Felix Salmon

10 Reasons Barry Ritholtz Is Wrong About Gold

Felix Salmon
Jan 11, 2014 23:24 UTC

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.


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

Gold: The fear bubble bursts

Felix Salmon
Apr 15, 2013 20:53 UTC

The total amount of gold in the world, according to Thomson Reuters, is 171,300 metric tonnes, or 5.5 billion troy ounces. What that means is that every time the price of gold falls by $100 an ounce, as it did on Friday and it has done again today, the value of the world’s gold falls by more than $500 billion.

That doesn’t mean investors have lost $1 trillion in the space of two trading days. Some gold is used in industry or jewelry, and there’s a huge amount in central banks, which don’t mark to market and therefore aren’t really investors as we normally understand the term. Still, with a “market capitalization” at the end of 2012 of about $9 trillion, the gold market is not much smaller than the NYSE, is twice the size of the Nasdaq, and is almost three times the size of the Tokyo and London stock exchanges.

As a result, the falling price of gold is more important than simply being an opportunity for schadenfreude around the likes of Glenn Beck or John Paulson or Zero Hedge. At the end of 2012, for instance, Paulson owned 21.8 million shares of GLD. Those have sunk some 19%, or $30 per share, since then — a total loss of more than $650 million, for Paulson and his investors. But that’s just a drop in the bucket compared to the $1.6 trillion wiped off the value of gold more generally during the same period.

To put that number in context, the NYSE has risen 6.6% since the end of 2012, a rise in value of some $930 billion. Which means that the value of gold has been falling faster than the value of stocks has been rising. But gold is held in much more concentrated hands: most people have very little exposure to it, while a relatively small number of investors have huge allocations. As a result, the wealth effect from the fall in gold prices is likely to be felt quite acutely.

Gold is the classic zero-coupon perpetual bond: an asset whose industrial value is a tiny fraction of its cash value, and which represents, as Joe Weisenthal says, a costly failure of markets to efficiently allocate capital to where it is best invested. Goldbugs are by their nature defeatist and pessimistic; get enough of them together at the same time and they become self-fulfilling. (That’s why they tend to be so evangelical about their beliefs.)

So what does the fall of the gold price mean for the rest of us? The first thing to worry about is the wealth effect: if people have suddenly lost a trillion dollars, does that mean they’re going to spend less, and hurt the broader economy as a result?

I doubt that, somehow. About 2,500 tonnes of gold is tied up in gold ETFs. That’s about 80 million ounces, which translates to investor losses of about $16 billion in the past couple of days. On top of that, there have probably been about $3 billion of losses in the futures market. Those numbers — a proxy for the gold positions which are marked to market regularly — are relatively modest: they’re much smaller than the $100 billion or so that has been wiped off the valuation of Apple this year alone.

What’s more, very few investors have leveraged positions in gold, and when asset bubbles burst, it’s normally the leverage, more than the bursting bubble itself, which does the most damage.

Still, there will be pain — pain which is necessary to break the gold fever. It’s important that goldbugs are seen to not only have silly beliefs, but also to have lost a substantial amount of money. Gold is a fear trade rather than a greed trade — it’s defensive, and defensive investors are always particularly loss-averse. If you lose money betting on high-flying tech stocks, that’s much more likely to be money you can afford to lose than if you lose money after putting your life savings into precious metals. (Silver, as befits its status as the “B” share of gold, is also being hit badly today.)

The biggest problem in the markets right now is that they’re still far too risk-averse. Fear-based assets like gold, Treasury bonds, and cash are in high demand, while there isn’t enough money flowing through greed-based assets like stocks and bank loans and into the economy as a whole. Even if the stock market is expensive, the number of primary and secondary offerings remains low; similarly, banks are not expanding their loan books nearly fast enough.

What the system needs, then, is a stark reminder that fear-based assets can be just as risky as greed-based assets. Rising interest rates can eat away the value of your bond portfolio, inflation can erode your cash, and as for gold (or bitcoins, for that matter), well, it can plunge in value literally overnight.

