Fear is Trumping Greed

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It may surprise you to learn that one of the world’s best indicators of overconfidence is the performance of a single stock: Sotheby’s.  As I’ve previously written, peaks in the auction house’s stock price have historically coincided with financial and economic exuberance. So what's it telling us today? Sotheby’s stock is currently down 48% from its December 2013 peak, even after rising from its February lows. Bottom line: the art markets are pointing to very muted confidence. Greed is no longer the flavor of the day.

But has greed given way to outright fear? It’s unclear, but in the battle between these two domineering emotions, fear is gaining ground. Take a look at gold. As an indicator, it’s flashing bright yellow. The precious metal recently had its best quarter in three decades, and since the start of the year, an index of 14 major gold mining stocks has doubled.  Just as a fall in Sotheby’s shares signals greed is receding, a spike in gold prices points to a rise in fear. As Warren Buffet put it, “What motivates most gold purchasers is their belief that the ranks of the fearful will grow.”

The number of fearful investors is indeed growing. Hedge fund manager Paul Singer wrote in an April letter that the current gold price spike “could represent something closer to the beginning of such [an upward] move than to the end.” Another hedge fund manager, Stanley Druckenmiller, noted gold is his “largest currency allocation.” And George Soros recently bought 1.7% of the world’s biggest gold producer.  Singer, Druckenmiller, and Soros are among the world’s most successful investors; each has an enviable track record that has produced billions of dollars of gains for clients. And they’re worried.

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A primary concern is general economic uncertainty. Specifically, fear that central banks have exhausted their monetary tools has generated the current gold rush. As Bloomberg’s Liam Denning pointed out, gold spiked as expectations of a Fed rate hike collapsed—a sign of economic pessimism. Declining interest rate expectations also drove the dollar lower, making gold more expensive in dollar terms. Fear is clearly gaining ground on greed.

It’s not just the dollar that drives gold prices. Remember China’s devaluation of the yuan last August? Investors remain concerned that countries will devalue their currencies to boost their economic competitiveness. As Jim Rickards has argued, precariously low growth rates in major economies are driving currency wars. Gold is a safe haven, immune to the supply manipulations so common among fiat currencies. As a currency that can’t be printed, gold appeals to many as a hedge against debasement.

Investors are also nervous about financial conditions. Monetary policies encouraging low—even negative—interest rates have inflated asset prices and reduced expected future returns. On top of that, negative interest rates make sovereign bonds less attractive as a “stable, low-risk asset.” As Raoul Pal has pointed out, today’s market is behaving like it did in 2000—ominously, right before inflated stock prices collapsed. No wonder investors are fearful.


Gold is a safe haven, immune to the supply manipulations so common among fiat currencies. 


Financial and economic uncertainties are not the only fears festering in investor minds. Many are also worried about political risks. Venezuela is imploding. Brazilian political chaos is intensifying as the Olympics approaches. In Europe, fear of a Brexit looms large, and in the United States, election uncertainties are dominating the news. And as I wrote recently, Saudi Arabia is on the brink. Bottom line: the probability of really, really bad  outcomes for the world is increasing, providing strong support to fear. Greed is in retreat.

In a world of rising economic and political uncertainty in which investors are increasingly unsure of the future and what it holds, gold acts as a kind of “unsurance policy,” as Grant Williams called it.  And for those not actively managing portfolios, the price movement of the metal is still a useful gauge of global economic and political sentiment.

In a complex, chaotic world, considering disparate indicators—like gold, art markets, and skyscrapers—can help us prepare for risks and spot opportunities. Connecting seemingly irrelevant dots may help us understand where we stand on the greed-fear spectrum, and, more importantly, where we're headed. Indeed, considering a broad set of indicators is the surest way to secure “unsurance” against radical uncertainty.

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