Gilded cage

This blog wouldn't be around if it wasn't for gold bugs.

Many moons ago my former-employer (and friend), the truest gold bug you'd ever meet, would lecture everyone in the office for hours about imminent hyperinflation, the wonders of the gold standard, and why gold should be worth $10,000. Fascinated, but unsure what to make of his diatribes, I started to read about the history of monetary systems, all of which would eventually provide grist for this blog.

A gold bug will typically have the following characteristics. 1) An abnormally-sized portion of their investing portfolio will be allocated to the yellow metal; 2) they believe in an eventual 'day of reckoning' when gold's price rises into the stratosphere, the mirror image of which is hyperinflation; 3) their investing case for gold is twinned with strong moral view on the decrepitude of the current monetary system and/or society in general; and 4) they are 100% sure that the monetary system's collapse will lead to the flowering of a new and virtuous system, a gold standard.

One thing I discovered fairly early on from my interactions with the gold bug community is that there's no point in debating a gold bug. In any debate, you should be able to ask your opponent what evidence they'd accept as proving their idea to be wrong. Gold bugs are loathe to submit such a list. After all, to do so would open up the possibility that they might have to precommitt themselves to changing their mind, which is the last thing they want to do. A gold bug's ideas are comforting to them. They've structured their entire mental landscape around these ideas, not to mention their entire life's savings and often careers around them.

Gold bugs have a powerful set of defense mechanisms to protect their ideas from outside threat. These mechanism, I'll call them 'mental bodyguards', will kill on sight any idea or bit of evidence that runs contrary to the gold bug schema, thus saving the gold bug from the discomfort, and potential danger, of having to weigh each new bit of data on its own merit.

For instance, consider the fact that central bank money was unmoored from the gold peg in 1968 (almost 50 years ago!). The monkeys behind the wheel should have caused hyperinflation by now and all those financial Noahs who were smart enough to jump into the gold boat before the fiat flood should be fabulously wealthy. But gold trades at just $1200 or so, not far above $850 levels set in 1980. Except for a few exceptions like Zimbabwe, hyperinflation hasn't happened.

Gold bugs can rationalize this contradiction because they possess a 'mental bodyguard' that absolves them of any responsibility for the timing of their predictions. Like the Millerite movement—which predicted the second coming of Jesus Christ on March 21, 1884, only to have to push the date to April 18 when nothing happened, and when that day passed uneventfully, bumped the event to October 22—gold bugs can keep pushing the day-of-reckoning further into the future without suffering any mental dissonance. Using an even more impressive bit of mental-Aikido they turn disconfirmation into a positive. The longer gold's meteoric rise is forestalled, say gold bugs, the more time it provides true believers with an opportunity to accumulate a larger stash of the stuff.

Another powerful mental body guard is the invocation of "them". Gold bugs invariably blame vague external and impersonal forces for wreaking havoc on the noble intentions of gold bugs and the upwards trajectory of the metal's price. They may be the Federal Reserve, the plunge protection team, or a cabal of Jewish bankers (politically-correct gold bugs just blame Goldman Sachs). When gold falls in price it's always because of the the machinations of these oppressors, without which the metal would be worth $12,000 or $13,000 by now. (Yes, gold bugs like to refer to gold as "the" metal, presumably to differentiate it from all the plebeian metals)

Thanks to the them mental body guard, the inability of gold bug predictions to be borne out in reality is never due to any inherent weakness in the ideas themselves, but to outside interference. Doubts are conveniently refocused on something external like Ben Bernanke and the Fed, upon which gold bugs regularly bestow two minute hates.

Other mental bodyguards that prove useful in protecting the core gold bug ideology include the knee jerk discredit that gold bugs level at both the economics profession and economic data. Gold bugs screen out economists by deriding them as mainstream and therefore (obviously!) puppets of the system. The shoot-first assumption of guilt spares gold bugs from having to engage with these economists' potentially contradictory ideas on a level playing field. The same goes for inflation data, which they dismiss out of hand as being 'cooked'. And if you try mentioning the MIT Billion Prices Index to them, they hum loudly and put their fingers in their ears. (Although when there's any sort of divergence between the BPI and CPI, they suddenly start to make noise).

The awful returns that gold and especially gold shares have provided over the decades have impoverished many gold bugs as well as those unlucky enough to listen to them. Yep, I've seen the year-end statements. Yet somehow the gold bug meme continues to limp on. That's because gold bugs are less concerned about making money than upholding "the cause", as they like to refer to it. The cause is a vague combination of the promotion of a gold standard and a +$10,000 gold price, where simply holding gold through all downturns is an expression of support for that cause. Mere financial losses cannot keep them down.

Now I've been tough on the gold bugs in this post, but the fact is that gold bugs would probably say that both myself and any of their many accusers harbour mental body guards of our own. And the gold bugs probably wouldn't be entirely wrong. With so much time and energy having been invested in the various things we know and believe, a bit of cognitive dissonance is only natural. I'd argue that the gold bugs having walked much further out along that plank than their critics.

This post won't change the minds of any gold bugs—as I already pointed out, they've made up their minds long ago. But if you're a busy individual with some money to invest, and you're considering a gold bug advisor, remember that the fate of your investment may take second seat to the gold bug's devotion to the cause. Be wary.