Golden opportunities and black swans

Someone who invested $100,000 in gold 18 months ago, when the precious metal was trading about $900 an ounce, could have made a profit of more than $22,000 if they sold it this week, when prices topped $1,100 an ounce. Of course, that profit would be in U.S. dollars, whose values have been dropping as rapidly as gold prices have been rising. Many investors have bought gold as a hedge against devalued dollars.

There have always been some people pushing gold as the ultimate safe investment. However, the number of economists and investment advisers who were predicting a major recession and a sharp decline in the value of the dollar 18 months ago was tiny, and their voices weren’t loud.

What happened with the economy, beginning a little over a year ago, was a black swan, and it should be a lesson to people making bold economic forecasts today.

A black swan, according to author and investor Nassim Nicholas Taleb, who wrote a book named after the dark bird, is an outlier event — something so unforeseen that almost no one predicted it.

Until the discovery of Australia, Taleb says, people in the Old World believed all swans were white because that’s all they had ever encountered. There were black swans in Australia, but no one anticipated such a discovery.

The same inability to foresee unexpected events makes most long-term economic and political predictions suspect, Taleb argues. “We act as though we are able to predict historical events or, even worse, as if we are able to change the course of history,” he wrote in his 2007 book. “We produce 30-year projections of Social Security deficits and oil prices without realizing that we cannot even predict these for next summer.”

As a result, we have people today claiming with confidence that they know what a massive reorganization of our health care system will cost 10 or 20 years down the road.

And we have economic experts trying to walk a narrow tightrope aimed at protecting the value of the dollar, encouraging economic recovery and, at the same time, discouraging inflation. Federal Reserve Board Chairman Ben Bernanke and his advisors try to perform that regulatory high-wire act primarily by manipulating interest rates and limiting the amount of currency printed.

But, as Washington Post columnist George Will pointed out, it is “hubris ... to think inflation can be precisely controlled like an oven’s temperature.”

Still, Bernanke and friends will keep tinkering with the knobs.

And financial experts of all political stripes will keep trying to forecast how much massive new federal programs will cost, or how many jobs they will create and save.

Investment advisers will eagerly tell clients they know what the next great investment will be. Some are now saying gold could reach $2,500 an ounce soon. Let’s hope they’re wrong. The alternative would mean real trouble for the U.S. dollar and our economy.

Many of these prognosticators may be correct — at least until the next black swan arrives and changes everything.


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