imagine the scenario. Peak oil happens and the economy is on its knees, never to rise again. The starving hordes are running amok in the streets. You need friends and you need youth and you need heat. That’s not to say that gold will have no value in human history from then on, as long as you can pick it up and run with it you have a chance, but you show it to anybody in that sort of scenario within the first five years and you will be dead meat feeding the feral hounds.

    In those sort of desperate times people are often slowed down by things they percieve to have value. Even in good times people needlessly die in fires rescuing pets FFS. That gold isn’t necessarily a good investment in the immediate aftermath. I went to a talk by the noted doomer Stoneleigh who was of the view that gold will have value in the long run – but you have to survive the first 20 years 😉

    Give me friends to watch my back and share the night watch with over journeying with a deadweight about 8kg of gold, which is about the value of my house as a benchmark. That 8kg would attract a lot of attention in those troubled times.

  • 13 grey gym sock January 12, 2014, 3:50 am

    “Hedge funds’ fat fees are basically a tax on the 1%”

    … reminds me of this exchange from Blackadder:

    “they say he’s half way to being the new Robin Hood.”
    “why’s that?”
    “he steals from the rich, but doesn’t give to the poor.”

  • 14 Ben January 12, 2014, 5:10 am

    Hi Ermine,
    Agree gold of limited value in Mad Max scenario, and during a financial reset, but what about afterwards?

    What does 5000 years of history tell you about the likelihood of such a “all or nothing” social and political collapse, compared to hundreds of examples of temporary currency and economic crises?

    Here is a nice history lesson:


    Please note that despite anti gold rhetoric, Central Banks and Central bankers are the biggest gold bugs of all. They hold approximately 20% of above ground gold, and have been nett buyers since 2009.

    Watch what they do, not what they say.

    . Gold has been used as money in multiple

  • 15 Robert January 12, 2014, 12:28 pm

    I’m always tickled when asked what will I do after the end of the world? To which the answer is always the same.

    “I am confident in my own ability to put a nail through the end of a stick, and take yours.”

  • 16 BeatTheSeasons January 12, 2014, 2:18 pm

    @ Ben

    > The trick is to look at which direction the government wants to influence any price. If the government is attempting to manage a price upward, then it is a safe bet that the value is lower than the price. And if the government would like to keep a price down, then you can be pretty sure the value is higher than the price.

    You are assuming the government will fail. This is sometimes known as trying to “fight the Fed”. Personally I would rather do the opposite of what you suggest.

  • 17 The Investor January 12, 2014, 2:39 pm

    While I might own a few sovereigns for bartering after the Apocalypse, my overwhelming interest in gold is as a non-correlated diversifier. From that perspective, the fact it’s fallen 38% while equities have risen so far is a plus, not a minus.

    I’m not personally much interested in or persuaded by the grand narratives of some gold enthusiasts. As Ritholz notes in the piece I link to above, they constantly change anyway, which is odd given the conviction with which they’re typically argued.

    I.e. I argued many times years ago with gold enthusiasts that the advent of exchange traded funds had helped push up the price. They disagreed. Yet now they look to the liquidation of ETF holdings as a source of comfort. Personally, I think the market is liquid enough for prices to just clear.

    Gold is useless, whatever its fans say. If it all vanished tomorrow, the world would be no different. Compare that with property, companies, even bonds. That is why gold is impossible to value, and from me just a source of non-correlation.

    It’s also why the long term returns are derisory, something like 1% real from memory! Although I appreciate the counter argument that the price was fixed for a long time, and I accept that has *some* validity.

  • 18 Ben January 12, 2014, 7:26 pm

    Hi Monevator,

    “It’s also why the long term returns are derisory, something like 1% real from memory”

    The long term returns on gold are excellent, even when compared to equities. 

    The price stopped being “fixed” at $35/oz in 1971 after the failure of the London Gold pool, and after Nixon closed the gold window due to a classical bank run on Treasury gold.

    Price in 1971: $35
    Price today $ 1250 (even after a 30% crash)
    Annualised compounded return: 8.7%

    8.7% nominal returns over 43 years is not too shabby IMO. As the poster below demonstrates, this is better than the return on equities (including dividends) over the same time period. I apologise for this being a YouTube video, but I have yet to find a better long term comparison of equities vs bonds vs gold. The quality of the data and presentation and data is excellent.


