All that glitters...

January 26, 2009 in Finance

The Wall Street Journal published an article this morning called "What You Need To Know About Gold" which epitomizes the dangers of financial journalism (or friends, family, Bernie Madoff) which may appear to recommend, encourage or in any other way invite investment in a product one is not an expert in.

Consider, for a minute, What You Need to Know:

Of all the major assets -- stocks, corporate bonds, cash and others -- gold was one of last year's few standouts. While so many investments collapsed amid the turmoil, the price of an ounce of gold posted a gain of about 4.3%.

And the reality check: here's a graph of the spot price of gold in 2008. Marked in white is the annual % change (+5.8% -- note this may differ due to which gold price is being measured, but they all track about the same). The largest gain from 12/31/07 is marked in green (a nice 20.3%, achieved in less than three months on March 14). The largest loss from 12/31/07 is a stiff -14.6% (November 12th). Not exactly a safe, stable investment.


I'm no expert, but it looks an awful lot like gold "collapsed amid the turmoil" as well. Just look at the jumps in September and October! The fact that gold finished positive appears to be more of a fortunate chronological accident than on account of any inherent outperforming property of the underlying commodity.

The Journal continues:

So far this year, the rare metal is up about 0.7%, after a rally Friday put it back in positive territory.

In other words, if this article were written Thursday night it would have an entirely different thesis! Maybe it would have been called "Gold: Volatile and Dangerous", but thanks to a late-day Friday rally it can ask with a straight face, "Gold shined in 2008. Could 2009 be as bright?"  Here's 2009:


Gold may rally over 2000 or fall through the floor this year; it's not my intent to speculate here.  However, misleading and inherently speculative journalism is what leads to dangerous investment decisions.  This article's entire premise lies in taking a wholly unremarkable story of 2008 and preying on people's belief in gold as a super-commodity to create a  "compelling" story.  The author would do well to read Taleb's Fooled by Randomness.

Leave a Comment

Previous post:

Next post: