Is the picture painted of a typical gold bug accurate?
Bullion.Directory precious metals analysis 9 November, 2014
By Terry Kinder
Investor, Technical Analyst
Recently, JP Koning outlined what he believes are gold bug characteristics in his piece titled Gilded Cage. We’ll take a look at some of his criticisms of the typical gold bug and whether or not they are fair.
Regarding the gold bug Koning recently wrote:
A gold bug will typically have the following characteristics. 1) An abnormally-sized portion of their investing portfolio will be allocated to the yellow metal; 2) they believe in an eventual ‘day of reckoning’ when gold’s price rises into the stratosphere, the mirror image of which is hyperinflation; 3) their investing case for gold is twinned with strong moral view on the decrepitude of the current monetary system and/or society in general; and 4) they are 100% sure that the monetary system’s collapse will lead to the flowering of a new and virtuous system, a gold standard.
While Koning’s caricature / stereotype of the gold bug appears to contain some elements of truth in it at first glance, there are some problems with his analysis:
1. He doesn’t define what an abnormal proportion of an investment portfolio would be. Is 5-10% an out sized allocation of gold within a portfolio? What about 15-20%, is that too much in his eyes? We can’t be sure because he hasn’t defined what he believes is the proper portfolio allocation. One fairly cut and dried view of portfolio allocation was outlined by Harry Browne in his Permanent Portfolio. Browne believed that an investment portfolio should be allocated as follows:
- Gold and silver – 25%
- Cash – 25%
- Stocks – 25%
- Treasuries – 25%
2. Koning’s second point is not an entirely incorrect view of the beliefs held by many a gold bug. However, it seems like the whole gold to the stratosphere, day of reckoning, hyperinflation characterization is a bit warmed over. Certainly, some hold exactly the stereotypical view outlined by Koning, but as a gold bug myself I view gold as a kind of hedge or insurance against risk. Sure, if there is some type of economic dislocation, high inflation, political instability, etc., gold is nice to have. However, as mentioned above, gold has a role within a balanced portfolio that performs well in varied economic environments, from boom to bust. You don’t need to believe in an impending economic apocalypse to hold gold or see the value in doing so.
3. The third of Koning’s points is that a gold bug views the current monetary system and society through the lens of morality. Again, there is no doubt that some do. Personally, I would fall under that characterization. For me, there is something deeply immoral about our current monetary system, central banking, and fractional reserve banking as currently configured. Yet, you could simply view that same configuration from the perspective of property rights, and come to a similar conclusion that there is something wrong with the current system and that changes are needed. It makes little economic sense for a system to take the property of one person and give it to another person without their consent. You don’t need to use any moral terms, or describe what is happening as theft, to realize the damage that is being done to our society economically and to individuals in terms of their ability to generate wealth. As a gold bug I do see gold as a way to hold a portable amount of wealth outside the grasp of a system that sees no problem in taking what one person earns and giving it to their cronies, to their supporters to buy votes, to financial interests, and even to foreign powers. All of the above can be described as morally repugnant, but they are also plainly bad economic policy and inflict great harm on an individual’s ability to save and live independently.
4. Finally, Koning believes a typical gold bug is 100% sure that the collapse of the current monetary system will lead to a gold standard. Once again, surely it wouldn’t be difficult to find a gold bug that believes exactly what Koning has written. I’m not necessarily convinced that a gold standard will emerge at all out of the current situation. In fact, it appears there is a pretty good possibility that the SDR will be pushed forward as the eventual replacement for the U.S. Dollar, which is something Jim Rickards has been talking about for years. JC Collins recently wrote about the coming SDR gold standard, which actually makes much more sense to me than the idea of a gold backed Yuan or imminent collapse of the U.S. Dollar. Of course, I’m not a stereotypical gold bug, but when you paint a whole group of people with a broad brush stroke your masterpiece begins to appear more and more the picture you want people to see and less and less what was actually seen.
However, Koning isn’t finished with his gold bug critique, yet and offers further criticisms about gold bugs.
1. You can’t debate them and they will never admit that they are wrong.
2. They make incorrect predictions and never accept responsibility for them.
3. A gold bug always blames some outside force. If the price of gold falls it is because of some outside sinister force or “them”.
4. The gold bugs don’t believe economists or their data.
5. The average gold bug is more concerned with “the cause” than making a profit from gold.
Well, certainly gold bugs, myself included have been wrong. Forecasts of hyperinflation, thankfully, have proven to be incorrect. The slowing velocity of money has helped protect us from higher levels of inflation. As far as predictions, there are always going to be people who make incorrect predictions and don’t own up to them, whether a gold bug or not.
As to point 3 and the sinister “them”, I’m not sure how much more evidence of manipulation, from HFT, Libor, and a host of other market manipulations are needed before there has to be some recognition that everything from stock prices, to interest rates and the prices of precious metals is pushed around. I don’t believe in the long-term this changes their general trajectory, but it certainly has an effect over the short and medium-term.
Now if being a gold bug requires one to not trust or believe every economist or economic data point, then count me in. I also don’t believe salesmen, politicians or televangelists either. One of the troubling things about economics is that it presents itself as a much harder science than it is.
Much of the economic data is produced by agencies or institutions that are dependent on government for their financing, so pardon me for being suspicious that, perhaps, not every bit of data produced by a government agency, university, business interest group, etc. is not truth handed down from on high.
The last of Koning’s 5 points above is an interesting criticism of the gold bug. First, what is the cause? To me, it’s a vague generalization. I like to both make a profit and hold gold as part of a balanced portfolio. Again, if you go back to Harry Browne’s Permanent Portfolio, you will understand that no asset performs well in all economic environments.
If someone tells you they have an asset that always performs well you should probably run rather than walk in the opposite direction.
Can you encounter a gold bug that believes in gold with a religious fervor and will spend every last penny on it? Yes, and you can also encounter people who will spend their last dollar at the racetrack, will spend all their money on alcohol, or will hoard so much useless junk in their home that it becomes impossible to live there. A balanced person, like a balanced portfolio, does not lean too far toward any extreme.
Conclusion: Clearly it is easy to paint a word picture with stereotypes. It is too easy. The thing about stereotypes is that they are called stereotypes for a reason. There is at least an element of truth in them, or at least something that sounds like truth.
But painting a whole group with such a broad brush stroke clearly blurs the line between what the painter of the picture sees and the reality that exists in the world. Koning isn’t completely wrong when he speaks about the characteristics of a gold bug, but he isn’t completely right either.
There are certainly worse things to be, or be called, than a gold bug.
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As a former Austrian-leaning fiscal conservative, it was moral concern over the perceived state of the financial industry that initially drew me to the gold solution. But I was never satisfied with the gold-as-money answers to critical questions of inflation, impacts to labor, banking, national priorities/trade, and more. Gold is a harsh task master, and is still manipulated and still doesn’t solve banking crises and speculation.
I still share the moral concern but there are far better solutions to monetary systems than returning to gold. Like many former Austrians, I believe Modern Monetary Theory provides a more accurate description of how things actually work in the monetary & banking systems, and also provides a framework to build a more fair and just system that puts people first.
It is up to us to determine if we will provide the broad support required for politicians to implement it. My hope is that more Austrians, with their passion for a better system, will join the cause. I appeal to you all to thoroughly research the MMT literature before casting it aside – it’s not the “Keynesian money printing” that you initially think (speaking from experience).