  • 19 dearieme January 12, 2014, 8:13 pm

    “That is why gold is impossible to value”: not really; its value is the same as anything else’s, to wit what a willing buyer will pay a willing seller.

  • 20 Ben Bernanke January 12, 2014, 8:33 pm

    “Gold is useless, whatever its fans say. If it all vanished tomorrow, the world would be no different”

    Hi Monevator,

    Respectfully, gold has (nearly) unique physical properties which lend themselves to its use as money (a medium of exchange, a store of value, an unit of account).

    A)It is fungible (one ounce is exactly the same as another)
    B)it is easily divisible 
    C)It is virtually indestructible and durable
    D) It is portable, and easy to store. You could probably carry your net worth in your pockets.
    E) It is very rare, difficult to print, difficult to counterfeit, and easily verifiable. 

    Gold as a store of value is difficult to game or cheat, which is why central planners and governments hate for citizens to own it, and love to use it themselves as money.

    Gold has been money for thousands of years, and is money today.
    If if wasn’t money, why do Central Bankers hold it on their balance sheets alongside their currency reserves? Why not diamonds, cattle, seashells, London real estate or Apple shares?


    Why would Iran sell oil for gold?


    Why would Saudi Arabia have demanded gold for its oil?


    Why do the major Western Central banks hold more gold than foreign currencies and bonds?Why have Central Banks been net buyers of gold since 2009? Why have Central Banks of emerging economies (Russia, South Korea, China) who hold little gold in relation to currency reserves, been buying gold like crazy over the last few years?

    Why have Chinese gold imports gone exponential over the last few years? Why have they stopped exporting any gold?


    5000 years of history, a billion Chinese, a billion Indians, the World’s Central Bankers and the Middle Eastern oil producers disagree with your statement that gold is “useless” and has no value.

    May I respectfully suggest that it is a good idea to act as your own Central Bank, align your actions with those of the world’s producers, and own gold in good proportion to your currency savings?

  • 21 Ben Bernanke January 12, 2014, 9:01 pm

    “You are assuming the government will fail. This is sometimes known as trying to “fight the Fed”. Personally I would rather do the opposite of what you suggest”

    Government manipulations work for very well for long periods, until they don’t. I believe Mr Market has a 100% track record of winning in the end.
    All you need to “fight the Fed” is an unlevered position and patience.

    Here is a deliciously amusing example: The London Gold Pool


  • 22 L January 12, 2014, 10:24 pm

    Got any bug spray TI?

  • 23 grey gym sock January 13, 2014, 12:15 am

    oh dear – you can’t measure the real return on gold by starting at the last point when the price really was being artificially held down (viz. 1971), and ending at a point where it’s still near its recent peak.

    in the long run, the real return is c. 0%. try figure 1 in this article – http://www.rickferri.com/blog/investments/gold-bugs-swatted-again/ – and notice that, even at the recent peak, it wasn’t quite as high in real terms as the all-time peak in 1980.

    getting more on topic for monevator (or is it?): communism …

    if “tax and spend” is communism, then we have a mixed capitalist-communist system now. and it works *much* better than either pure capitalism or pure communism would.

    advocating changing the balance between the capitalist and communist elements is not advocating full-blown communism. i do agree that there’s a hostility to the capitalist element in the rolling stone article (and elsewhere) – no recognition that anything good comes from it. however, that may be because (a) the author is saying what they want changed – there’s no need to say what you *don’t* want changed, unless somebody else is threatening to change it; and (b) the author has no clear idea how much they do want changed.

    for instance, a land use tax is a perfectly sensible tax reform. but it’s left unclear whether the article is just advocating tax land differently, or raising a land use tax to such a high level that landlords make almost nothing – which would be rather unfair, in that it would make investment in property almost worthless, while leaving investments in shares intact.

    the other “communist” idea that i think has a lot of merit is “free money” (a.k.a. universal cost of living allowance) as advocated in the de correspondent article. this is a social security reform, based on the evidence of what tend to happen when you give ppl money with no strings attached.

    incidentally, though it is not quite the same thing, there is evidence that similar methods work for charities which aim to alleviate poverty: see http://www.givewell.org/international/top-charities/give-directly

    (sorry if this is too much politics!)

