Big Short in Gold?

In any monster bull market, skeptics keep the bull market going; without them, you wouldn’t see the truly amazing rallies that shock the masses. The rally in gold has been subject to skepticism ever since its inception a decade ago. Has general skepticism prevented gold from rallying? Nope. Gold is supported by fundamentals that will send the yellow metal to new highs in the years ahead. Skeptics are welcome because they can do nothing to stop a bull market.

Today I came across an article that explains why gold is the next big short. The author mentions that the short gold trade is very similar to the short John Paulson put on in housing. As an aside, I found it ironic that the author mentioned Paulson and his housing short since Paulson is currently long gold in a big way. The author also says that Paulson created the instrument to go short housing. This is actually false- it was Michael Burry. Coincidentally, Burry also likes gold. Am I the only one catching the irony here?

Anyway, the author makes arguments I’ve heard many times before. For example, he says that gold has experienced “explosive and exponential gains” of over 400% since 2002. I find fault with this line of thinking because what exactly constitutes “explosive and exponential gains”? Let’s see. The Dow rose from 800 in 1982 to 4000 in 1995. This is a 400% gain. Did this “explosive and exponential” move herald the end of the bull market in stocks? Not at all. Stocks went from 4000 to 11000 in the next 6 years. Any short in stocks would have resulted in a huge loss of capital. The “explosive and exponential gains” argument is useless without frames of reference. Without looking to past bull markets to see what percentage gains are possible, you are making judgment calls that are subject to biases. Just look at the numbers and try to mitigate biases.

Public Participation?

The author also mentions that there is mass public participation in the gold market. This is an argument that truly baffles me. Gold is a bubble because people are holding gold parties where they are selling their gold? The whole logic behind the public participation argument is that the foolish masses get the trend wrong. So when the public is selling, shouldn’t investors be buying? I must be missing something here.

There is something called the ease-of-recall bias that I believe helps explain in part why people think there is a public hysteria in gold. The ease-of-recall bias causes us to misjudge the frequency of an event based on how easy it is to recall. Let’s think about investments for a second. Do you remember exactly who is long certain stocks like Exxon Mobil, Apple, or Microsoft? It doesn’t really register in our brains because these type of investments are mundane and common. But for some reason, people tend to know exactly who is buying gold- perhaps because of the stigma attached to owning gold. Since it is so easy to recall exactly who is a “gold bug”, people misjudge exactly how many gold bugs there actually are.

Do people realize that by investing passively in a 401k, you are implicitly invested in most of the major companies in the world. Where are talks of the mass hysteria in blue chip domestic stocks? Gold-related investments still account for less than 1% of financial assets. Is there not a bias against gold and gold-related shares then? Interesting.

“This Time is Different”

Another very misguided argument that the author uses. As an investor in gold, I am not saying “this time is different.” In fact, I am saying this time is the same! This sovereign debt crisis resembles the crisis in the 1930′s when capital fled out of most currencies and into the dollar, which coincidentally, was one of the few currencies linked to gold. In the 1970′s, gold rose over 20X from $35 to $850. So is it not the people who are going short now after a 5X gain in gold who are saying “this time is different?” Am I the only one who finds the humor in this?

Gold bugs rest assured that skepticism is still alive and well in gold. When the rocket launches in gold come in the next year, these gold bears will go into hibernation as they always do. Why the biases against gold? I don’t know, but I plan on profiting from it in a big way.

Big Short in Gold? is a post from: Expected Returns

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