Conspiracy, complacency and the death spiral phase

Some thoughts on gold's failure to respond to Greece - is the answer only central bank manipulation? I think you can't ignore the complacency of professional money managers http://research.perthmint.com.au/2015/07/07/conspiracy-complacency-and-the-death-spiral-phase/

Gold blog writing for fun and profit

Below is a confidential email that has been forwarded to me from an anonymous whistleblower. It seems times are tough out there in gold blog land.

 

From: John Winklebottom [mailto:john.winklebottom@goldblogadvisors.com]
Sent: Tuesday, 25 November 2014 9:00 AM
To: [redacted to protect name of whistleblower]
Subject: Surviving these tough times

 

I have been receiving a lot of emails from you my customers of the Gold Blog Advisors "Pumping for Profits"(tm) system. I hear your pain. There is no doubt that this prolonged gold bear market and recent break of $1180 has finally caused a lot of your readers to actually question your content.

 

Apparently for one guru things got so bad with negative feedback and public questioning on his site that he had to shut down comments completely. Now that is an extreme measure and not one I would recommend as public commenting and forums are a great way for those who have bought into your particularly shtick to help groom newbies to accept your pronouncements and sign up. Academic studies have shown that "theories and facts contradicting existing beliefs are conveniently misinterpreted, treated as insignificant" and belief perseverance is ubiquitous, but only if the newbie has first taken on the theory! Removing the ability of newbies to interact will work against them assimilating your ideas and keep them open to other contradictory ideas, which will reduce signup conversion rates. But desperate times can justify desperate measures.

 

However I would like to emphasise that this is just a temporary problem. Yes you will lose subscribers/readers as market reality bumps up against your shtick but remember in this game you have a fair bit of turnover anyway so it has always been about the newbie funnel and continual conversions. OK right now the flow of new newbies into your sales funnel is low but they will return once the price recovers and these newbies will not know about, or bother to check, any of your past failed predictions or theories. You just need to hold on for the good times to return, which they will.

 

Now I can hear you saying "yeah that's great but what do I do right now to retain readers and increase conversions on the few newbie suckers that come my way". I think this is a good time to get back to the basics, so lets go over some key strategies that I have advised you on in the past.

 

First up is Content. Now you all have memes you specialise in but I think you have to be a bit more careful these days to not be too far from reality - don't overestimate the stupidity of your readers. Reconsider your meme rotation list and drop those that are far too bullish in tone or rework them down a bit. I think these memes are particularly worth focusing on at this time:

• China - you really can't go wrong with anything on China and how much gold they are buying, the punters love it.
• Paper-physical disconnect - this one should still work even though coin premiums are low, just pick some silly price on eBay to contrast to spot or spin it that there are physical deals being done under the counter at much higher prices. Selective highlighting of online stores being out of stock can also support this meme.
• Blame it on manipulation - this is a great standby if you were silly enough to not make a generalised claim about price and got too time or figure specific.

Keep in mind the great advice in The Tipping Point on the psychology of rumours when you are constructing any new memes:

• Level It - leave details essential for understanding true meaning out
• Sharpen It - make remaining details more specific
• Assimilate It - fit it to readers' frames of reference, they will condense or fill in gaps to give themselves a simpler, more significant configuration

With your memes also remember that academics have shown that it is better to be confident than correct as "pundits get a better audience through confidence and the excitement it generates". Also lets not forget the great work of Stephan Lewandowsky on misinformation:

 

"People love sensational stories. They like to pass on tales that make the listener very happy, disgusted or afraid: anything that provokes a strong emotional response. Neutral stories, which are probably more likely to be true, but much more boring, therefore get short shrift."

 

While unique content or spin is key to getting readers, with such little news flow it is OK to pick up memes from other bloggers and rewrite/respin - the echo chamber effect helps us all but just don't get too plagiaristic.

 

The rewrite/respin point leads on to the next key which is Headline. We have all seen cases where a repost/respin got more clicks than the original article due to a superior headline. A good headline is also crucial to cut through - there is so much content out there that your potential readers are unlikely to look any further than your article's headline, so it has to work. Remember to keep it below 65 words otherwise you'll get cut off in search results, with Twitter you have a bit more room to move.