  • 24 The Investor January 13, 2014, 10:30 am

    Regarding communism and the like, I absolutely agree that there’s a spectrum. (And I included the De Correspondent article because I think the ideas are worth thinking about 🙂 ).

    But I do believe the current politics of the proponents of the left (as opposed to the actual politicians, who are much more moderate) is basically calling for communism in not so many words, as in the Rolling Stone article. If you boil down what he says, it’s “everything should be nationalised”.

    The arguments for land tax and wotnot here are far better, which is perhaps not surprising. But there’s a more critical problem, which is that by expressing this kind of inchoate angst the author of the article is calling for something that *has* been thoroughly discredited, IMHO.

    Rather than an implementable tweak. Higher taxes, windfall taxes, payments to all — we may or may not agree with them, but at least we can debate them, rather than calling for some Utopian better world while enjoying a good fruitless rant at the problems of this one.

    As I’ve written before, I do think capitalism has a massive PR problem at the moment. The best way I can boil it down is that most of my friends basically seem to think it’s a tax on the welfare state — at best a parasite to be tolerated. Rather than the imperfect engine of human progress it blatantly is.


  • 25 The Investor January 13, 2014, 10:47 am

    Re: Gold.

    Thanks for the various comments, especially as people have been polite, which is always to be welcomed on this topic.

    I don’t think we’re going to resolve a debate that’s raged across the Web for five years — in fact, I think a certain faction is immoveable — so I’ll just make a few last points.

    First, re: valuing gold. Yes, clearly it can be “priced” but almost anything can be priced, so that insight doesn’t give us much useful information beyond being a useful axiom in your mental toolbox.

    My stray left sock is worth what someone will pay for it, but I’d challenge you to value it.

    Re: The “special” properties of gold. These are real enough, as far as it goes. I was being a bit dramatic when I said gold was “useless” but nobody has ever given me a satisfactory answer to my point: All the gold in the world could vanish, and basically we’d have to make jewelry differently and there might be a tiny handful of medical/industrial uses that would need to change, but aside from that life would go on unchanged.

    The fact that most gold is just locked away proves my point.

    As a thought experiment that is very powerful to me — especially when contrasted with the enthusiasm for the asset of most gold promoters. And it’s not true of many assets at all, let alone those with giant bulletin boards full of fans, dedicated websites, central bank holdings and so on. The productive economy would be more impacted if Post It notes vanished tomorrow than gold.

    Yes, gold does have those physically enduring properties — and it certainly has an enduring hold on the human psyche. That for me is what makes gold “worth something”, albeit something I struggle to value.

    Because I think gold will likely always have those enduring but extremely hard to value characteristics (unless perhaps we crack alchemy at last or the Google boys hit a gold mine on their first asteroid mining venture) I have come to believe it is rationale to hold some gold in a portfolio, given its powerful diversification benefits. But for me that’s it.

    All this other stuff to me is noise. But each to their own.

    I am grateful to Grey Sock for saving me the trouble regarding the long-term returns so far. It’s justifiable to claim that gold has been a good long-term store of value, but it’s not been a good source of returns so far, especially given the huge risks of holding it in terms of price volatility (compare with similarly low-return cash.)

    Come the Great (Great!) Collapse, all bets are off, of course.

  • 26 Ben January 13, 2014, 2:45 pm

    Hi Grey Brown Socks,
    I think it is quite reasonable to measure the performance of an asset class

    A) Over nearly half a century
    B) Over a period it has been subject to free market forces devoid of failed government “price fixing”.
    C)From a time it became legal to own

    I gather you would prefer to measure performance from the top of a parabolic peak ($850 in 1980), or over a period when prices were fixed and it was illegal to own gold in th US and UK (e.g 1960-1970). This lowers the embarrassingly high annualised return figure of 8.7%, which sits ill with your notion that gold is a poor long term investment and poor store of value.

    Two can play at that game. Let’s apply cherry picking performance windows to equities.

    Let’s assume you went all in at the parabolic peaks in the Nikkei in 1989, and the NASDAQ, FTSE and Dow in 2000.