My hope is that the price of gold will continue to fall, that goldbugs will look increasingly silly, and that as a result Americans with savings will conclude that the best thing to do with those savings is to put them to work in a productive manner, rather than self-defeatingly trying to protect what they have.

At the end of the 1990s, and again in the mid-2000s, we had greed bubbles. Both those bubbles burst, and the weird result was a fear bubble, which manifested itself in negative risk-free real interest rates and a soaring price of gold. Let’s hope that what we’re seeing right now is the fear bubble bursting. It’s what the world needs.


Please may I invite you to step into this lovely golden bear trap? Well OK but first can I ask a few questions – if the gold price is falling it must mean that labour force participation has improved? Err no! Has GDP improved despite QE and budget deficits >10% of GDP? Err no! Has QE stopped and have bankers started behaving responsibly? Hell no – they will probably fail again at the mere sniff of a crisis! Has a huge supply of Gold that nobody wants suddenly been discovered? Err no in fact ore grades are declining and Germany is waiting 7 years for its gold from Uncle Sam! So with no fundamentals behind any economic recovery, a gold price at it lowest for a couple of years, and record physical demand you want us to dump it and embrace some horrendous QE bloated stock/bond fest? Yes but we have a printing press and lots of other suckers so everything will be fine, just step forward!

Posted by maxim_moto | Report as abusive

Can gold be used as a currency?

Felix Salmon
Apr 27, 2012 04:59 UTC

It worked! Kinda. I took Matthew Bishop’s challenge, and tried to spend a gram of gold like I would any other currency. And, frankly, didn’t have a lot of luck — until I managed to find a small business where the owner just happened to be standing around. In the end, I got three lobster rolls (and free drinks, too) for one gram of gold. Which were very tasty — thank you Snack Box!

So, what did I learn on my expedition in Times Square?

  • When I tell the Snack Box owner that the gold is real and that “you can tell by how shiny it is”, I’m not kidding. Pure gold is really shiny.
  • The most surprising people turn out to know how much a gram of gold is worth, with an astonishing level of accuracy.
  • Gold is not a currency. I’m reasonably sure that Andrew, the guy behind the counter at Snack Box, would not have accepted my gram of gold unless his boss was telling him to.
  • If you do want to spend gold, then try your luck with small businesses, and don’t expect a good implied exchange rate.
  • Also, bringing a film crew along is unlikely to help you at any big chain store.

Most interestingly, however, at least to me, was how much it actually cost us to obtain that gram of gold. For the purposes of the video, I was using the value of one gram of gold based on its market price per ounce. But if you go out and attempt to buy a gold bar, you’ll never be able to find one for a mere $53. In fact, my producer wound up paying double that, in Manhattan. Even if you do a lot of searching online, you’ll be hard pressed to find one for less than $80. We didn’t try to sell the gold — we wound up getting a delicious lunch instead — but my guess is that in most cities the effective bid/offer is absolutely enormous. And much bigger than for any major global currency.

Still, it was a fun — and tasty — experiment. If you try it yourself, do let me know the results!


I am total agreement with gold as currency and I want to share an opportunity for you to purchase/exchange cash for it for less than the $80 spent for the 1g in the video. Visit http://www.KaratBars.com/?s=iprovidesoul to register your gold savings plan NOW! Fiat currencies have intrinsic value, gold is a tangible asset class.

Posted by Anonymous | Report as abusive

The problem of fake gold bars

Felix Salmon
Mar 25, 2012 20:19 UTC

You don’t need to be a conspiracy theorist to find this worrying: a 1kg gold bar, certified as 99.98% pure by XRF (X-ray fluorescence) tests, turns out to have been drilled out and largely replaced with tungsten. This bar was discovered only because it was 2 grams lighter than it ought to have been: the forgers failed to add quite enough gold to the outside of the bar to make up for the weight lost when they replaced gold with tungsten. But if they’d gotten the weight right, it would probably still be circulating today.

