By Ronald-Peter Stoferle, Incrementum AG Lichtenstein

Why Is Gold Such A Highly Emotional Topic?  Possible Reasons For “AUROPHOBIA”

November 6 (King World News) 

It appears as though there are only two camps when it comes to gold:  people who love gold (a.k.a. 'gold bugs') or people who hate it.  Between those two extremes there appears to be very few shades of gray, and people are only very slowly moving from one camp to the other.  Gold is having a hard time ridding itself of the reputation of being a “barbarous relic”; a reputation created in the 1980s and 1990s.  Demystification and relativization as far as a number of unshakable myths and misunderstandings go (“buying physical gold is expensive”, “gold is highly speculative” etc) are slow....

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It appears as though there existed – especially in the financial sector – an 'aurophobia'.  This pathological fear of, or aggression towards, gold does not seem to exist for any other currency or other asset class.  After all, we have not heard of such a profound aversion against copper, we do not know of any “bond haters”, nor are militant property bashers a popular concept.  We regard ourselves as analysts rather than psychotherapists, which is why we do not really want to dwell on the reasons for that strong aversion.  However, in our opinion there are a number of phenomena of behavioral psychology that explain the extreme emotions attached to gold.

“People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.” George Orwell

First of all the concept of “mental accounting” seems to be important to understand:  People always categorize financial transactions in terms of 'mental accounts' and evaluate them differently.  Interest income is, for instance, booked in different accounts than price gains.  Dividends are therefore regarded as a permanent addition to income, while capital gains are not booked as permanent, even though both have the exact same financial utility.  That also explains why the phrase 'gold pays no interest' appears to be such a central counter-argument to owning gold. 

Another crucial factor seems to be the so-called normalcy bias.  It refers to a mental state of distorted perception, which people enter when facing a disaster.  It leads people to underestimate or disregard the possibility of the occurrence of disasters and their possible consequences along the idea of “what must not happen, will not happen” and “what has been that way, will remain that way”. 

Moreover, availability and selective perception of information are important, as human beings tend to overestimate the importance of events of the recent past, relative to events that have happened a long time ago.  The recent past is therefore extrapolated into the future.  Therefore references to currency reforms of wealth confiscations of the past are ridiculed, because this is already decades ago and can no longer happen in our “modern world”.  

What explains Warren Buffets “aurophobia”? 

For reasons we do not understand, Warren Buffet has more and more frequently declared the low esteem in which he holds gold.  He criticizes the low industrial use, the lack of intrinsic value, and questions the general reasonableness of buying gold.  We believe that Buffett has made a fundamental error, having missed the connection between gold and money and is thus comparing apples and oranges.  The majority of demand is based on monetary requirements.  Therefore, in this case he should not compare gold with equities, but with cash.  Gold is an alternative currency and not an investment.  Taking this train of thought further, the same arguments then apply to the US dollar – it has no intrinsic value, no industrial use, and does not pay any interest at this point in time either. 

Warren Buffett’s aversion to gold may also be explained by a certain rebellious behavior against his father, Howard Buffett.  Buffett Sr. was a liberal senator (in the sense of classical liberal) who spent every living day campaigning for a return to the gold standard. 

His speech “Human Freedom Rests on Gold Redeemable Money” is a must read for every gold investor:

“Is there a connection between Human Freedom and A Gold Redeemable Money?  At first glance it would seem that money belongs to the world of economics and human freedom to the political sphere.  But when you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty.”

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