Wednesday, 08 October 2014 08:57 YOU CANT TEACH A PIG TO SING: Gold price decline always brings out the cranks Written by Barry Ritholtz “Never try to teach a pig to sing; it wastes your time and annoys the pig.” — Robert A. Heinlein, “The Notebooks of Lazarus Long” Whenever I write about gold, the pushback is always robust. Yesterday’s column, “How Low Can Gold Go?,” was no different. As a public service, I thought I would address the feedback, criticisms and complaints. Some of the commentary was worthwhile related to investing in general and precious metals in particular. These insightful souls seem to always generate inspiring food for thought. Their comments help me clarify my thinking on trading and commodities. Unfortunately, those folks are the exception. Most of the pushback comes from people who have been long and wrong, and refuse to hear from anyone suggesting they are on a losing trade. The attitude seems to be along the lines of, “Who are you going to believe, me or my lying P&L?” The denial is profound. Before we continue, one quick note: It is easy to tell when a commenter didn’t read the column and is responding only to the headline. Believe me, after 30,000 blog posts, you can tell at a glance which comments had nothing whatsoever to do with your column. Note original comments and e-mails are in italics, and my comments follow: On to the pushback: As I frequently point out, in the past decade or so we had periods of inflation. Oil went up more than fivefold between 2001 and 2008, many foodstuffs doubled and tripled in price, housing went crazy. Since then inflation has been tame and we have very little in the way of wage pressure. And if you don’t care for the consumer price index as a measure of inflation, try MITs Billion Price Project. The smartest comment about inflation this was: “Most gold bugs aren’t investors, they are holders of physical gold as an insurance against inflation.” I can neither argue nor disagree with that. However, that is a choice investors can choose to make. I choose not to hedge against inflation, which pushes stocks higher as well. • Forecasts: The next run up is going to be much higher than 1400 1800 2500. The silliest aspect of any online debate is from the people who respond to any and all analysis with a future forecast. These predictions are always stated with great confidence (and zero authority), telling us EXACTLY what is going to happen next to the price of gold. It is hard to argue with this sort of nonsense. My approach: Thank these people for their predictions, and then demand to see their forecasting record. (Note that several regular readers have picked up on the technique, which is now my proudest online accomplishment). I have learned to ignore these folks, but this allows me to let other readers recognise the disingenuous argument technique. • The Dollar: Commentaries on the “price” of gold (or anything else) seem to assume that the US dollar is a fixed unit of measurement, like a meter or a gallon. This is bizarre, because in the column I specifically note the rising and falling dollar. The US currency is falling, is going to fall, has fallen, will soon be worthless. Never mind that the dollar is actually at multiyear highs, it is destined to collapse. Chalk up another non-reader. • The Economy: The economy is improving? I don’t see that… This may have been the single biggest area of dispute among readers. Yes, the economy was in a free fall in 2008-2009, then it stabilised, now it’s recovering based on almost every benchmark, albeit slower than many of us would like. “I don’t see the evaporation of fundamental economic reasons. I see that the gold price dropped and ask why.” I thought the fundamental reasons were readily apparent, but let’s elaborate: — The dollar is at multiyear highs versus a 41 per cent decline from 2001 to 2008; — The US is adding more than 200,000 jobs a month instead of losing 500,000 a month; — General sense among the population that things are improving as shown by the rise in consumer confidence; — Fear of another financial collapse is fading; — Inflation is very moderate, with deflation the bigger risk in Japan and Europe. • The Fed’s balance sheet: It’s unprecedented what the Fed has done. The Fed has a US$4.5 trillion balance sheet. How are they going to unwind QE? Short answer: The Federal’s Reserve’s average duration is seven years. Hold until maturity, then let it run off naturally. Next question? • Diversification: Gold can be a sound investment as part of a diversified portfolio. The problem arises in putting all of your (golden) eggs in one basket. Not much for me to disagree with here, other than to point out that this isn’t the kind of investor I am usually referring to when making note of gold’s major losses. • Manipulation: Perhaps most ironic were the e-mailers who were unwittingly acting out my, “Rules of Gold Buggery”: “Gold price in USD has been pushed down by massive sales of unbacked gold futures contracts on the Comex, systematic and highly intelligent price suppression at times when the futures market has the fewest bids.” Rule #2 states: The price of gold can’t fall; it can only be manipulated lower. “Of course the price of gold can fall if demand drops or supply increases, it’s not just price manipulation that can drive gold price down. Still, gold price manipulation is occurring at this time and is very strongly influencing US dollar gold prices.” Rule #3 states: If the price of gold is rising, it is doing so despite enormous and desperate efforts by manipulators to prevent the rise. Please, save the conspiracy theories for your screenplay. • Avoid paper gold, only buy physical: Own physical gold. Investing in futures and in juniors defeats gold’s purpose. You can still place physical gold in an IRA or 401... just USE A GOOD FIRM.. (there a still a couple shady firms). This seems to be based on the idea that gold exchange-traded funds are just so much paper and, like the dollar and stocks, will soon be worth much less. I don’t know what to say about that, but it seems to be a rather bleak view of the future. I am often accused of being a gold basher. I am not. I happily use any mistake by anyone — me included — to demonstrate an investing or trading lesson. After 20 years of analysing markets from the decidedly non-traditional perspective of combining quantitative analysis with behavioural economics, I would hope that I might have an observation or two that will be of value to you. That gold has lent itself so well to teaching lessons is something for which we should be thankful. Let’s hope we can all take away something from this that will helps us avoid future losses, and maybe even make us a little bit of money now and then. You know we’ll all need it after the dollar finally collapses. — Bloomberg View
Posted on: Thu, 09 Oct 2014 08:55:08 +0000
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