The Outliers

Mon, Feb 24, 2014 - 8:31am

In any naturally occurring population there is some degree of variation between individuals within that group. When the variation is genetic, then the subtle differences between individuals can sometimes equip a few of them to survive better than others- for example, a small number of moths born with slightly more pigmentation of a color which makes them harder to spot by predators. If that difference has enough of an effect on their inclusive fitness to allow them to pass on their genes differentially, then that trait will be slightly more common in the next generation. If this happens for a long enough period of time, the entire nature of the population will change. This is what is familiarly known as natural selection.

This dynamic is not confined only to genetic inheritance, and in some cases can apply to variations in behavior as well. Within any large group of individuals there will be a wide range of differences in behaviors, values, goals, comportment, strategies, etc. Find something that people do, and if you study it closely enough you will quickly realize that there is great variety in how different individuals choose to go about doing that thing. Some may even choose not to “do that thing” at all! What is interesting is that, through the exceptional power of our brains, human beings do not have to wait for thousands of years for these differences to slowly work their way through the genetics of the population- if they can observe that behavior X is beneficial to those who have adopted it, they can also choose to adopt it, often with great rapidity. When large numbers of people suddenly start doing something that only a few had done previously, this is called a preference cascade.

A preference cascade is a uniquely human phenomenon. It happens, in part, because we are NOT purely rational actors, always weighing costs/benefits and choosing based on this analysis. Instead, we are intensely social creatures and tend to be influenced to a great degree by what others around us are doing. In normal times people look around, observe how most others are behaving, and copy that behavior themselves. This usually works fairly well as an adaptive strategy because the totality of individuals can usually be assumed to be doing just fine, so if we do what they do, we assume we will be just fine too. Additionally, activities that are perceived to be outside the mainstream often carry a degree of social or cultural stigma, thus imposing some costs on the people who adopt them – there are significant negatives to being perceived as the “weirdo” because you are behaving differently or deviating from the accepted. So most people just do the “usual” thing and don’t think much about it… right up until they observe their peers suddenly doing something differently. Then they quickly perceive not only that it is “OK” to do that thing but they also will not be acting alone if they do it, and a preference cascade ensues.

University of Tennessee Professor Glenn Reynolds has written about the phenomenon of the preference cascade over the years, and in this article he gives two interesting examples of it in action. Reynolds writes:

(Prior to 911), the people who didn't have flags on their cars weren't necessarily unpatriotic - but displaying a flag on one's car was associated with particular political and social categories that aren't especially popular on campuses. After 9/11,enough people started flying flags to make other people feel safe about doing it too. Now you can see a lot of flags on the cars in that garage. Have people become more patriotic? Maybe. But more likely they've just become more willing to show it. This illustrates, in a mild way, the reason why totalitarian regimes collapse so suddenly. Such regimes have little legitimacy, but they spend a lot of effort making sure that citizens don't realize the extent to which their fellow-citizens dislike the regime. If the secret police and the censors are doing their job, 99% of the populace can hate the regime and be ready to revolt against it - but no revolt will occur because no one realizes that everyone else feels the same way. This works until something breaks the spell, and the discontented realize that their feelings are widely shared, at which point the collapse of the regime may seem very sudden to outside observers - or even to the citizens themselves. Claims after the fact that many people who seemed like loyal apparatchiks really loathed the regime are often self-serving, of course. But they're also often true: Even if one loathes the regime, few people have the force of will to stage one-man revolutions, and when preferences are sufficiently falsified, each dissident may feel that he or she is the only one, or at least part of a minority too small to make any difference.

Understanding the dynamics behind the preference cascade is particularly important for gold and silver. If we think about the behavior that we call investing, we can quickly discern that at present, people who place a portion of their savings into physical gold and silver are “Outliers” in terms of investing behavior among the general public. The vast majority of people who invest do so in equities (through 401k’s, trading accounts, mutual funds, etc), and many own bonds or own funds that invest in bonds, as well. The idea of investing your saved wealth in physical gold and silver outside the system is still a practice that is comparatively rare. This makes all of us at TFMR unusual exceptions to the norm… we are the odd outliers within the larger population of investors.

