The gold bug’s narrative defies reality, keeps on failing

Will they never learn?
Despite recent short rallies, gold has been experiencing a long and painful fall in the last few years. And the accompanying narrative has been instructive to say the least.
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.
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.
One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. Since its peak in September 2011, it has declined 37 percent.
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.
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. 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.
Why do these narratives all tend to fail? For the most part, they reflect information that is already in prices. Markets are far from perfectly efficient (they are kinda-sorta-eventually-almost efficient). But they are more efficient than many seem to assume.
Perhaps you prefer the narrative about the “Worst Gold Shortage In Over A Decade.” That’s only if you define shortage as an excess of supply versus demand for the overpriced metal, which has since fallen about 40 percent from its 2011 peak. One of the more eccentric valuation arguments comes from Citigroup Chief Economist Willem Buiter.
“Gold is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store. It has no significant remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses.”
Perhaps the most egregious narrative failure came from Grant Williams of Mauldin Economics. He imagined a conversation 30 years from now about China’s secret three-decade-long, gold-buying spree, dating to November 2014. Well, we only need to wait 30 years to see if this prediction is correct.
This seems to be the preferred approach of too many investors. They engage in emotionally satisfying story lines that are either already reflected in prices, or just wrong. It tends to cost them dearly. •


Barry Ritholtz is a Bloomberg View columnist and founder of Ritholtz Wealth Management and former CEO of FusionIQ, a quantitative research firm.

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