Felix Salmon

10 Reasons Barry Ritholtz Is Wrong About Gold

By Felix Salmon
January 11, 2014

Barry Ritholtz has been receiving a lot of praise for his 2,500-word Bloomberg listicle “10 Reasons the Gold Bugs Lost Their Shirts”. Which is weird, because it’s deeply flawed. Here, then, are the top ten places he goes wrong:

1. The title. Ritholtz frames his entire piece as a “post-mortem” examining a “debacle” which resulted in certain investors losing their shirts. But he never identifies a single such investor. The rest of the article is effectively moot if people haven’t lost a lot of money on gold. And so it’s telling that no sooner is the concept raised than it is dropped. Yes, the gold price has fallen from its highs. But without knowing where people bought, and whether they have sold, it’s a case of overstretch to thereby deduce that many gold investors have lost most of their money, as Ritholtz’s headline implies.

2. Any idiot can make money in the past. Every year, the FT’s John Authers extolls the astonishing returns posted by Hindsight Capital LLC, two of whose spectacular 2013 trades involved shorting gold. Hindsight Capital, of course, is a joke: its positions are revealed only at the end of the year, when we know exactly what happened. But Ritholtz seems to be absolutely serious here:

As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade — such as the 2010s.

The only thing that Ritholtz is saying, here, is that the price of gold went up, and then it went down. His self-identification as “a gold agnostic” basically amounts to saying that it’s a good idea to own gold when it’s going up, and a bad idea to own gold when it’s going down. On that basis, it seems, it was a good thing to own gold in the 2000s, and a bad thing to own gold in the 2010s. To put it mildly, this is not helpful.

3. He relies on tautology. Ritholtz goes into a lot of detail about the exact movements of the gold price, telling us that it peaked above $1,900 per ounce. “Unless something radically changes in the near future,” he intones, “that may very well be the peak for this secular cycle.” Well, yes. Gold is currently trading somewhere in the $1,250 range: if it shoots back up above $1,900, then I’m pretty sure that would count as something radically changing. But is it reasonable to worry about a sudden radical change, and to therefore hold on to a long gold position? Ritholtz never says. All he tells us is that “some gold fans may argue that the cycle is not over yet, and they may be correct.” Thanks.

4. He criticizes a phantom. Ritholtz says that he has found, in gold, “a teachable moment of what not to do in a trade”. One would think that before you criticize a trade, it is reasonably important to know what that trade is. But that doesn’t stop Barry! Specifically, the standard goldbug trade, it seems to me, consists of putting lots of money into gold, and keeping it there. If you’ve been doing that for decades, you’re still feeling pretty smug right now, and can quite easily ride out the current market downturn. The trade that Ritholtz is criticizing, on the other hand, seems to comprise buying gold at $1,900 and then selling it at $1,200. Although he never quite comes out and identifies it that specifically. Without identifying exactly what (or whose) bad behavior you’re learning from, it’s pretty hard to draw useful lessons.

5. He blames Wall Street for the run-up in gold prices. “On Wall Street, storytelling is a big part of the sales process, and gold was no different,” says Ritholtz in his second lesson. He follows up in the third: “Salesmen always need something to sell. In GLD, they found the found a perfect vehicle to pull in the masses.” The story here — the narrative that Ritholtz is selling, if you will — is that a group of latter-day Jordan Belforts were hitting the phones, telling their schmuck clients to load up on gold ETFs, and making millions in the process. The problem with this story is simple: it isn’t true. The big gold salesmen weren’t Wall Street brokers extolling the efficiency of newfangled ETFs; rather, they were the likes of Glenn Beck and Ron Paul. The Cash4Gold people might have made money from a rising gold price; Merrill Lynch and Morgan Stanley, not so much. Indeed, the main reason for the popularity of the GLD ETF was precisely that it didn’t involve paying substantial commissions to middlemen, be they on Wall Street or elsewhere.

6. He confuses an investment with a trade. Ritholtz quite rightly points to the many periods in the past where gold has gone up and then has gone down. “Everything,” he says, “eventually goes to hell”. But that is not the same thing: the price of gold is still higher than it was during many of the previous peaks. The real lesson here is that in order to be a gold investor, you need a stomach strong enough to withstand these big cycles. Ritholtz’s lesson, by contrast, is the exact opposite: “Everything Eventually Becomes a Trade”. Or, to put it another way, if anything you hold ever goes down in value, then you’re not a long-term investor, you’re just a failed short-term trader. Ritholtz is a trader by profession, so it’s natural for him to think that way. But it’s not how gold investors think.