    What would your inflation adjusted returns have been over the last 25yrs and 14 years respectively? Deeply negative, even including dividends.

    Let’s also assume you bought into portfolio theory and the “stocks for the long term” mantra between 1968-1980 (the “stagflationary 1970’s”). The link above describes the shellshacking stock and bond investors received over this period.

    The shallow arguments used to disguise the strong long term performance of gold can equally well be applied to equities, real estate and bonds.


  • 27 Ben January 13, 2014, 3:16 pm


    You have inadvertently hit on one of the reasons gold functions well as money and Central Bank reserves.

    It can be hoarded, or arbitrarily priced higher with zero consequence on industry or the economy as a whole. If all the gold in the world disappeared into Central bank vaults, or was arbitrarily revalued to $55,000/oz, it would not affect society one jot (except for the lucky few who happened to have physical gold in their possession at th time).

    Compare this to copper, aluminium, wheat, oil or even silver.

    Money by its very nature is an overvalued something, be it a $100 note or a gold coin.

    Gold is available at very close to its commodity value (<production cost) right now, with zero monetary premium.

    If it is remonetised by the Central bankers that hold it, an order of magnitude increase in value would be a conservative estimate.

  • 28 SG January 13, 2014, 4:56 pm

    My view on gold is similar in that it has a part to play in a portfolio for the sake of diversity, but I have none at the moment because I think the entry point is crucial and I still think it has a lot further to fall.

    I’m prepared to wait and while I’m waiting I’ll ruminate in what form I want to hold it. I’m tending to think that will be physical, bars or coins, so that, with catastrophe averted hopefully, I can eventually give it away.

  • 29 gadgetmind January 13, 2014, 4:59 pm

    > What would your inflation adjusted returns have been over the last 25yrs and 14 years respectively? Deeply negative, even including dividends.

    According to the figures I have, the FTSE All Share is showing a mildly positive inflation adjusted return from the 2000 peak to now.

    Anyone who kept on drip feeding and rebalancing (as I did) will be very happy with the performance of their equity investments over this period.

  • 30 Andrew Williams January 13, 2014, 6:29 pm

    @Ben (13 Jan 2014, 14:45)

    “I gather you would prefer to measure performance from the top of a parabolic peak ($850 in 1980), or over a period when prices were fixed and it was illegal to own gold in th US and UK (e.g 1960-1970).”

    This is a straw man argument. The article that grey gym sock linked to talked about the value of gold since 1791. And the article talks specifically about historical periods when gold coins were used as currency.

  • 31 Lee January 14, 2014, 4:23 am

    As to the discussion of being “all in” … Well, excluding cash, I’ve got 95% of everything else stashed in a pot of diversified equities, so I guess that is pretty close.

    Been thinking of getting more fixed income for a while, but everything I read recently says now is not the time for that. I’m still dropping bit in cautiously each month on shorter term periods with an aim towards 70/30 over the next year or two.

    Gold holds no interest to me at all – it seems like something from the past.

  • 32 Ben January 14, 2014, 7:00 am

    “Gold holds no interest to me at all – it seems like something from the past”

    Nice comment. Time stamped. Very much the majority view.

    Equities: crowded trade owned by everyone and their uncle. Overvalued by any historical measure. Inflated by QE and ZIRP.
    “Do not fight the Fed”

    Gold: owned by wing nuts, kooks, conspiracy theorists. <1% of global financial assets (cf 20% at the top of the last bull market). Heavily propagandised in the Western financial press. Sentiment in the toilet. Currents price less than marginal cost of production. A contrarians dream. "The free market always wins in the end"

    Let's revisit this thread in 5 years. Equities have been crashing against gold since 2000. History tells us theis secular trend will end with a Dow:gold ratio of <1


  • 33 Paul S January 14, 2014, 10:37 am

    Professor Jeremy Siegel gives the total real returns for the period 1800-2008 as follows:

    Updating the gold to 2012 increased it to 0.5% due to the recent bull market.

  • 34 Paul S January 14, 2014, 10:40 am

    Sorry that went too soon. That is from Siegel’s “Stocks for the Long Run” and the figures are, of course, compound annual growth rates (CAGR)

  • 35 Ben January 14, 2014, 4:33 pm

    Hi Paul,

    The world was on a gold standard, or a gold exchange standard until 1971.

