Even In a Crisis, Gold Is Fragile

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With Cyprus dominating the financial markets news this week, the "risk on/risk off" switching process has governed stock market action this week. On the back of Thursday's losses, stocks mirrored Wednesday's gains, with the S&P 500 (SNPINDEX: ^GSPC  ) gaining 0.7%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 0.6%. On the week, the S&P 500 lost 0.2% -- only its second weekly loss this year.

Reflecting the day's gains, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street’s fear gauge, fell 3% today, to close at 13.57. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Gold: not anti-fragile
Philosopher-trader Nassim Taleb, the author of The Black Swan and, most recently, Antifragile, has been a harsh critic of the Federal Reserve, both under Ben Bernanke and his predecessor, Alan Greenspan. According to the argument he develops in Antifragile, the national economy is like a living organism in that it requires an environment that changes -- sometimes in an adverse or hostile manner -- in order to become stronger. Or, as he puts it, "Anything organic requires ‘variability stressors.'"

In this model, which I think is a powerful example of consilience, any efforts to artificially suppress that variability -- such as quantitative easing -- are doomed to weaken the organism and sow the seeds of larger, more damaging crises.

Consistent with this reasoning, you might think Mr. Taleb is very bullish on gold -- a store of immutable value, according to its supporters. Not so. As reported by Barron's Michael Santoli, at an investment conference in New York yesterday, Taleb told investors: “It’s too neat a narrative, gold. Central banks own gold,” before adding, “something that doubles [in value] in no time can’t be a real store of value.”

I'm not sure that the fact that central banks own gold is, in itself, relevant to the investment case -- after all, Ben Bernanke himself said this is a matter of long-term tradition, rather than economics.  However, I think Taleb is dead on with his two other remarks, particularly the third. Something that doubles in value is highly unlikely to be a real store of value. Why? Because if it behaves that way, it's probably equally likely to halve in value in the same amount of time (or faster). By definition, a store value cannot exhibit that sort of volatility. Shareholders of the SPDR Gold Shares and the iShares Silver Trust may want to ponder Mr. Taleb's words.

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  • Report this Comment On March 22, 2013, at 7:25 PM, Petropetro wrote:

    The truth Of the matter is this there is no true measure of value because value is an abstract concept that represents an ideal. That being said the most ideal measure of value is the rarest and scarcest element. Gold cannot be reproduced and it cannot be artificially manufactured. Gold is the best marker of value therefore the only way that gold could drop halfway in price truly in the long run Not artificially but naturally is if the supply of gold doubles the supply of gold will only double if we find gold on another planet therefore not seen is kind of right but actually quite wrong for our immediate purposes. If gold does Halfway it will only be because consumers perceive that gold is worth less but in reality it will still be the best most scarcest element that someone could own a for its malleable properties and b for it's conductiveness c for the fact that it is a luxury metal as well.

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