So far so good… but I think a key insight comes from understanding WHY there are a comparatively small number of gold and silver investors, and more precisely why such an outstanding, traditional investment vehicle is now considered so outside the mainstream. When one considers how precious metals are portrayed and discussed, however, it makes perfect sense, particularly when one thinks about who, precisely, controls that mainstream narrative. You can tell what a power structure fears most by observing the energy and resources they deploy against that thing, and the ‘thing’ the fiat currency regime fears most intensely is a preference cascade to real money.

Consider the vast array of resources deployed today against gold and silver investing. First, we see a regular drumbeat of negative articles, the full weight of the mainstream financial media and legions of writers on financial websites brought to bear to convince people NOT to buy gold and silver. We see variations of the same hackneyed articles year in and year out, regardless of the state of the markets or the price. These constant attempts at shaping opinion and sentiment employ misleading arguments, ignore contrary evidence, and use every rhetorical trick in the book to convince people that gold and silver are “risky” and “speculative” (Anatomy of an MSM Hit Piece on Gold), when the reality is that they the most historically stable stores of value known to man. We also see mainstream brokerage houses issuing sell recommendations year after year, for assets which ironically they never told their clients to buy in the first place (It’s Never a Good Time to Buy Gold). All of these operate within a conventional milieu of financial advisors emphasizing “traditional investments” (i.e. fiat based, fiat supporting) while going out of their way to dismiss gold and silver – think Berkshire Hathaway’s Charlie Munger claiming “Civilized people don’t invest in gold” for a fairly standard example. If you think about the totality of the effort used to try and manage the public perception of gold and silver, you start to get a sense of just how intensely these things are feared by the Fed/Finance/Political regime.

But wait, there’s more! Consider, too, the extraordinary energy and enormous wealth deployed against the price of gold and silver over time. Look at the long history of price suppression, from the known and historically established facts of the London Gold Pool (link) to the extraordinary actions of the last five years (The Golden Ostrich, Chris Powell speech on price suppression). I think people in the general public would be shocked at the sheer amount of effort, the degree of secrecy employed, and the vast amount of wealth expended towards suppressing PM prices over time. This, above virtually everything else, makes it crystal clear what an enormous threat that a large-scale adoption of gold and silver by the investing public would be to the current power structure.

Reality, and particularly mathematical reality, has a way of asserting itself. Inevitably, the truth of the real nature of the present system will become apparent to everyday investors. At some point the broader public will look around and grasp that the current system has been siphoning their productivity and labor for generations, and has been doing so well beyond the publicly acknowledged and democratically chosen practice of taxation. They will realize that the “value” of everything they have earned or saved has been remorselessly diminished by the hidden confiscation tax of currency devaluation over time. They will see that as the politicians spend the produce of their labor without limit and the enabling Fed prints to pay those bills, their paychecks buy less and less and the value of their pensions shrink. With every dollar printed and every TBTF bank bailed-out, in every investment they own they are slowly being bled dry. At some point people will wake up and understand that although they are following the rules (and following the herd when it comes to investing advice) they are swimming against the tide, and the tide is winning.

And when this becomes plain to them, people will look around and see that there is a small group of investors who have managed to protect their saved value through physical gold and silver in their possession, and that this has insulated them, over the long term, from wealth confiscation via inflation. And I firmly believe that when this happens, and when the obvious benefits of the behavior of these investing “outliers” becomes crystal clear to the broader population, we will see a preference cascade to end all preference cascades into the metals. That, I think, will really be something to behold.

Then and only then, when the awareness of these things has become so widespread that my idiot neighbor is talking about ASE’s and everyone and their brother is trying to buy gold and silver, will I start thinking about selling some of mine. I hope to do so at a healthy, and possibly ridiculous, profit.