    Thus, the return on gold would have been tautologically 0.0% for the majority of Siegel’s window.

    Gold was money (or the denominator for everything else) until 1971. It has been floating against fiat currencies since, and has appreciated by an annualised rate of 8.7% since it was floated.

  • 36 Ben Bernanke January 14, 2014, 6:57 pm

    For those who thought that Barry Ritzholts “article” on gold above was anything other than a propagandised hit piece, here is a thoughtful rebuttal:


    So I logged-on to the Yahoo finance page the other day and I came across a main page headline that was a genuinely perfect specimen.  No, it wasn’t the “Eight Hottest NFL Wives” or “Superfood that boosts your sex drive” that caught my eye.  The headline I read, carefully placed in the dead-center of the page to draw your eye, blared “THE LESSONS OF GOLD’S COLLAPSE”.


    Intrigued by the fact that a 29% pullback in 2013 after a monster 500% twelve year bull run could be called a “collapse”, and wondering what sage lessons I might learn from this, I clicked… and was treated to such an outstanding example of a drive-by hit piece that I thought it would be fun to outline all of the techniques used in this article, and frankly many MSM articles, on gold.  I think there are actually some valuable lessons to be learned from this thing, but I doubt they are the ones the author wanted me to take from it.  So rather than take apart the mistakes of the article one by one (which was largely done in the comments section of the piece by some of the more informed readers), instead let’s examine the standard characteristics of a pedestrian MSM hit piece on gold.

    An Overhyped Negative Headline

    Much can be learned about the intentions behind an article by examining the descriptive words chosen.  Knowing that most casual investors will only scan the headlines, the descriptor in the heading will communicate 90% of the intended message. “The Lessons of Gold’s Collapse” communicates that something ruinous has happened to gold, so terrifying that one needs to learn a lesson from it!  Note that a 50% drop in the entire equities market was a “correction”, a 40% drop in a specific stock is a “pullback”, but a 29% drop in gold over the course of a year is a “collapse”. 

    A few short years ago, Bank of America went from over 19 dollars per share to less than five dollars per share.  Did Bloomberg run headlines describing what happened to BAC as a “collapse” or offer snarky articles talking about what the duped investors in BAC should have learned from the loss of more than 70% of shareholder value?  Of course they didn’t.  Nor did they chastise equities investors as a whole for losing half the value of their portfolios in the 2008-2009 financial crisis.  And Mr. Ritholtz certainly didn’t write snarky articles accusing investors of “having a huge emotional investment and an unhealthy investment in the narrative”. 

    It should be noted that more than half of the ten “lessons” offered in this piece aren’t even specific to gold.  Instead, they are standard investing advice (beware of leverage, have an exit strategy, etc) that would apply equally to equities, bonds, real estate, or commodities.

    The Pretense of Objectivity

    Particularly dismissive articles require a proclamation of neutrality to establish the author’s bona fides. The shopworn pretense is the stance of Hey, I don’t have a dog in this fight, I’m just calling it like I see it. Ritholtz hauls this out early in the piece, proclaiming “As an investor, I am a gold agnostic”.  The evidence, however, strongly suggests otherwise. 

    The first tell is the descriptors used in the article, as mentioned above.  The prose is stuffed with negative adjectives and descriptions of gold, including “dead money”, “horrific” price drop, “plummeted”, “trounced with repeated massive selloffs”.  The actual article heading at Bloomberg shrieked that gold investors “Lost Their Shirts”!  All this hyperbole for an investment that is UP 50% over the last five years, and 340% over the last ten.  That is one damn fine shirt!

    Next, Ritholtz gives away his game when he writes “This column is not an “I told-you-so” or an exercise in “Goldenfreude” (describing a “delight in gold bugs’ collective pain)”. This is a particularly cheap rhetorical trick, one that would earn even a beginning debate student a sharp reprimand from his or her professor. When an author at Mother Jones writes “I am not one to describe the Republicans as stump-toothed inbred hillbillies” it is crystal clear that this is exactly what he is saying. It is the same as a Republican politician saying “I am not one to call my opponent a terrorist sympathizer or say that she is soft on terrorism”.  The pretense of objectivity is even more diminished by the fact that, through the link provided, we learn that Ritholtz actually coined the term Goldenfreude (which ironically would actually translate to something like “golden joy” or “taking joy in gold”… but we know what he meant). This may seem obvious, but one does not sit around coining new terms to describe how sweet it feels when a particular group loses money… unless you are thinking about how sweet it feels when a particular group loses money. 

