Avoiding the golden mistake

[jducoeur]

Those who are nervous about the markets and contemplating pushing their money into gold might do well to take a look at yesterday's article in the Motley Fool. Suffice it to say, they make the point that, while gold tends to look good in the short run, it's generally a poor investment in the longer term. And most people are pretty bad at figuring out when the short term starts turning into the long.

Looking at it, it's pretty clear to me that gold is currently in the middle of a bubble, and getting steadily more over-valued. Piling out of one bubble into another is probably not the best strategy...

Comments

[aneirin-awenyd.livejournal.com]

Unless the dollar loses all its value.

Which is a possibility.

[jducoeur]

It is, but honestly -- if that happens, we're talking about an economic meltdown so comprehensive that all bets are off. In particular, it would likely be paired with a political breakdown so severe that it would have its own problems, because civil society would probably collapse and transform. If your gold was notional, physically held by someone else, you'd be fairly likely to lose access to it and it would become meaningless. And if you held it physically and it really *was* worth something in a society that has broken down, you'd become a serious target for theft and assassination. (Indeed, there's a fair likelihood that this would lead to revolutionary thinking -- which frequently leads to political murder of the rich.)

So I don't see this as an option worth focusing plans on. If things get to that point, American society will probably go through wrenching changes, and we're just going to have to take *that* one day at a time.

Besides, at the moment, despite the doomsaying, the signs about the dollar are decidedly mixed: since *everybody* is getting hammered by the crisis, it's not hurting the dollar nearly as much as most predictions said. Indeed, the dollar has actually risen the past few months, and while that's by no means certain to continue, it does point up that the situation is more complex than the doomsayers would like to believe...

[aneirin-awenyd.livejournal.com]

I think it depends on whom you listen to and what you want to believe. :)

I think we are going to go through wrenching changes as a society, and I think they are not far off. I think we are in for quite a rude transformation. I think we are now in a period of deflation. And if I could afford to have investments, I would hold gold and silver (always physical, never notional).

But I agree that the signs are confusing, and that is why I say it's all in whom you listen to.

My source for most info is www.chrismartenson.com, but you probably already knew that.

[redsquirrel.livejournal.com]

Actually it occurs to me that if you are investing for long term and can afford to wait it out this would be an excellent time to invest in the stock market. There's a huge panic mentality going on and people are fleeing it in droves, depressing prices across the market. With a little research it shouldn't be hard to find companies out there that are fundamentally sound that will make it through the bad times of the next few years. Because the economy is cyclical and bad times really don't last forever and I think that eventually we'll make it through, optimist that I am.

I could be completely off-base because I'm certainly not deeply versed in the subject though I have been doing some reading. I have a working hypothesis about the size of this whole economic problem and that it's a function of the Information Revolution. The ease of communication has allowed an an enormous concentration of capital sloshing around the globe in what's become a very small market. The people managing this are chasing the highest returns for this huge lump of capital. Being people, they tend to chase in the same direction - herd mentality, you know.

Because this lump of capital is so big, it distorts any sector it lands in. Rather the way global warming is causing more "extreme weather." It excites the system because it adds more energy to that chaotic system. The money managers have no idea how to handle these feedback loops. It's too new and the economy, like the weather, is too chaotic a system to be fully understood. Throw deregulation on top of that, allowing that huge lump of capital to slosh where it will and you're going to get the natural boom-and-bust cycles of the economy - magnified.
(Drat, I don't know if that was very lucid. But I don't feel like taking it apart and rewriting it so I'll just have to hope you can pick out the sense in it.)

All of which comes 'round to saying that I think this is a cyclical downturn and eventually there will be a cyclical upturn. If you can wait it out long enough, there are probably some real bargains out there - stocks, like houses were overvalued during the bubble, now they're likely undervalued. People need places to live and they need what a lot of companies sell. The market will eventually (and I do stress eventually) rebound.

[redsquirrel.livejournal.com]

Oh, and yes, I think some of that big lump is sloshing toward gold right now. I wonder where it will slosh next when the resultant gold and existing commodities bubbles burst, as have stocks and real estate? Any ideas?