 

There are a lot of websites with advice on how to write the ultimate headline, see here for a good example, but these are not precious metals specific. To help you out I have looked at the work of The Master, taking 2,773 headlines from King World News and removed the words "gold" and "silver" (which obviously dominate) as well as the names of interviewees. Below is the resulting word cloud (click to see larger image).



If you work from this list I don't think you can go wrong, it certainly works for KWN.

 

Before I close, just some administration. Gold Blog Advisors renewal notices for 2015 will be sent out shortly. In the past few years many of you did not go with my Variable option, where you pay based on number of subscribers to your site, and instead picked the higher priced Fixed option. I suspect many of you thought that you would save because you were only paying me a fixed flat fee while your subscriber numbers were going to go up as gold price shot to da moon, but if you had chosen the Variable option you would be paying a lot less now. I think that those who went with the Fixed option fell into the trap of believing your own bullshit that the market would turn around and so would your subscriber numbers. Believing your own bullshit is very dangerous in this business, not just financially but also mentally. I do not need to mention those gold blogosphere names we all know who have fallen into this rabbit hole. Keep this in mind when filling out your subscriptions for next year.

 

OK. So there you have it, keep your chin up and remember what I always say: Keep Your Content Confident and Crazy.

The Answer

I was talking to Alex Stanczyk of Anglo Far-East this morning and he said that when he read Ben Hunt's work on narrative it hit him like a brick, being so relevant to gold. He and I agree that gold is very much a narrative driven market, a pure epsilon asset. Others however react negatively to this idea, feeling it is mumbo-jumbo.

The reason I think is because many can't handle ambiguity or the ability to hold two opposing ideas in mind at the same time(1). In an uncertain world, in a complex world where hyper-specialisation means it is impossible for the average person to understand how systems work (financial particularly), it is not surprising that many seek the metal comfort of absolutes and simple truths.

 

I don't think it is coincidental that gold attracts a fair share of such black and white thinking - gold itself is chemically inert and valued over centuries and cultures so has this timeless absolute nature about it.

Anyway, a long way to get to Ben Hunt's latest article, which focuses on oil. A lot of what he writes on oil I found myself agreeing could be applied to gold:

• multiple explanatory factors
• the demand for "The Answer"
• the competition to provide "The Answer"
• the idea of "arriving at a useful assessment of what’s going on, not a Platonic effort at uncovering some eternal Truth with a capital-T"
• that "there is no Answer. In a structurally unstable market, there is no stable deterministic model of discrete market-exogenous factors like global supply/demand and monetary policy to 'explain'" gold prices.

Worth a read for those not scared of a bit of "I don't know".

Use narratives, not just charts, to tell if gold's bottom may be near

To determine if gold may be bottoming, I think Ben Hunt's game theory approach to investment decisions is a useful framework to use. First, a quick summary of Ben's theory, mashing up his words from this article:

"Game theory is a methodology for understanding strategic decision making within informational constraints where each player’s decisions are made in the context of expectations regarding the other player’s decision-making process. In other words, playing the player, not the cards.

The secret of effective market game-playing is to recognize that the market game hinges on the Narrative, which is a set of public statements made by influential people about the market. These statements create Common Knowledge - what everyone knows that everyone knows."

Goldbugs have their own narratives to explain gold price movements but as I discussed in this post, what matters is the narrative that mainstream investors are hearing as that is what is driving their investment decisions and money flow (in or out of gold).

Over the past year the mainstream narrative has been that "gold is in a bear market and shows no sign of ending". The focus for this narrative was the reduction in ETF balances, with each subsequent redemption validating the thesis, acting as a negative feedback loop. On top of that you had the idea that the US economy was turning around and the associated taper talk.

For example, see this Gulf News article where it says that gold buyers (my bolding) "were put off by gold price’s sharp decline and did not want to be seen buying when there was every chance that it could drop further" or analysts falling over themselves to forecast a lower gold price bottom than the last forecast.