    Finally, Ritholtz demonstrates that he is indeed far from an objective observer through an inadvertent admission made via grammatical error.  Look closely at the tenses in the following sentence: 

    “Challenge anyone’s belief on gold, and instead of having empirical, data-driven counterarguments made, the zealots responded with venom.”

    Note that challenge is present tense and impersonal (the voice he was trying to speak in for this piece to pretend to objectivity) while responded is past tense and clearly implies the personal “responded to me”.  The sentence should read “Challenge anyone’s belief on gold… and people will respond with venom” but Ritholz lapses into a more truthful voice by the end of the sentence, telling how people “responded with venom” to what he, the wording suggests, had to say.  Unsurprising, then, that Ritholtz would take delight in gold bugs (those zealots!) collective pain.


    Cherry-pick the Timeframes to Support the Narrative

    So based on its precipitous 39% drop, gold is “speculative and dangerous” according to this article and should serve as a lesson for what NOT to do in a trade. Horrible, right? Well, I guess it was if you bought all of your gold precisely at 2:51 EST on September 8, 2011.  Because that is the exact time you would have had to purchase to achieve the 39% drop used in this article to characterize all gold investing. Neat how that works, isn’t it?

    On both a five and ten year timeframe, this “speculative and dangerous trade” as he terms it has outperformed the S&P 500. And the S&P outperforms 60% of all Wall Street money managers in any given year, so it could reasonably be argued that the terms “speculative and dangerous” are more appropriately applied to equities investing in general and to trusting you investments to Wall Street money managers in particular. People like Barry Ritholtz, in fact. 

    One more thing about timing. Calling something a “bad trade” depends entirely on what your timeframe is for the investment, doesn’t it? If you went long WTI at 43$ / barrel in 2009 and it retreated to 39$ over the next month, would that be a bad trade?  Only if you failed to stay long through the run up to 114$.  Unless someone has a crystal ball and knows for a certainty what future price is eventually going to be, then we really don’t have any idea whether gold is a failed investment at this moment in time, or is simply in the midst of a healthy correction after a 12 year bull run.  That doesn’t stop naysayers from gleefully tap-dancing on gold’s grave after a single, solitary down year, but it doesn’t make them right, either.

    Ad Hominem and Dismissal by Definition

    Do you know the negative term for people who invest in oil? How about soybean investors, do you know the derisive word used to describe them?  What about the dismissive terms for people who invest in real estate, stocks, or bonds?  Of course not.  Of all investing classes, types, or assets, only investors in gold merit a commonly-known term of derision that is freely used: goldbugs. 

    There is a good reason for this. Ad Hominem arguments (latin for “to the man”) are a logical fallacy, and are listed as such in every introductory logic or rhetoric course you will ever take.  It means attacking the man, not the argument, and it is a logical fallacy for the simple reason that the quality or characteristics of the person making the argument have no bearing whatsoever on the truth or falseness of the argument being made. Once again, use of this term is a cheap rhetorical trick to distract and mislead the listener, and every time you read it you should instantly be wary of the author’s intent because it reveals they are not arguing in good faith. 

    This goes hand in hand with “dismissal by definition”, under which you libel those who disagree with you as something horribly bad (racists, fascists, pinkos, etc) in the hope that your audience will simply tune out any argument they might make, thus absolving you from having to make an actual argument based on fact, logic, and reason.  The use of the term “zealot” in this piece to characterize the already negative term “goldbug” is a pitch-perfect exemplar of this technique.  No need to marshal facts or arguments against zealots, eh?

    The Credentials Fallacy

    One of the more hilarious aspects of this piece was that the author actually attempted to mix it up in the comments section. It was a public forum on Bloomberg, so one might expect a generally uninformed commentary, but I was mildly surprised that at least a significant percentage of comments were well-informed from a PM investing perspective.  Though numerous mistakes, assumptions, and dismissals went largely unchallenged (or at least were not called-out in the way they would have been on this board), there were nonetheless some great points made by commenters. 