[jducoeur]

If I knew that, I'd be rather wealthier than I am now. Seeing where the herd is going to go *next* is one of the better ways to get seriously rich, but it's tricky...

[jducoeur]

it occurs to me that if you are investing for long term and can afford to wait it out this would be an excellent time to invest in the stock market.

Hopefully correct. For various (mostly bad) reasons, we didn't get out when we should have, and have lost a lot; the result, though, is that our portfolio looks *very* undervalued by most reasonable yardsticks. So my current instinct is to sit tight until things rebound at least a fair ways, and then rebalance.

Drat, I don't know if that was very lucid.

Well, I got the idea anyway. It's an interesting theory, and at least plausible on the face of it. Indeed, if you assume that most people are *not* all that economically rational, and that the herd effect is strong, it's almost inevitable. It basically dictates that, at any given time, there will be at least one inflating bubble of *some* kind -- which does actually match my observations of the past couple of decades fairly well. (For example, the housing bubble inflating in the wake of the dotcom bust, and now gold inflating in the wake of the housing bust. The "sloshing" you describe does seem to happen to at least some degree.)

The interesting question this leads to is whether people will eventually learn from the mistake. The phenomenon isn't new, but it's happening rather quickly nowadays. This implies that people might see enough booms-and-busts to begin to recognize the general pattern and compensate for it, thereby tamping down the effect...

[alexx-kay.livejournal.com]

"The interesting question this leads to is whether people will eventually learn from the mistake."

Nope. Individual persons may learn this sort of thing, but "people", in aggregate, cannot. Evolution has (mis-)wired us so that we are not rational economic actors. This is why "there's a sucker born every minute." Sadly, learning not to be a sucker takes *considerably* longer than a minute, and most people never manage it at all. Hence, most of the population, at any given time, are suckers.

For "people" to learn this sort of thing will take either or both of:
*) a fundamental improvement in the default wiring of our intuitions
*) a substantial increase in our average speed of learning

I think both of these are possible, and valuable, but neither one is notably happening during this economic cycle.

[metahacker.livejournal.com]

How about *) an improvement in our formal education?

I mean, our instincts tell us to steal, cheat, lie, in some cases rape, and other things that we have successfully eliminated from the majority of polite society -- or which have attendant penalties to balance them out. Why not the same with panicky investing?

Or maybe that's wishful thinking.

[jducoeur]

our instincts tell us to steal, cheat, lie, in some cases rape

That's not really so clear. Consider the recent experiments that are pointing to certain ingrained universal notions of morality. At this point, the nature/nurture jury is still very out on which bits of violence and morality are "natural", and which are cultural.

But really: I'm suspicious that formal education will help in this case. I think a deeper level of education is needed -- at the cultural/ritual/religious level, not the intellectual one. I could imagine that happening, though...

[alexx-kay.livejournal.com]

"How about *) an improvement in our formal education?"

IMAO, only if that *results* in "*) a substantial increase in our average speed of learning". Which is possible, but I think would require, at minimum, a massive revolution in teaching methods. I don't see us getting there incrementally from our current pedagogy.

"our instincts tell us to steal, cheat, lie, in some cases rape, and other things"

I think that's an over-simplification. The evolutionarily stable (mostly) mix is that most people are cooperatively social, but a few sociopaths exploit the system. I'm not sure that that has significantly changed. We may (maybe) have reduced the expression of sociopathy among low-power members of society, but high-powered sociopaths are as powerful and abusive as they have ever been.

[I have occasionally played around with an SF Utopia scenario based on the existence of an objective test for sociopathy. That invention leads to the *actual* War to End Wars, as all the sociopaths make their last attempts to maintain control. But once the cooperative societies are immune to infection by defaulters, they are hugely more productive, and can't be beaten in the long term. The end result is a society where severe sociopaths are isolated in asylums, and mild ones are prevented from occupying positions of power.]

[meiczyslaw.livejournal.com]

The evolutionarily stable (mostly) mix is that most people are cooperatively social, but a few sociopaths exploit the system.