Of course, there are means of testing gold bars beyond just weight and XRF. If you can weigh the bar accurately, then you can test for purity by essentially dropping it in a bucket of water and seeing how much the water level rises: a gold-covered tungsten bar will displace more water than a pure gold bar. Alternatively, for $3,000 or so you can buy a micro ohm meter, which is easily sensitive enough to tell the difference in conductivity between a pure gold bar and one which is largely tungsten.

But as far as I know, these tests are not particularly commonplace among gold dealers, and in any case only a minuscule fraction of the gold bars in the world are physically traded, changing hands from one owner to the next — the obvious point at which tests like these would be conducted. If you own gold — if you’re a central bank, say, or a physical-gold ETF, or even if you’re just a Ron Paul or Glenn Beck type with your own personal stash — then there’s no realistic chance at all that you’re going to go bar by bar through your own holdings, testing each one.

In the case of gold, then, what JK Galbraith famously called “the bezzle” — the amount of wealth that people think they have, which in fact they don’t have — could be truly enormous. If there are 1.3 million salted 400 oz bars in existence, and each one is 75% tungsten, then that makes 390 million ounces of gold which in truth isn’t there. At $1,660 per ounce, that’s over $600 billion which people think they own but don’t. To put that number in context, it’s roughly half the total quantity of subprime mortgages which had been issued at the height of the housing bubble.

On the other hand, it’s also possible that the number of salted 400 oz bars is zero, that the 1 kg bar recently discovered was an amateurish aberration, and that there’s nothing to worry about at all. But the economic incentives here are so enormous, for people looking to make a fortune in the fake-gold-bar industry, that I very much doubt no one has tried. And statistically speaking, if a bunch of people have tried, then some subset of those people will have succeeded.

So what to make of the fact that no salted 400 oz bars have yet been found? On the one hand, it can be viewed as very worrying — as being an indication that the gold markets are very bad at uncovering such things. On the other hand, you’d think they’d be good enough at it that they would have uncovered at least a small percentage of the salted bars outstanding — and if they’ve uncovered no such bars at all, then that can be taken as an indication there aren’t any salted bars outstanding.

In any case, there’s clearly now serious tail risk for anybody in the physical-gold market. And like most tail risks, measuring and/or insuring against it is extremely difficult. Any store of value has problems, be it fiat currency or sovereign debt or bitcoins. This latest discovery just goes to show that the problems with gold aren’t just the obvious ones surrounding things like the risk that the price of gold might plunge. There are non-obvious ones, too, which have the potential to be even bigger.

Update: Thanks to smart comments from BronSuchecki and Tim Worstall. I forgot that gold is actually used, once in a while, to make things like jewels — which means that bars are melted down pretty frequently. If there was a significant number of salted bars out there, we’d know about it, since you’d notice when one of them got melted down. Which isn’t to say that there are no salted bars at all, but it certainly does seem to imply that there’s nowhere near 1.3 million of them.


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Posted by jclausin | Report as abusive

How to get $12 billion of gold to Venezuela

Felix Salmon
Aug 23, 2011 01:59 UTC

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.


What is the big deal anyway ? India imports nearly 800-1000 tons of physical gold every year and China is close to that number. All this gold is used for jewelry and hence actually travels every year. Obviously, commercial modes are well established to transport physical gold in hundreds or even thousands of tons a year.

Posted by rsksquare | Report as abusive

Bad housing advice of the day, Philly edition

Felix Salmon
Feb 1, 2011 22:41 UTC

Erin Arvedlund — yes, that Erin Arvedlund — has a pretty crazy column in the Philadelphia Inquirer, under the headline “Why buying gold may be better financially than buying a house.” It says pretty much what you’d expect: house prices are falling, gold prices are rising, and therefore before you go ahead and buy a house, you should probably consider whether you’d be better off buying gold instead.

Arvedlund talked to a bunch of people for this column, mostly rent-a-quote types like Barry Ritholtz and Peter Schiff, but the central conceit is all hers: none of the people she quotes is literally saying that people should make a speculative punt on gold rather than buy a home to live in. Indeed, Schiff comes out quite explicitly and says that homes are not an investment, they’re more of a consumption good. (He’s right.)

