“If I know exactly what I’m going to do, what’s the good in doing it?”
Shall I invest in gold now … or should I wait? Who should I vote for … should we get married?
Decisions and choices besiege us daily. Most are inconsequential and have short-term impact – like what to wear or which route to drive. Others are significant, resulting in longer term consequences – like investing and electing … and of course, relationships.
These days, it is becoming increasingly difficult to make informed decisions that end up being correct or, at least, nearly correct. Our choices, now overloaded with a plethora of information, data, statistics and so-called advice, are swayed by conflicting options. Sometimes the array of choices seems so divergent that choosing one by throwing a dart provides an equal probability of success.
Now add the more recent emergence of fake news and deliberately-manipulated information into the decision-making melting pot and we are faced with some serious dilemmas. For the average investor, what to rely on and whom to believe are not easily resolved by doing the necessary research … because we even have doubts about the veracity of the facts that our research may have revealed.
And once we have exhausted all the logical steps of so-called ‘rational’ decision-making, we still have to contend with an even greater obstacle – that of the personal biases and assumptions that drive our thought processes … plus a large dollop of emotionally-driven sentiment that invariably eludes any concept of logic.
Finally, we have to contend with the ‘Black Swan’ principle. In the western world, it was always assumed that all swans were white. However, in the seventeenth century the unimaginable occurred, a breed of black swans was discovered. We are prisoners of the so-called unimaginable – or put another way, the seemingly unpredictable. As humans, we never expect unexpected events – even when strong possibilities are evident. We assume that things will continue as before. We are taken by complete surprise when a catastrophe occurs. Like the events of 9/11 … yet in the period leading to this unexpected tragedy, all the evidence had pointed towards this attack. Despite our acceptance that unpredictable events occur, we never factor this into our decision-making.
Pummelled by so many confusing, conflicting and complex variables, our conundrum as intelligent investors or voters or ordinary citizens, is to make choices that beat all the odds stacking up against the possibility of being remotely right. In what should we invest? Do I buy, hold or sell? Life’s major and minor decisions are so fraught with ambiguity that the intelligence which we have spent our entire lives developing, is barely adequate within a world of uncertainty, volatility, tainted information and flawed thinking.
And this, in itself, drives share and commodity prices up … and it drives them down. Within this kaleidoscope of ever-changing scenarios, many investors are making substantial gains … and others are making crippling losses. Yet we endure! Our brain has the remarkable ability to make us blind to painful realities, often protecting us from discomfort. It distorts data, interpreting it in a way that is comfortable, aligning it to our preferred reality. It is our fundamentally flawed thought-processes, influenced by interpretations of external events that sways our vote – and similarly, pushes us towards or away from certain investments. In its broader impact, this ‘mob sentiment’ has far-reaching consequences for fluctuations in the price of gold and other equities.
So, how do we make decisions that have an improved propensity for correctness or success? Thousands of self-help books offering strategic decision-making models provide elusive and often inappropriate advice. Pages of websites provide both believable and unbelievable investment advice. Ultimately, all decisions must be based on complete, accurate, relevant and realistic information – and therein is the problem! Who or what do we believe? And then – just as we think we have got it right the market does the opposite of what we expect.
For instance, last week the US Federal Reserve, in order to tighten monetary policy, increased the interest rate by .25% as the US National Debt creeps terrifyingly close towards the $20 trillion ceiling. Contrary to expectations, the price of gold did not drop – it increased! It is now 15% up from year-end 2016. And if one trawls through the avalanche of explanations by so-called experts on the internet, there is anything but consensus. Indeed, there are so many conflicting opinions that identifying the ‘truth’ – the real reason for the counter-intuitive rise in the gold price – is as easy as understanding quantum physics.
Another example of unanticipated market movement resulted immediately after the election of Donald Trump. According to the pundits, the surprising election outcome should have pulled the rug out from under stock prices, hammered the dollar against other major currencies and (at the time) propelled gold sharply higher. In hindsight, we know that markets did not react as predicted and gold did not surge. As is to be expected – the diversity of explanatory opinions is boundless.
In an environment of continuing uncertainty, one thing is for sure – in the short run, financial markets – including gold – dance to their own tune and short-term forecasts, even when based on serious analysis, are often wrong. Strategic decision-making, calculated choices, non-emotional thinking and informed judgement all seem to be useless in predicting short-term investment scenarios.
However, when all has been said and done, history reveals that gold has prevailed in the long-term. It has unequivocally proved its propensity for lasting returns, providing a solid hedge against unexpected fluctuations in markets and fiat currencies. Whilst this does not make the decision of when to buy or sell any easier, it does validate an investor’s decision to include gold as an essential element of an investment portfolio. In times of turbulence, such as these, it is wise to retain a reasonable proportion of one’s wealth in gold.
Sadly, we may not be able to convincingly justify our choice to purchase gold – but we may revel in the peace of mind that we have made the right decision to minimise risk – even if we cannot explain why!
Written by Michael Pryke on behalf of MetCon.