Much of the current research reinforces this notion. Humans tend to generate a natural high when they help other people.

There are a couple of exceptions: for one, humans apparently really like vengence. We're willing to suffer a lot to get back at someone we think deserves it.

[jducoeur]

Well, it's a bit ambiguous whether that's an exception or not. The vengeance thing isn't necessarily helping other individuals, but it appears to be at least partly motivated by a desire to protect the tribe as a whole, by discouraging harm to it. (At least, that's the most plausible evolutionary-biology explanation I've seen.)

So it's arguably still altruistic, just in different ways...

[jducoeur]

During this cycle, no, but this cuts to the heart of my argument: the boom/bust cycles seem to be running particularly fast nowadays. Everyone tends to fall for this once, maybe twice. But if you experience several of them in your lifetime, that's enough opportunity to get the generalized clue, teach it to your children *viscerally* as opposed to intellectually, and bake it into the culture.

I'm not thinking in terms of the next three years, or even really the next ten. But if current trends continue, I could imagine things beginning to shift significantly in the 20-40 year timeframe.

The problem, of course, is that the visceral lesson gets lost a generation or so after it is learned. At that point, though, it tends to get ritualized into the culture. And now I find myself wondering what *that* culture looks like -- interesting detail for a science fiction story...

[alexx-kay.livejournal.com]

There are still people alive who remember the Great Depression viscerally, and learned a great deal from that one event. It got 'baked' into the culture, in a number of ways, but sadly all impermanent.

"the visceral lesson gets lost a generation or so after it is learned. At that point, though, it tends to get ritualized into the culture."

I don't see how the second sentence follows from the first. Indeed, the first sentence seems to refute the second. If the lesson is lost, how does it get ritualized?

And even if such knowledge does get ritualized, rituals themselves are not very stable on a societal level over a period of generations. Historically, in some periods, some rituals lasted a long time (or at least it appears that way from my modern perspective). But the modern western world is one in which 'ritual' and 'tradition' are in near-constant flux.

[meiczyslaw.livejournal.com]

If the lesson is lost, how does it get ritualized?

In the old days, the power structures were organized in such a way that the folks at the top didn't forget. They had the time to think about how to fix the problem, and then they passed the solution down to the masses.

This is where you get the prohibitions against pork rooted in the Middle East. Other people could eat pork and not get sick, so you can't just simply say, "don't eat pork, it'll make you sick," when it obviously doesn't make Egyptians sick. No, the priests had to say, "God doesn't want you eating that. It's unclean."

But if there is no God, then the pigs must not be unclean! we say, and then end up with trichinosis.

[alexx-kay.livejournal.com]

My point, though, is that that sort of strong, effective religious injunction doesn't seem to get created any more. Ideologies are too much in flux. The folks in power over the last few decades didn't forget the Great Depression; but they decided that the laws designed to prevent its recurrence no longer fit their ideology.

[meiczyslaw.livejournal.com]

I'm not arguing the point -- the question you asked did not seem rhetorical.

I could also have brought up how family-oriented the professions were, and how family traditions could be used in place of religious ones.

(There was good reason for the nobility to be hereditary -- without a serious education system, the only way you learned the complex job of governing would be from your predecessor, one of your parents.)

We've broken these constraints to create flexibility and innovate, but we haven't replaced them with anything, thereby losing institutional memory.

[kathryn-aka-kat.livejournal.com]

Bah, you forget to take into account that gold has other things to recommend it. When it becomes worth less than you paid, you can still make much nicer jewelry out of it than you can out of stock certificates? ;-)

[metahacker.livejournal.com]

(blink)

Why would anyone buy gold *now*? It's clearly at or near the top of its bubble. I guess if you wanted to do short-term speculation before everyone starts selling their gold to buy cheap dollars; but that's a risky route.

Or do I not think like the man in the street, the one who's about to sell low and then buy high later?

[jducoeur]

Or do I not think like the man in the street, the one who's about to sell low and then buy high later?

Bingo. Sadly.