When Gold And Flawed Statistics Overlap

We are most easily manipulated when we use skewed information to reach our own obviously right conclusions. The easiest way to do that is to present verifiable information that leads to a weak conclusion.

End point bias is the most effective tool to manipulate people

Consider this Twitter feed

“Gold yields time preservation, not interest. Fantastic chart displaying ‘s “Store Of Value” function.”

I have not tried to verify the 1971 values, but the ones I remember are not far off. Gold was about $40 and a house about $28,000.  Oil about $2.50. Car about $2,500. Family income about $7,500. Not crazy. I don’t know what “one unit of the Dow Jones” means.

The suppliers of the data look reliable, even though they have nothing to say about your inference.  You could easily decide, “Wow, income has gotten hammered. Gold buys twice as many cars and houses. I should have bought gold a long time ago.  Maybe I still should.”

The answer is maybe you should buy gold, but the information above won’t help. Lying with the truth is powerful.

Gold Prices were and likely still are manipulated

Gold Price were controlled by the United States until 1968 when a two-tiered system was introduced. They sold gold into the market and that kept the price close to their target until 1971 when the price began to rise uncontrollably and by 1975 they abandoned the entire idea.

Here are prices in that period in $US per fine ounce.

  • 1968 – $43.50
  • 1969 – $41.00
  • 1970 – $38.90
  • 1971 – $44.60
  • 1972 – $63.84
  • 1973 – $106.48
  • 1974 – $183.77
  • 1975 – $139.29

Choosing 1971 as the beginning confuses us

Presumably it is intentional. It conveys a false message, abut looks real. If 1974 had been chosen the income ratio from the chart above, instead of being 182 to 65 showing a huge loss, would have been more like 50 to 65 indicating no advantage to gold. I know house prices were higher in 1974 than in 1971 but not four times higher as the gold price would require. They did not fall 25% in 1975 either.

Statistical information will say anything you want

Choosing an endpoint is one of the easiest ways to manipulate people’s thinking. If I wanted to show that gold is a meaningless relic from ancient times, I would choose to present information beginning in 1980 when it peaked at over $800 per ounce and averaged $594.90.  In 2015 the average was $1,060. Up 78%.

Isn’t up 78% a good thing?

Maybe.  It depends on what other comparisons can be found. From December 1980 to December 2015 some other factors were these:

  • Dow Jones up 622%
  • Cost of living up 185%
  • Household Income up 136%
  • Crude Oil down 15%

Context always matters

Gold behaves more like a commodity than it does like a super secure source of enduring wealth. Don’t get me wrong, I like gold, and silver even more, but I don’t think it has real value for purposes of investing.

The value is all in our heads. We mistrust governments more than we mistrust the market for gold. If it works to preserve wealth, governments will confiscate it. If it doesn’t they won’t care. Emotional mistrust is not a basis for objective value.

Pay attention to what people use it for

Over the last five years 50% to 60% of production went into gold jewelry in India and China. If gold becomes relatively expensive per ounce, or if those people need money capital because they have new faith in their economies, the jewelry use will disappear and some of the old jewelry will end up in the melting pot.  Prices will be adversely affected in either case.

The future is unknowable

If you want to own some gold as an insurance policy, please feel free to do so. It could help. Your question is only how much of your portfolio should be precious metals? At anything over 15% or so, you are likely becoming a trader and betting you know more than the others and will therefore win big. Again, it could be true, but….

Always keep in mind that you are not the smartest trader in the world. You likely have less relevant information than you think. There are yet unseen variables that can come into play. 

And you probably don’t need the money anyway. 

In an unknowable market, never risk money you need to make money you don’t need.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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