16 Apr 2013
The falling gold price is making the headlines and has reportedly caused a well-known hedge fund manager, John Paulson, to lose $1billion of his clients’ money. Another very smart guy named David Einhorn has also suffered heavy losses on behalf of his investors, according to reports. These men made their names and presumably their fortunes by betting against sub-prime mortgages and the banks that owned them. It is disappointing to see heroic figures such as these getting tripped up like this. I wonder if investors who have a great success begin to believe that they can make something happen through the power of their own genius. Great investing is all about getting the big picture right – but this is very, very difficult and the correct pricing of probability must never be neglected. Gold bugs often display fanatical tendencies and a fondness for historical destiny (I’m not sure what that is but it looks quite profound so I shoved it in). They seem to incline to the belief that there is a morally correct price for gold (and today’s price always falls short of it) and that not owning gold is an omission that comes close to being a sin. I suppose that the notion of gold as an investment for the righteous derives from its former role as the ultimate reserve currency. A century ago, nations were supposed to limit their issuance of paper currency to the size of their gold reserves. Notes were theoretically certificates that could be exchanged for gold equal to their face value. This stopped governments from printing money as they wished, which was understandably regarded as irresponsible (sinful, even) but might also have prevented desirable monetary expansion in times of economic hardship. Keynes wrote in 1924: “In truth, the gold standard is already a barbarous relic.” Yet the world returned to it, frightened by the inflation of the Weimar republic, with the USA running the dollar as the global reserve currency, backed by the contents of Fort Knox. You may remember that Goldfinger planned to render the contents of Fort Knox radioactive and untouchable for decades, assuming that the United States would be forced to purchase gold on...