Network News

X My Profile
View More Activity

Time to bet against gold?

This study suggesting that investors are more bullish when their party is in power and more bearish when the other party is in power has been making the rounds, and I'd hate for you to miss it.

This paper shows that people's optimism towards financial markets and the overall economy is dynamically influenced by their political affiliation and the existing political climate. Republicans (Democrats) are more optimistic and they perceive the markets to be less risky and more undervalued when the Republican (Democratic) party is in power. These optimism shifts are more pronounced among individuals with lower financial sophistication. Further, when the opposite party is in power, investors lower their forecasts of market returns, keep own portfolio return forecasts unchanged and, therefore, appear more overconfident. These shifts in optimism, overconfidence, and perceptions of risk and reward influence people's investment decisions. Specifically, investors with a pessimistic view of the domestic economy exhibit strong propensity to invest in foreign stocks and in the domestic setting, they gravitate toward less risky, familiar local stocks and trade more actively. Investors improve their raw portfolio performance when their own party is in power, but the improvement in risk-adjusted performance is economically small.

More on the study here and here. The observed effect is fairly small. Or at least it was. Presumably, the fact that clownish -- but influential -- voices in the opposition are starting to exhort their viewers to buy gold probably isn't helping matters. It does suggest, however, that more rational investors could make a bit of pocket money betting against the positions most likely to be irrationally inflated by partisan investors.

By Ezra Klein  |  February 1, 2010; 3:30 PM ET
 
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Oldies but goodies in the budget
Next: Return of the wine track?

Comments

The Republican market can stay irrational longer than Democrats can stay in power.

Posted by: DJAnyReason | February 1, 2010 3:44 PM | Report abuse

"It does suggest, however, that more rational investors could make a bit of pocket money betting against the positions most likely to be irrationally inflated by partisan investors."

Maybe, but remember that shorting bubbles is very risky. If the bubble hasn't popped by the time your short position expires, you've suddenly lost a ton of money.

If I called the mid-2000s bubble in 2003 and diligently shorted it - I would have lost money for half a decade.

As Keynes put it, the market can stay irrational longer than you can stay solvent.

Posted by: jesmont | February 1, 2010 3:53 PM | Report abuse

But which party really is better for the stock market?

This was answered in a 2003 paper in academic finance's top journal, the Journal of Finance. The stock market does far better under Democrats. From the abstract:

The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium.

At: http://docentes.fe.unl.pt/~psc/Politics.pdf

The economy in general also does far better under the Democrats. For more on this, see:

http://richardhserlin.blogspot.com/2008/08/its-not-just-economy-in-general-thats.html

Posted by: RichardHSerlin | February 1, 2010 3:58 PM | Report abuse

The gold bubble is definitely going to pop at some point.

If governments around the world were foolish and transitioned from free-floating currencies to gold-backed currencies, then you might see an increased demand for the commodity, but right now it seems to have all the hallmarks of a bubble (the historical norm seems to be closer to $400-$500).

Fortunately, it's an asset, not a debt bubble, so when it does pop the secondary effects probably won't be too bad for those who opted out of the speculation game.

Posted by: JPRS | February 1, 2010 4:26 PM | Report abuse

I would suggest everyone buy gold, as a hedge against the clownish but influential bloggers who keep trying to push goverment controlled health care on the nation.

Posted by: cummije5 | February 1, 2010 4:46 PM | Report abuse

I'm investing in food, clothing, and transportation. Oh, and housing. Once I get those handled, I'll think about gold.

Posted by: Kevin_Willis | February 1, 2010 4:46 PM | Report abuse

rational investors could make a bit of pocket money betting against the positions most likely to be irrationally inflated by partisan investors.

Give it a shot, but I'll bet Republicans can stay irrational longer than you can stay solvent.

Posted by: TWAndrews | February 1, 2010 5:07 PM | Report abuse

We are not in a gold bubble by any stretch of the imagination. If you want to understand the mentality at the top of a gold bubble, check out this book from 1980. It captures the age the way Dow 40,000 captured the late 90s.

http://www.amazon.com/Crisis-Investing-Opportunities-Profits-Depression/dp/0936906006

Gold couldn't even gather a meaningful rally in the financial crisis - an event tailor made for it. If gold was REALLY in a bubble and ready to burst, it would have gone meteoric in late 2008 and it didn't. Short gold at your own peril.

Posted by: sold2u | February 1, 2010 9:58 PM | Report abuse

I wouldn't bet too hard against gold- the inflation risk is still high as long as the printing presses are running full steam to buy treasuries. One thing to pay attention to is that China has begun acquiring a lot of gold- even more than Republicans.

Just to avoid running with the herd, I went long on silver, platinum and palladium.

Posted by: staticvars | February 2, 2010 9:56 AM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company