Arvedlund, here, has committed the journalistic equivalent of mixing toothpaste and orange juice. Either tastes fine on its own: it’s perfectly OK to pen a column pointing out that house prices might well continue to fall, or another one looking at gold as an investment and saying that it has a fair amount of possible upside. The really nasty taste comes when you combine the two.

To see just how crazy Arvedlund’s thesis is, look at how she presents it:

Maybe you’ve saved enough for a down payment. But should you bet your money on home prices, even with a tempting low-interest, fixed-rate mortgage? Or is it financially smarter to continue renting and invest the money in an asset that could appreciate for at least another few years?

By definition, money that has been painstakingly saved up for a down-payment on a house is not risk capital which can or should ever be applied to a highly speculative investment like gold. It might well be smart to continue to rent rather than buy a home. And indeed it might even be true that gold will rise in value over the next few years. But that doesn’t mean that anybody in their right mind should seriously consider taking their down-payment nest egg and investing it in gold.

Being “financially smart” is not the same as investing in whichever asset gives you the highest return over some given time horizon. If that were the case, then everybody should just go out and start selling lottery tickets without any downside protection. The fact is that nothing is a good or a bad investment in and of itself: you always have to look at it in the context of the specific risk profile of the investor in question. And if the investor is someone scraping together a down-payment on a house, then it’s trivially true that using some or all of the down-payment money to buy gold at $1,350 per ounce is downright bonkers.

Essentially, Arvedlund is proposing an exotic relative-value trade here: she’s saying that houses will underperform gold, or that the price of a house in gold is going to go down rather than up. Which brings us to this graph, which is the price of houses in gold:


Arvedlund’s trade has been a good one for a long time — pretty much since 2002. Over those nine years, whether house prices have been rising or falling, the price of a house in gold has gone down, and you would have been financially better off buying gold than taking that money and using it as a down-payment for a house. On the other hand, from 1980 to 2002, Arvedlund’s trade was an utterly atrocious one, which would probably have lost you money on both legs.

One look at this volatile time series tells you all you need to know about Arvedlund’s advice: it’s way too risky for her audience, and in fact, over the long term, it’s pretty likely that the price of a house in gold is going to revert to its long-term mean and go up rather than down.

Arvedlund is writing for the Philadelphia Inquirer here, not for Barron’s or for people with huge amounts of risk capital and disposable income. The last thing this audience needs is speculative advice about buying gold now and trying to time the market so that you sell it before the bubble bursts. But if I were a hedge fund manager, I would wonder whether this column marked some kind of a turning point. It’s entirely possible that  Arvedlund has hit the very moment at which gold starts to underperform house prices. Which isn’t to say, of course, that either of them are going up.


…of course that logic only applies if you hold a house for decades.

Posted by TFF | Report as abusive

Gold and the worry trade

Felix Salmon
May 11, 2010 20:13 UTC

Is it a coincidence that the price of gold hit an all-time high just as David Cameron was becoming the prime minister of Britain? Yes. But it’s also indicative of the enormous amount of uncertainty that continues to pervade the market. If you’re just looking at the stock market, you’re not looking at the most sensitive barometer of fears about the global economy in general and the eurozone in particular. As Paul Krugman notes, the euro/dollar exchange rate is probably a better place to look, and that’s now back down below 1.27, after trading at 1.50 as recently as December. For what it’s worth, here’s the price of gold in euros:


It’s entirely conceivable that we could see gold at €1,000 an ounce pretty soon. Which, just as much as recent stock market volatility, is a pretty clear indication that there’s still a lot of worry out there, trillion-dollar eurozone bailout plans notwithstanding.


Finance is as we know, much like a fortune tellers ball! To monitor the exchange of value between different types of commodities is a full time role. Hence stock brokers! Gold is, like much of the market, effected in both highs and lows.