7. He turns a virtue into a vice. “What would make you reverse your biggest present holding?” asks Ritholtz. “If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.” This is pretty much the worst advice that any investor can receive. To be sure, if you’re putting on a trade, and you expect and hope to take profits by exiting your position in the foreseeable future, then it’s a very good idea to have an exit strategy at the same time that you enter the position. But if, on the other hand, you’re doing something sensible like putting all your retirement savings into a Vanguard target-date fund, then the lack of an exit strategy is a very good thing. You don’t want to panic and sell when the market goes down; indeed, the entire structure of the fund makes sense only if you hold it all the way through your retirement. Ritholtz, like all money managers, complains about fickle clients who withdraw their money at the first sign of underperformance. But if he keeps on writing like this, you can hardly blame them.

8. He encourages market timing. “Every position,” writes Ritholtz, “no matter how compelling the underlying story, should have an exit strategy.” The idea that you should just buy and hold, he says, is “an especially money-losing attitude when holding a commodity” — even though he himself admits that “gold has no fundamentals” and that commodities “lack an objective measure of cheap or dear”. In other words, he’s advocating a market-timing strategy — buying low, selling high — in the absence of any useful information about the best time to buy or the best time to sell. Attempts to time the market are the main reason for the existence of the “behavior gap”: the difference between investment returns, on the one hand, and investor returns, on the other. Here’s a chart from Betterment showing just how big that gap has been estimated to be:


In other words, if you follow Ritholtz’s advice, you’re likely to underperform the asset classes you’re invested in by 1.5% or more. Probably much more, frankly, if you’re the kind of person who likes to play in classes like commodities. I don’t think much of gold as a buy-and-hold investment, but I’m quite sure that attempting to trade in and out of gold is going to be a much worse idea.

9. He shows no conception of hedges, or optimal portfolio allocation strategies. Ritholtz enjoys taking a hammer to what he calls “End-of-World Tales, Conspiracy Theories and Other Such Nonsense”. But while he’s shooting fish in a barrel, he misses the one genuinely good reason for including gold in a portfolio — which is that it’s a reasonably good hedge against various tail-risk events. And indeed, when the entire world imploded in 2008-9, the price of gold helped anybody who owned it as a part of their portfolio to handily outperform the market. Hedges are like insurance: they’re there to help protect you in the unlikely event that a low-probability unexpected event suddenly knocks you sideways. Judging the gold price on its own, as Ritholtz does, is silly — especially in the context of a world where the stock market has been resurgent and portfolios in general have done extremely well. That’s exactly the time when you aren’t reliant on your hedge. And that’s why I’m skeptical that investors in gold have really lost their shirts. Sure, if you’re invested in nothing but gold, then your portfolio will have gone down in 2013, while everybody else’s went up. But for someone with say a 5% allocation to gold, just in case everything goes wrong, then last year was probably a very good one, overall.

10. If all else fails, resort to nonsense:

The concept of situational awareness comes from military theory, particularly aviation, representing the idea that a pilot needs to be fully cognizant of all the elements occurring in three-dimensional space, as well as those about to occur in the near future. For the investor, situational awareness means not getting too caught up in the moment, and understanding the continuum of time. Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video.

I have a vision of Ritholtz at his advisory shop, putting an arm around some young protégé’s shoulders, and telling him, “my son, you show promise. But what you lack is an understanding of the continuum of time“. To this, the only reasonable response is a slap in the face.

13 comments so far | RSS Comments RSS

Gold is not an investment. It may be a hedge or a speculation and you had better know which it is for you and trade appropriately for that. Since it is not an investment, it is all about market timing and if you convince yourself otherwise, you are only fooling yourself.

Posted by MyLord | Report as abusive

Ritholtz said in 2010 that he thought gold would go down 20-30%; instead it went UP 25%, so it proves he has no particular insights. If I owned 1000 Camrys and agreed to bleed them into the market for $30, you may CLAIM that the current price for Camrys is $30, and you would be right – until I ran out of Camrys.

Posted by Fazsha | Report as abusive

Ritholz can defend himself, but i would say that this article is really an elaboration of his view that a number of (retail) investors have “invested” in gold for political reasons. These people see a number of signs of the Apocalypse, including the extension of the welfare state under a black, non-American, socialist president, and that a proper preparation for the coming chaos is canned foods, shotguns, and a store of gold. This crowd does not receive cold calls from Goldman Sachs, but do get their world views from Beck and Paul. More broadly, Ritholz has pointed out that those who acted on their political convictions that the election of a Democrat would lead to perdition have missed out on one of the greatest stock market rallies of all time.

Posted by mlnberger | Report as abusive

What is your point with the Camrys? Obviously 1000 will not push the market far. If you want to sell them at $30, I’ll pay cash on the spot for the whole lot. You could likely sell a couple hundred million at that price, in this country alone.

