January 15, 2023
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Op/ed: The Gold Bug’s bull narrative keeps on failing investors


By Barry Ritholtz

Will they never learn?

On Dec. 1, 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.

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. 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.

One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. The history of this ETF — often referred by its ticker symbol, GLD — is a fascinating tale, well told by Liam Pleven and Carolyn Cui of the Wall Street Journal. Since its peak in September 2011, GLD has declined 37 percent.

As 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.

Why anyone believed this fairytale in the first place is beyond me. Surveys of voters suggested that the ballot proposal was likely to fail.

And yet there’s muddled thinking about gold among the bears too. Short sellers loaded up on bets that gold would plummet, a mistake in its own right since the outcome was all but foretold.

When the collapse failed to materialize as the ballot initiative lost, the shorts had to cover their errant bets, sending spot prices higher (temporarily it seems).

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.

What’s that you say? Consumers in China and India are big buyers of gold? You mean, the way they always have been?

Indeed, most of the recent narratives reflect information that is already reflected in prices. Yesterday, I read a breaking news article that said India’s decision to lift gold import restrictions would have a big, positive impact on prices.

The problem with that narrative is that India eased import limits in May — and it moved gold prices higher by all of 0.5 percent.

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.

As John Kenneth Galbraith famously said, “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”

Rather than accepting certain unpleasant realities, gold bugs have contorted themselves into a painful waiting game.

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.

Once again, the narrative fails.

• Barry Ritholtz writes for Bloomberg View.