Until that day comes, protect yourself and your wealth in the present. Keep stacking.

About the Author


Motley Fool
Feb 24, 2014 - 10:31am


"And I firmly believe that when this happens, and when the obvious benefits of the behavior of these investing “outliers” becomes crystal clear to the broader population, we will see a preference cascade to end all preference cascades into the metals. That, I think, will really be something to behold."

It occurs to me that one of the other things that is often err complained about here is the vast disparity in wealth holdings between the many and the few. Statistics such as (thumbsucking but doubt I will be far off the mark) 10% of the population hold 90% of the wealth come to mind.

It is kinda astounding then to assume that this 90%, who barely have any savings to speak of will be the driving force that breaks the gold market.

I am of the opinion that essentially all gold will be spoken for before J6P wakes up, and he will only come to realize his mistake once it is too late( as is uhhm always? the case in history).

That day is not far off, yet J6P still slumbers happily... and I do not think we will see him awake...and even if he does awaken...well he does not matter much...thinking on wealth disparity....cute as this preference cascade concept is. ^^

Feb 24, 2014 - 10:40am


The gold market is already broken, with the daily spot price having not much to do with actual physical gold. I probably don't need to explain this to you. J6P is not needed to break the gold market, just to discover it is broken. Every one of the hundred people that have a claim to each physical ounce will be the preference cascade, as everyone tries to take possession of what they thought they owned.

Even though the 1% crowd holds a significant amount of the wealth, there are still a lot of those paper dollars sloshing around. I am not wealthy by any stretch, but I have found ways to stack metal on my shoestring budget. I am one of those J^P's without a lot of money that you speak of. Surely I am not the only one.

Feb 24, 2014 - 10:41am

Great post, Pining !

There is an old saying about investing, "When you see it on the cover of Time magazine, it's already too late."

Inversely, if everything you see, hear and read about gold is negative, it's time to buy. Stack on.

"Outliers" sound a lot like what were once called "contrarians". Contrarians watched the direction of the herd and promptly went the opposite way. In all fairness, the bell curve chart is incomplete. We stackers would be as shown if we are right. If we are wrong, we would be at the same distance from the center but on the left side instead of the right. As in IQ's, smart on the right, as dumb as a box of rocks on the left, average and dull normal, in the center.

Feb 24, 2014 - 11:03am


I am struck by something after reading the post today.

Every day those of us who haunt this house are treated to an excellent article, relevant to our interests, that is well-researched and worth reading. I consider myself fairly smart (mostly), but I gain something from every article posted here and just as much from the intelligent discussion that follows. When you add to this the vault membership that provides daily commentary and podcasts, for less fiat that an subscription to the Atlantic Monthly, then the value of this site become immeasurable. Not only that, but we have folks here who will respond to most questions posted in the forums and we have the privelege the ability to PM one another. While other blogs may provide articles that are as useful, they lack in frequency. No one person will have the ability to write about the breadth of topics that we find here, with the level of depth and research links to back it up, day after day after day.

Thanks for yet another great article Pining. And my thanks to JY, Argentus, Stephanie, CA Law and all those who post regularly in the comments section.

Oh yeah, and my thanks to Turd who comes up with something creative and useful every day--often twice or three times per day (and that is not easy), to keep me interested and returning to the site.

Feb 24, 2014 - 11:24am

Home Run Pining!

Excellent, simply excellent.

This is a fantastic concept, so brilliant, so clear, and it explains so much:

"You can tell what a power structure fears most by observing the energy and resources they deploy against that thing, and the ‘thing’ the fiat currency regime fears most intensely is a preference cascade to real money."

Why did I not think of that? Sheesh, maybe that is why you are the professor!

Feb 24, 2014 - 11:36am

Annoyed Too By TraderDan's Comments

I tried to post this in his blog, but couldn't--something to do with goggle account requirements which I didn't want to do. So I posted it in Dave from Denver's Blog: (I tried to post this here, with charts, but got moderated). (Of course Dave doesn't like the COT's, but that's not the point. I think I showed, in the charts, that they can be used on a relative basis).