Posted by BarbaraRobbins | Report as abusive

Esquire’s investment advice

Felix Salmon
Feb 10, 2010 17:50 UTC

Courtney Comstock is absolutely right when she runs a story under the headline “You Know It’s Over When Esquire Magazine Is Telling Its Readers How To Invest In Gold Funds”. In a spectacularly silly article, Esquire’s Ken Kurson extolls the virtues of buying gold-denominated hedge funds, on the grounds that if the hedge fund doubles and gold doubles, then you’ll end up quadrupling your money! Genius.

But to appreciate the fuller expression of Kurson’s genius, it’s worth flicking through his archives. There’s the 2006 article where he says that everybody should invest in credit default swaps, specifically by buying stock in a company called GFI Group:

A few days after its January 2005 IPO, I bought a few hundred GFI shares (GFIG on Nasdaq) for just under 26, and I have since added a couple thousand, picking up more each time the stock dips below 50. (I should mention that GFI’s CEO, Mickey Gooch, has become a friend of mine.) In addition to my belief that this stock could very well become a tenbagger within ten years, there’s something very appealing about investing not just in a company but in a whole new industry.

Today, GFI Group is trading at $4.43 per share. Yes, that’s in the wake of a 4-for-1 stock split, but it’s still well below its IPO price, and Kurson, if he didn’t sell at the top of the market, is now sitting on substantial losses. Of course, that’s the problem with 99% of investment advice, not just Kurson’s: these people are very happy to tell you what to buy and when to buy it (now), but never tell you when you should exit your position.

Kurson also reckoned that the automakers were a screaming buy in 2005, saying that “GM is moving with stunning speed to address what ails its business, and that “the United States government will not allow Ford or General Motors to default on its debt”. How did that trade work out for you, Ken?

But if Kurson is not very good at telling you what to buy, maybe he’s good at telling you what to sell. Let’s see:

An investor should short as many shares of Apple as he can possibly borrow…

I’m short a bunch of AAPL at $65.

Oh well, never mind.

So when Kurson says that “$20,000 will barely buy in five years what $10,000 buys today”, it’s worth reading that in the context of his past predictions. And maybe staying away from the gold-denominated Superfund.


Hi, just wanted to say I attended this conference last year, and found it by far the best of about 8 conferences that I attended in the field. Full of professional insight based on testing by experts that knew what they were talking about. I would certainly go again and recommend it to anyone operating in this field.
electronic cigarette

Posted by mbmdan | Report as abusive

The ontological status of gold

Felix Salmon
Dec 22, 2009 20:22 UTC

I was pleasantly surprised by the volume of email response I got to a passing reference to Kripkenstein on this blog — clearly quite a lot of you enjoy a bit of analytical philosophy! I went out to lunch today with a couple of philosophically-inclined finance types as a result, and, since I’m still high on Sichuan peppercorns and it seems to be something of a slow news day, I thought I’d put up a poll.

Remember this wonderful graph, from Paul Kedrosky, showing the price of gold in gold? Pay attention, there will be a quiz.

So here’s the question, for those of you who remember the analytic-synthetic distinction:

Or to put it another way: Can an analytic a priori statement be funny?

Update: With 125 votes cast, a clear majority of you (59%) are voting for the first option, analytic a priori. But you’re wrong, as dsquared explained to me in an email this morning — what happens to the graph if the price of gold goes to zero?

The assertion that the price of gold, in gold, is 1, is not analytic because it depends on the truth of at least one other proposition (that gold has a nonzero price) and is not a priori because there are possible worlds in which gold does not have a nonzero price.

Which just goes to prove, if nothing else, that philosophy is probably not best conducted by polling blog readers.

Update 2: Natecha defends the analytic-a-priori crew against dsquared, saying that the statement “x/x=1″ isn’t false when x=0, just undefined. He adds for good measure that “Daniel’s comment flies in the face of philosophical orthodoxy about analyticity and apriority”. Which is a statement I daresay Daniel would agree with.


The price of gold is the price of gold. Positive, negative or otherwise. The analytic is the logic.

Posted by BarbaraRobbins | Report as abusive