Pushback to the Lessons from Gold’s Rise and Fall

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Last week, we published a 2,500-word opus on what lessons could be learned from the rise and fall of gold.

There was lots of feedback on the general concept and many of the specifics. By and large, the response was positive, although there was lots of pushback from those who were long gold or other metals. I thought it might be worthwhile to respond to some of the comments that came my way, both positive and negative.

1. Denial. I guess this should not have surprised me, but: People called the 38 percent drop from the peak a "pullback." Really? That's like saying leprosy is a dermatological condition.

It is not completely inaccurate to say that we don't know for sure if the secular bull market in metals is over. I have no objection to anyone saying we don't know how this ends. But ask yourself this: If stocks fell 38 percent, what trader would not declare the secular bull market over? How much does something have to drop before anyone admits the trend is broken? I chalked that up to trader's denial.

2. Not about gold. Quite a few people understood that the entire idea of the piece was not about gold, but rather used gold as a jumping off point to discuss investing errors in general. That the 10 "lessons" offered in the piece weren't specific to gold was by design. Some of the pushback said this critically -- "These lessons don't even apply to gold!" -- which really confused me. It was supposed to be investing advice that could be applied to equities, bonds, real estate or commodities. I have done similar such "lessons" after elections, and about investing in general (see this and this).

3. Not Objective. Duh. This was another perplexing criticism. I have never made a pretense to objectivity. I have opinions, and Bloomberg View is the opinion/commentary portion of the site.

I should have explained that I was long gold since the $400s (and said so publicly on TV). I sold half after it tripled. The rest was shaved off substantially higher. We also had positions in First Eagle Funds, which were sold in December 2011. That is what I meant by gold agnostic. In the future, I will try to clarify any investing positions we have had with greater clarity and transparency.

As to being "agnostic," I believe all investors should approach every investment that way. That is where objectivity matters. I don't care if its Apple or gold or Enron or AIG, if you are not agnostic, you will eventually get burned.

4. Biased critics. Speaking of objectivity -- it was really weird to be accused of bias from a run of people whose comment and/or Twitter names were things such as GoldTrader, Bullion Bull, GoldPhreak, MetalsReport, etc. I expected people who owned gold to object, but I was surprised that obviously non-objective observers of gold and or other related investments would make a claim to objectivity themselves. Perhaps this is a topic worthy of exploring in a future column on behavioral economics.

5. Market timing. Another odd claim, but it came from several people who I suspect never traded a share of anything in their life. So let's clarify this one:

There is nothing wrong with being a Buy & Hold investor in an asset-allocation model. You can buy any broad asset class -- equities/bonds/real estate/commodities -- holding it in an asset-allocation model with defined weightings. Do regular re-balancing, selling a little of whats run up, and buying a little of whats come down. When you own an asset class, mean reversion works in your favor.

Gold, however, is not an asset class like the four broad classes discussed above. It is one precious metal (part of group that also includes silver, platinum, and palladium), which itself is part of the broader class of metals. They in turn are part of the broad asset class called commodities (and Gold is a volatile one at that). Owning any specific commodity is akin to owning a single named stock. Hence, I said you must have an exit strategy. I don't care if it's Apple or Microsoft, AIG or Enron, gold, timber, oil or a specific CDO.

These are not asset classes, they are specific holdings, and that means applying risk management to them. Again, if you do not understand that, not only should you not be trading, you are not even qualified to comment on the subject.

6. Predictions. Many responses in comments and e-mails were claims about the future made as if they were fact. I call nonsense on that rhetorical trick every time I see it. If you are making a prediction about the future effect of (fill in the blank) debt, unfunded liabilities, demographics, etc., it is plain and simple, a forecast. You humans stink at them. If you haven't figured out yet that you have no idea what is going to happen next year, than you have not been paying attention. I am all too happy to call people on that silliness.

This is consistent with my views for a long time. See "Folly of Forecast" and "My 2014 Predictions" as examples.

7. Cheap rhetorical trick. Speaking of rhetorical sleight of hand, I did write, "This column is not an 'I told-you-so' or an exercise in 'Goldenfreude.' " That was called a cheap sleight of hand. Upon review, I have to plead guilty. It was, and I should have been less cheeky about it.

8. China & India. OMG, this came up again and again. Lookie here, I don't dismiss Chinese accumulation or Indian purchases. My point was simply that these are well-known factors to the metals market. They may drive demand, but it is already reflected in the price of gold, as it has been for decades (if not centuries). If you do not understand that well-known elements are in the price, you should never trade another anything. Ever.

9. Goldbug as a pejorative term. This was a new one to me. I've heard the term "goldbug" forever and never thought of it as negative or ad hominem. I am curious if anyone else thinks of it negatively. Perhaps in the future, we will have to start calling it the "G-word."

10. The headline. A lot of criticism was about the headline, "10 Reasons the Gold Bugs Lost Their Shirts." Editors at Bloomberg (and most major media) write headlines, not writers. I expressed my opinion on it -- I felt it set the wrong tone -- in the comments on the article page.

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The point of the whole a exercise was to see if we could derive some intelligent lessons from other peoples' mistakes. I think we accomplished that. Look for my upcoming column, "Lessons learned from slaughtering sacred cows" sometime next month.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net