The Outliers

173
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

  173 Comments

benque
Feb 24, 2014 - 3:24pm

Thanks Pining!!

Great write-up on a subject I've only touched on from time to time. Makes so much sense!.

And frankly, the sheep I know have been been giving me fewer "odd" looks lately, than in the past. I do not; however, associate with clowns.

silver66
Feb 24, 2014 - 3:26pm

Questions/information on Sentry PME

last week Levon asked about this investment. Our office met with the company today

Here is some info for mainstreet

We had the liaison in from Sentry Investments today. I asked him to fill me in on the Sentry PME that had been asked about on Mainstreet. For those interested (and this is not financial advice, consult Turd or your local bank teller for that)

The PME is a closed end investment fund. The manager is Kevin McLean, who is probably one of the best PM Managers in North America if not the World. If you are Canadian and don’t want to buy this on the secondary market, the precious metals mutual fund he manages has very similar portfolio holdings.

The yield is a fixed payout per month relative to NAV(net asset value). So as NAV has dropped, the yield has gone up. There is a portion of the investing public that wants or demands a yield and this has been provided thru a fixed monthly payout. The amount is met thru capital gains on sale of shares. The last 4 years has been ROC (return of Capital). They have been giving you your own money back each month.

This closed end fund was developed as a segment of the advising market and the buying public wants an investment that has a symbol listed on the TSX.

It is valued every Thursday.

An observation would be you would be better off buying the precious metals mutual fund and doing a systematic withdrawal plan then buying this closed end fund( but hey, that is not advice)

Silver66

stackaloha
Feb 24, 2014 - 3:28pm

Another GREAT read!

Big thanks to P4F and all the other contributers, you guys write some very interesting and well though out pieces. keep stacking and keep writing!

bullion only
Feb 24, 2014 - 3:36pm

Maybe some Americans buy bullion

Maybe some Americans buy bullion but with all the we buy gold stores the middle class are being forced to sell whatever jewelry they have to make ends meet. Selling the one insurance policy that will get them through. Such a pity. So the haves get more and the have nots get less and the gap is growing wider and wider. So sad to see people trying to maintain their life style and standard of living when in fact they should be hunkering down and battening down the hatches for the storm that is approaching. Do they not see that the storm clouds will not just pass but will leave a wake of destruction. The slight drizzel they feel not is a harbinger for the torrential downpour and flood to come. Where is that golden life boat? Oh yeah , we sold it last year to take that vacation. Where did we go by the way? RT

Motley Fool
Feb 24, 2014 - 3:43pm

Haha ok

Good points, we would need some stipulations.

Do we agree that dollar hyperinflation is inevitable? Because that would be a good point for measure of collapse. Perhaps the end of the hyperinflation?

As to awakening, that is more tricky to define. How about when the media reaches frenzy state on the need to buy gold, but none can be had for any hyperinflating price? ;)

Your own suggestions are welcome.

Edit : Fwiw, to me losing this bet would also be akin to winning. Whatever breaks the gold market first I am rooting for. :D

BohemianPining 4 the Fjords
Feb 24, 2014 - 3:47pm

@Pining

"...the average retirement saving for people in the US 40-60 yrs is about 220k."

No, I don't believe that. :-) At first, I would look into "median," and not the average. Secondly, I don't believe that the savings would be so high. Savings, that's something what one can liquidate into cash, right? Well, even the net worth 220k per person would be too high! 440k in savings per one household of two retirees? No way.

As for the gold investments, people have some jewelry, one or two coins... I would ask, how many U.S. citizens have more than 5 oz of gold in coins or gold bars, as in investment gold? I think that much less than 1%.

JMHO

Feb 24, 2014 - 3:51pm

What about this?

If annualized inflation (CPI?) reaches 30% for an entire quarter, you win. If premium over spot for gold or silver at major metals suppliers reaches 30% first, I win? Still not sure this captures the essence of the thing...

silver66
Feb 24, 2014 - 4:04pm

Tipping point

Pining 4 the Fjords, excellent article, as I read I thought of this book which has been discussed here before.

https://www.amazon.ca/The-Tipping-Point-Little-Difference/dp/0316346624

I have often wondered what the percentage number is? 5%, 7%, 11% before the avalanche/stampede starts to real money. Some day will will know when the history books are written and the chattering class is wiped out and the middle class is destitute.

As was noted on ZH last week in Grant's article things that make you go hmmmm. I don't want to get wealthy in the reset I want to stay wealthy. (wealth is a relative thing to a little peon like me)

Silver66

Motley Fool
Feb 24, 2014 - 4:05pm

Pining

Hmm. Well, the first measure is tricky. Argentinean inflation is in excess of that at present, yet official statistics has it at what 12%? Though it's not like the US could withstand even 12% inflation.

As to major metals suppliers, fabrication bottlenecks is something to consider, but 30% does seem a hefty premium. What's the highest it has been historically? And do you want to pick a specific supplier perhaps? One like our Rand Refinery, or the Perth Mint?

The essence of the bet is that I do not think the west will be able to save their savings, by converting it too gold, before it evaporates due to inflation, or before gold is revalued overnight.

It is hard to capture that essence in a binary measurable option.

tyberious
Feb 24, 2014 - 4:20pm

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