Investing Lessons from the Gold Collapse

The other day legendary financial blogger and current Bloomberg View columnist, Barry Ritholtz, put together a great piece on the 40 percent collapse in gold prices called “10 reasons gold bugs lost their shirts.” What I love about the piece is not what he says specifically about gold, but some of the universal investing truths Barry extrapolates from bullions’ rise and fall.

Here are a few in particular that spoke to me.

Beware of the narrative: Story telling is a massive part of the human experience, but in investing, this can become a hindrance. Barry notes that storytelling plays a crucial role in the Wall Street sales process, but I would argue that all investors build their own narratives in their minds, subconsciously or not, and we become attached to these narratives—which as we learned from gold, can be spectacularly wrong.

As a blogger, I know this is something I must contend with as I often write about the markets I am looking to trade and I must be careful not to become too emotionally invested in the pieces I craft. For example, I wrote an extremely bearish note about gold the other week…and I have been wrong ever since I hit the publish button. Should gold keep rising, I will need to admit my narrative was incorrect and reconsider my bias that gold has at least one more down leg in the near term. It hurts to admit being wrong, but I’d rather be wrong than sacrifice my bankroll.

Gold does not have many industrial applications but it looks good as a toilet seat...

Gold does not have many industrial applications but it looks good as a toilet seat…

Ignore history at your peril: I’ve touched on this theme is the past during my discussion about “this time it’s different.” As gold bugs chose to ignore the fact that gold is just like any other commodity market in that it is not a “safe haven” but a highly leveraged, zero-sum game that trends both up and down.

Barry points out not just one or two, but nine gold run-ups and selloffs in the last century. It happens nearly once a decade.

Ignoring history, or in the gold bugs’ case, selective history that fits neatly into one’s narrative leads nowhere but to financial ruin.

Barry Ritholtz: 10 Reasons Gold Bugs Lost Their Shirts

Previously on Rip City Trader…

What My Serengeti Safari Taught Me About Risk Management

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One thought on “Investing Lessons from the Gold Collapse

  1. Pingback: Someone's buying what other people are dumping | Gold Investing FAQ

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