    What was especially amusing, however, was the fact that whenever someone would venture their opinion that the gold bull wasn’t dead, Ritholtz would jump in with some snarky version of “Well, what is YOUR public investing track record? What qualifies YOU to make that prediction?”.  This is a rather sad version of playing the “Do you know who I am?” card… the answer obviously being “I’m Barry Freaking Ritholtz and you’re not”.  In his mind, the only people who are allowed to have an opinion on this matter are those who have posted their investing advice publicly on the internet for the last ten years, all others are unqualified to question his wisdom.

    But hypocritically, this doesn’t go both ways.  If you offer your opinion and you agree with Barry, he is fine with that and does not demand your credentials. He may even say “great point”.  If you disagree with him or suggest that it is too early to call the death of the gold bull, he smears you as unqualified to offer an opinion by dint of the fact that you haven’t been publicly posting stock picks for ten years.  I guess some opinions are more equal than others!

    Not a shill

    Ritholtz notes that he has been called a shill for his anti-gold stance and writings, and I believe this is unfair to him.  A shill would be someone who is paid money specifically to produce an anti-gold hit piece like this, where someone (an editor, webmaster, etc) would contact him and say “We would like you to write a piece bashing gold and here is what we will pay you”. I sincerely doubt this has ever happened.

    Barry Ritholtz is therefore not a shill.  He is a whore.  He knows what his employers want to hear without being specifically told, he knows his bread is buttered by producing articles that 1. Pump equities and mainstream investing (preferably creating the illusion that you can thrive in the markets but only if you closely follow Barry Ritholtz), 2. Produce eye-grabbing and mildly sensational headlines to generate clicks and 3. Annoys all the right people, generating just enough controversy to be “interesting” but making sure at the end of the day that alternative asset investors and “goldbugs” in particular are derided and mocked just enough to make sure his employers know where he stands… and he stands foursquare with them, against the barbarians and their barbarous relic.

    .   .   .

    So there you have it- a pedestrian hit piece on gold that denies inflation, dismisses Chinese accumulation of the second largest (and possibly the largest?) sovereign gold hoard in the world, disses theories of market manipulation, and goes so far as to claim “the gold market has no fundamentals”(apparently supply and demand do not exist for gold). Undoubtedly some will be fooled by this, while others will gleefully jump on the bandwagon because it makes them feel good about themselves and their worldview (including a former TFMR commenter, interestingly).

    But one person’s “horrific price drop” is another person’s golden buying opportunity to stack at cheap prices.  I know what I know.  And five to ten years from now, I will be happy to compare my “track record” with Barry to see if I am qualified to comment on one of his articles.  The question would be, why bother?

  • 37 Under The Money Tree January 16, 2014, 10:49 am

    Great blog and article!

    I’ve been thinking about adding some gold as a macro hedge. Sovereigns are out as the bid/offer you have to cross to buy/sell is just far too big. I think I’ll opt for some mining stocks/etf that will at least provide some sort of income in the mid term.

    The way the worlds markets are at the minute I see no compelling reasons why it’s due a sustained price rise in the short term hence if i’m buying I’d like some income.

  • 38 Returned expat December 28, 2014, 9:20 pm

    Re Ben Bernanke

    Hi Ben, a truly great response, worthy of its own blog :-). Again the monevator site showing that not only are the articles themselves excellent but also the quality of the comments from readers.

    I too will be holding my gold, just like I have paid for house, car and life insurance for years, one day it will be there when I need it.

    The constant negative stories about the “gold crash” hide the other stories which get less attention. Central banks and countries are now hoarding gold, Im sure they have more info than me.

    Germanys failed attempt to repatriate their gold, “stored” in the US, speaks volumes of new scandals brewing.

    The last several years has revealed scandal after scandal that are suddenly discovered, recently Libor and the FX markets hit the headlines. They will not be the last. The work of GATA is yet to hit mainstream.

    People may calm gold could disappear and it would not matter, however as the gold traded DAILY at the LBMA in London pretty much dwarfs the world FX markets, Gold is obviously of significant importance to someone.

    Anyway, keep up the great work on this site Monevator.

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