Since commodity markets are strictly supply and demand, with no fundamentals, a large seller will move the market. But this may permanently diminish demand, thus resulting in a lower equilibrium price. No?

Posted by TFF | Report as abusive

i’m pretty shocked by your #7, Felix, as I think that

““What would make you reverse your biggest present holding?” asks Ritholtz. “If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.”

is probably the BEST advice any investor can receive.

Posted by KidDynamite | Report as abusive

Posted a comment on Ritholtz’s “Big Picture” site suggesting it is easy to publish lessons on gold investing when the gold market is down; that doing so would have been more helpful when gold was at its peak. Suggested that he publish some lessons in WAPO or Bloomberg on the effect of easy money on stock prices (e.g. 2000 & 2008 crashes for starters) now when stock prices are high. My comment was rejected by the “Big Picture” censor. Kind of thought it was relevant, apparently Barry did not.

Posted by JBtfsplk | Report as abusive

Posted a comment on Ritholtz’s site suggesting it is easy to publish lessons on gold investing when the gold market is down; that doing so would have been more helpful when gold was at its peak. Suggested that he publish some lessons on the effect of easy money on stock prices now when stock prices are high. My comment was rejected by the “Big Picture” censor. Kind of thought it was relevant, apparently Barry did not.

Posted by JBtfsplk | Report as abusive

A very weak critique. Where Ritholz and Salmon disagree, Ritholz is right on almost every point. If you refused to sell in 2013 as the market was going against you, you lost, a lot, no matter when you bought. Even if you’re a long-term investor, you’ll do better if you learn to sell near the tops – and that’s true even if saying so might perhaps mislead some poor saps into trying to sell near the tops and instead selling near the bottoms (sorry). The mainstream US financial investor community usually called “Wall Street”, buying mainly through GLD, was a major force in gold’s surge to $1900. Ron Paul fan goldbugs were a puny force.

But both Ritholz and Salmon miss a very obvious and powerful factor in the 2013 market turn for gold: the end of Asian real appreciation. Rising Asian incomes in dollar terms has been the single most powerful driver of gold’s run over the last decade. Asians are more numerous and more culturally inclined to own gold than Europeans and Americans. “Wall Street” was speculating ahead of that trend, and dumped in a hurry as it became clear that Asian real appreciation was running out of steam. If you missed that point you really know nothing about gold.

Posted by _tom_ | Report as abusive

Agree with your critique 100%. The problem for both Ritholtz and his protege Josh Brown is that they exist in self-inflicted dichotomy. They both criticize prognostication ad nauseum, but there’s Josh Brown on TV all the time analyzing the day’s trading and Ritholtz is the CEO of Hindsight Capital. You never hear about their positions until one has done well. They are both intelligent, well spoken and hopeless conflicted in that their stated mission conflicts with their actions.

Posted by LeChefBoyardee | Report as abusive

Why the fuss over Gold ? The market cap is about 3-4 days of QE and all this constant media focus. My point is made.

Posted by whopper | Report as abusive

He doesn’t have to identify any investor to say that someone lost money buying at $1900. If the price got that high, it means, that someone, somewhere, a bunch of someones most likely, was actually willing to fork over the cash. Now they have an asset that is worth less than they paid. Technically, they may not have “lost money” until they sell and it’s certainly possible that at some point in the future they may be able to recoup at least their nominal investment. Price goes up, then down, then up again, then down again, over and over and over.

Posted by Moopheus | Report as abusive

Most of the demand for this commodity is for jewelery and Gold bars. That is not good fundamental support IMO. I do not buy into the currency bit, or at least, I won’t until the reserve base can supply for all individuals in physical form.

Here is another way to look at it. In 2013, demand for jewelery was ~2200 tons and investment was ~770 tons while actual useful applications in industry was ~400 tons. Well, the jewelery/investment demand was ~19% lower from the start of 2012 to the finish of 2013 while the actual price declined ~29%. Industrial demand was statistically the same for the time period. Gold is currently priced at ~560% over inflation since 1920 in USD. Gold production will not change much and is up against diminishing returns unless a new frontier opens up. I believe that each years supply of jewelery and investment can be diverted to 4-6 years of useful supply for the planet. So, think, how much jewelery and investments are consumers willing to part with vs how much is needed for useful purposes vs how much base supply exists. Total Gold supply appears to be ~4400 tons annually with a slow decline to ~2200 over several decades. Oh, and over all, Gold has high recycleability at current prices.

Posted by bongstar420 | Report as abusive

Interesting, all these comments about be censored out of Barry’s blog comments. I suffered the same fate from Mr. Continuum of Time and am fine with it.

Got to keep up appearances to keep the new Bloomberg gig of his!

Posted by Alex... | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/