Recently, however, I've noticed the emergence of a different narrative, one that asks whether gold's bottom may be near. See these recent examples:

AFR: Gold is on the way back

Barrons: Gold Fund May Be Near Bottom

City Index: Gold rebounds from three-year double-bottom low

CNBC: Gold to see bottom building process

Daily FX: How to Trade the Double Bottom on Gold

Now this narrative is not bullish and more cautious but that in itself is significant because it is the precursor to more bullish narratives. It also gives confidence to smart money to start to get into the market, as we can see from that Gulf News article where it notes that "with gold prices seeming to have settled in at the $1,200 an ounce mark, buyers are heading back to the shops."

I would also note Rick Rule's recent observation that "it appears big money is circling the physical sector as well. The money has not yet ‘landed,’ but it is important to know what might happen to those markets if the ‘big money’ begins to settle. We believe it would not take much demand for physical delivery on the futures exchanges to create a very unsettling experience for the large institutions that are short the trade."

When the gold price bottomed at $250, there was talk of it going to $200 or below, which was mine cost at that time. It never got there because the smart money realised that at those prices gold miners would start to close and the supply reduction would push prices up. I believe they started to buy ahead of that, and those actions provided support and the basis of a new narrative for gold.

We could be seeing the same dynamic in play today. I'd suggest keeping an eye on the mainstream narrative around gold, just as much as the charts, if you want to work out if gold is bottoming.

Gold is a pure Epsilon/Narrative asset

I came across this gem of a blog from a reader sending me Mauldin Economics' latest.

I think I could argue the case that gold is almost all Epsilon and little Alpha or Beta, because it is a Monetary asset, because of its massive stocks to flow ratio. As I said here "It is actually supply - the withholding of supply - that matters most." What those holders think matters, and that "think" is what the blogger calls a Narrative.

What we see going on in the goldbug internet is an attempt to construct a Narrative around gold. However, as the blogger says, it is not necessary for the Narrative to be true, "it is only important for a Narrative to sound truthful." Truth is not relevant because the point of the Narrative is to serve the interests of the powerful/those who are communicating it. How true - truth doesn't matter as long as it generates clicks and sells newsletters and coins.

It seems my, at times, crusade for truth in the blogosphere is in vain because what matters is "the more Common Knowledge in play at any given time, the more that market behaviors will be driven by the rules and logic of the Common Knowledge Game than by fundamentals or traditional factors."

Certainly I would have to concede that the current goldbug Narrative (a group of various memes) is all pervading in the gold blogosphere and I'm not really making a dent. There is a catch however. What the goldbugs don't realise is that their Narrative is not the Narrative that the rest of the world is using. Indeed in this post the blogger says that gold doesn't have a Narrative:

"In some periods of history gold is money. In other periods of history gold is not. But gold is always something, and that something is defined by the Common Knowledge of the day. To be an efficient gold investor in any period, I believe it’s crucial to identify and measure the relevant Narrative that is driving the Common Knowledge regarding gold. Only then can one construct an informational surface that predicts how the equilibrium price of gold will respond to new information ... There is no stand-alone Narrative regarding gold today, as there was in 1895. Today gold is understood from a Common Knowledge perspective only as a shadow or reflection of a powerful stand-alone Narrative regarding central banks, particularly the Fed … what I will call the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes."

The result is that those who operate under the blogosphere Narrative will make the wrong decisions:

"You may privately believe that J.P. Morgan is still right, that gold has meaning as a store of value. But if you participate in the market on the basis of that belief, then you will buy and sell gold in an incredibly inefficient manner. You would be a smart gold investor in 1895, but a poor gold investor today."

This is a challenging statement for goldbugs - it doesn't matter if you think gold is a store of value, or if it should be one, what matters is what most people think gold is. I first came across this idea when reading The Social Construction of Reality (see this blog post of mine for background on this idea). When making investment decision what matters is what is, not what ought to be. I think most blogosphere Narratives are about the Ought, not the Is. That's fine, just don't buy and sell on that basis.