Gold: What's With The Hysteria?

Includes: GLD
by: Market Blog

By David Berman

If you've ever read some of the comments on this blog for articles about gold - particularly negative articles about gold - you'll know that investors have strong opinions when it comes to the commodity. These opinions are certainly much stronger than for any stock, and they have always intrigued me: Why do gold investors get their backs up about views that run counter to their own?

The question becomes even more urgent with some of the commentary revolving around investor Whitney Tilson's flip-flop on Barnes & Noble Inc. (NYSE:BKS) Mr. Tilson had been short the stock (meaning that he stood to profit if the share price fell), but switched to a long position (meaning that he stood to profit if the share price rose) just before it struck a deal with Microsoft Corp. (NASDAQ:MSFT) that sent the shares up 52 per cent on Monday.

The reason for the switch? Mr. Tilson apparently read an interesting thesis on why Barnes & Noble was worth holding - ie, one that ran counter to his own thesis - and was convinced.

As Kid Dynamite noted on his blog, the "key to successful investing and trading, to me, is to seek out conflicting opinions rather than conforming opinions. When you do this, you can figure out what might be wrong with your thesis, and either gain a measure of comfort if the conflicting views are weakly formed, or change your view if they make a lot of sense. Tilson did the latter - I respect that."

Which brings us back to gold. If reader comments on gold-related blog items is any indication (hey, maybe this post will bring a few fresh examples of what I'm talking about), gold investors are awfully sensitive to any view that challenges their own, and this can't be healthy. It can't be healthy for the gold market if investors' views are entrenched, and it can't be healthy for gold investors either if they refuse to accept that they just might be wrong - because eventually they will be.

Meanwhile, gold investors seem to love Ron Paul, who recently ran for the Republican presidential nomination. He has an extraordinarily high allocation to gold in his investment portfolio and has delivered extreme views on the role of gold in the monetary system, advocating for a return to the gold standard.

Yet, his debate on Bloomberg Television with Paul Krugman should give gold fans pause. As Mr. Krugman noted on his blog in response to the debate, "If Ron Paul got on TV and said "Gah gah goo goo debasement! theft!" - which is a rough summary of what he actually did say - his supporters would say that he won the debate hands down...."

It's called confirmation bias, and it's not a great approach for investors.

Disclosure: None