The Gold Fairy Tale Fails Again
The stories devised to explain why gold will rise, even though it has fallen for four years, are exercises in valuing narrative over analysis.
Bloomberg, December 2, 2014
Will they never learn?
Yesterday, oil rallied 4.3 percent and gold gained 3.6 percent as commodities had an up day after a long and painful fall. The fascinating aspect of the trading wasn’t the $45 pop in gold, nor the even greater percentage rally in oil, but the accompanying narrative. (As of this writing, each has giving up about half of those gains).
When it comes to speculating, especially in precious metals, it is all about storytelling. Over the years, I have tried to remind investors of the dangers of the narrative form (See this, this and this). Following a storyline is a recipe for losing money.
Why? The spoken word emerged eons ago and narration was a convenient way to pass along information from person to person, generation to generation. Your DNA is coded to love a good yarn of heroes and villains and conflicts to resolve, preferably in a way that is both exciting and memorable.
However, your genetic makeup wasn’t created with the risks and rewards of capital markets in mind. When it comes to being suckers for storytelling, I have been especially critical of the gold bugs. Since 2011, the gold narrative has been a money loser, the secular bull market for the metal clearly over.
However, gold often provides a plethora of teachable moments. I want to point out several recent gold narratives that have been dangerous to investors.