Gold Is Steady and Wins the Race!

Illustration by Jean Grandville from the 1855 edition of LaFontaine’s Fables. Public Domain.

If you bought bitcoin in 2016 you might be enjoying the roller coaster ride. Your gains, even with the recent epic swoop down in price, are still up 10X or more as of the time of this writing. If you bought it in December 2017, maybe not so much.

G-coins are fundamentally different. G-coins are gold tokens. And the price of gold is not remotely as volatile as that of “cryptocurrencies.” G-coins are simply a “warehouse receipt” of ownership of real gold.

As a recent article by Simone Stolzoff in Quartz headlined Checking bitcoin prices is a fidget spinner for finance nerds observes:

The internet has turned us into excitement-seeking machines. Many social-media sites take advantage of this by employing some basic science. In behavioral psychology, the cycle of linking actions with rewards is called reinforcement.

But when users acclimate to the reward promised—when the consequence of your actions becomes more predictable—the behavior loses its shine. The best way to keep people coming back and repeating behaviors is actually not to give them what they want all the time: It’s to drive them crazy by only giving it to them some of the time.

In behavioral psychology, this is called “variable-ratio reinforcement.” The theory was pioneered by B.F. Skinner in the 1950s, when he discovered that a rat would continue hitting a lever that would occasionally release a pellet of food for much longer than one on a set, predictable schedule. Today we see this in slot machines, where the thrill of wondering if you’ll get a reward keeps you gambling; it’s more exhilarating to put a quarter in a slot 10 times with a small chance of winning $1 million than safely putting your money in the bank where it will safely (but slowly) accrue interest.

Playing the stock or crypto market is much the same, with cryptocurrency’s volatile market creating the perfect storm for addiction. For the uninformed investor—and let’s face it, almost all crypto investing is speculative at this point—day-trading digital assets is like playing a giant slot machine. The price of a currency can induce depression or joy in the blink of an eye. But the problem with crypto is that the consequences can be a lot more dire than losing a few quarters.

This rather puts one in mind of one of Aesop’s most famous fables, The Hare And The Tortoise, Townsend translation.

A Hare one day ridiculed the short feet and slow pace of the Tortoise, who replied, laughing: “Though you be swift as the wind, I will beat you in a race.” The Hare, believing her assertion to be simply impossible, assented to the proposal; and they agreed that the Fox should choose the course and fix the goal. On the day appointed for the race the two started together. The Tortoise never for a moment stopped, but went on with a slow but steady pace straight to the end of the course. The Hare, lying down by the wayside, fell fast asleep. At last waking up, and moving as fast as he could, he saw the Tortoise had reached the goal, and was comfortably dozing after her fatigue.

Moral – Slow but steady wins the race.

“Slow but steady” is not addictively exciting in the “variable-ratio reinforcement” “giant slot-machine” sense. That said, patiently winning is fun. Watching your wealth consistently rise is a very gratifying experience.

The World Gold Council recently published its report on prospects for the price of gold in 2018. And while past performance does not predict future trends, it is interesting to note that its report shows gold outpacing many other asset classes over time.

The WGC shows that gold has yielded an average annual return of 10% since 1971, nearly 10% annually over the past 20 years, a bit over 5% in the past decade, and over 10% in 2017. Due to “the miracle of compounding” value can, if the trend continues, add up handsomely.

There can be no guarantee of future performance, of course. As that great quantum physicist Niels Bohr once reportedly employed an old Danish proverb, “It is very difficult to predict — especially the future.”  (By this Bohr may have been alluding to the difficulty, per quantum theory, of even perceiving “reality” in the present. Bohr also once said: “Anyone who is not shocked by quantum theory has not understood it.”)

 That said, secular trends may have investment significance. Economists speak of a dynamic called “reversion to the mean.” As defined at WolframMathworld™ (“the web’s most extensive mathematics resource”):

“Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event.”

Meaning? “Slow but steady wins the race.”

Compounding indeed is a powerful thing. reported on the results of its investigation as to whether Einstein ever declared that compound interest is “the most powerful force in the universe”:

[Sangillo, 2006]

There’s an urban legend that Albert Einstein once said compounding [interest] is the most powerful force in the universe.

Whether or not he really said it, that line has become my financial motto. I strongly suggest you adopt it.

Sylvia Nasar, in her book Grand Pursuit: The Story of Economic Genius observed of the great economist Alfred Marshall:

The chief error of the older economists, in Marshall’s view, was to not see that man was a creature of circumstances and that as circumstances changed, man was liable to change as well.  The chief error of their critics—but, ironically, one that the founders of political economy shared—was a failure to understand the cumulative power of incremental change and the compounding effects of time. Marshall:

“There are I believe in the world few things with greater capability of poetry in it than the multiplication table… If you can get mental and moral capital to grow at some rate per annum there is no limit to the advance that may be made; if you can give it the vital force which will make the multiplication table applicable to it, it becomes a little seed that will grow up to a tree of boundless size.”

Simone Stolzoff’s article in Quartz concludes:

In the words of Warren Buffett, “Successful investing takes time, discipline and patience…You can’t produce a baby in one month by getting nine women pregnant.”

Or, as Aesop taught us: “Slow but steady wins the race.”

About the Author:

Ralph Benko is editor-in-chief of The Supply Side and, with Charles Kadlec, author of The 21st Century Gold Standard: For Prosperity, Security, and Liberty, and lead co-editor of the Laissez Faire Books edition of Copernicus’s Essay on Money.

Benko also wrote The Webster’s Dictionary: How to use the Web to transform the world and was editor of The Lehrman Institute’s gold standard website. He was one of 23 official witnesses before the Reagan Gold Commission, testifying on the constitutional history of American monetary policy.