  1. JakeSunday, 23 February, 2014

    Additionally, the COT's are very bullish in both the silver and gold reports:

    Trader Dan published an article recently regarding recent COT reports. His assertion is incorrect. Specs do not drive our modern markets –Commercials manipulate so that the specs follow them. So I thought I’d give you my opinion on COT’s and let you respond.

    While the spec short/long positions are one of THE most unreliable indicator components of these COT Reports when the market is topping, they do become net long at market bottoms. Let's look at any of the recent gold tops. Here's one from September 28, 2012. Gold had rallied from the high 1500's in July to almost 1800 on October 4th. Large specs were EXTREMELY BULLISH at 233944 Long/Short 30,098. At the same time, Commercials were Net short by 406861/144506.

    Specs do not drive the market It doesn't work this way at market tops. In fact, IMO, you must decide what group of participants is RELIABLE at TOPS and BOTTOMS.

    Thus, the only group that applies here in these COT reports is the commercial group. Granted, the large specs seem to become bullish at market bottoms, but the commercials DRIVE the point at which they allow the price break out.

    Let's look at another example: Here's one from February 24, 2012. Gold had rallied from the 1550's in January to almost 1800 on again February 28th. Large specs were EXTREMELY BULLISH at the market top at 214343 Long/Short 33,382. At the same time, Commercials were Net short by 375306/146004.

    So---who were we supposed to believe? --The commercials? -Or the large specs?

    The only way to interpret these reports is to first decide who's DRIVING, (Read: CONTROLLING), the markets and observe their relative positioning against price. The commercials have, for as long as these reports have been around, been relatively short in the extreme at market tops and less at market bottoms.

    They short into price rises and cover into price drops. Although, I've never seen them NET LONG, they are relatively less short and are the LEAST short at market bottoms. I have also found that they are influenced by the relative amount of inventory available in the comex.

    If you divide their net shorts X 100 oz by the inventory, and chart it, you'll see that they are least net short at bottoms and are most net short at tops as a percentage of comex inventories. Large specs follow them---They do not lead--they follow what the commercials are doing AFTER the commercials decide to allow the markets to move.

    Right now, the commercial positioning is quite bullish as their net shorts have been relatively low. They’ve also recently started to short into this slight price rise.
    We should see quite a good rally in both gold and silver as the commercials get more and more net short as both gold and silver rise in price based on this.

Feb 24, 2014 - 12:41pm

Typical leader--Presidents palace Ukraine

It's good to see how the other half lives. No wonder they flee, the commoners would throw a rope over a lamp post if they caught him Silver66

Feb 24, 2014 - 12:47pm


Excellent post Pining and a bunch of fantastic responses. A lot of the posts contain subjects that I think about quite often.

One thing that in this thread hasn't been touched on yet is the usage of stored funds (PM's) when converting to other forms of tangible items. Mainly what will the tax's be like then, that is of great importance as well and has to be considered. While I have seen this talked about in other posts it is something we all need to think about. It may be best to use it as collateral on a loan so as not to incur the dreaded siphoning of part of your life's work. The best plan I have come up with is to test the winds at the time to see which direction is most beneficial. There may be several ways to go about this ( as there already are as in different type markets etc ). Stay agile in your thinking here as it may have a very big impact.

Stack'em High
Feb 24, 2014 - 12:58pm

What happen to all of our cake bakers?

P.S. Thanks pining, great read as always.

bullion only
Feb 24, 2014 - 2:27pm

Tax ramifications

I think this is a possible way for the government to get your physical.

First the government imposes a very high tax for capital gains on gold like %70

This could easily be justified if gold price is reset to $10,000

JPM and other extensions of the government will then allow you to use your gold a collateral for a loan and when you pay off your loan you will be given fiat back and because it is sold you will be taxed %70.

Nope. I won't ever trust them.

Here, Ukraine, EU, China, Russia..........They are all the same.


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