Vivek Kaul
The Malaysia Airlines Flight 370 disappeared on March 8, 2014, with 227 passengers and 12 crew members, around 40 minutes after taking off. Whenever there is an air crash, questions are raised on how safe it is to fly. Given this, it is not surprising that the same seems to be happening at this point of time, with the disappearance of Malaysia Airlines Flight 370, which was on its way from Kuala Lumpur to Beijing.
“It increases the fear for people who are already afraid of flying. It temporarily makes people who may not be phobic about flying uneasy about flying. And people who already really have difficulty flying — it stops them from flying for a while,” Martin Seif, a clinical psychologist, told nbcnews.com.
Let’s take the case of what happened in the United States in the aftermath of two aeroplanes colliding into the two towers of the World Trade Centre on September 11, 2001. Many Americans took to driving long distances instead of flying.
But was that the right thing to do? As Spyros Makridakis, Robin Hograth and Anil Gaba write in Dance with Chance – Making Your Luck Work for You “In 2001, there were 483 deaths among commercial airline passengers in the USA, about half of them on 9/11. Interestingly in 2002, there wasn’t a single one. And in 2003 and 2004 there were only nineteen and eleven fatalities respectively. This means that during these three years, a total of thirty airline passengers in America were killed in accidents. In the same period, however, 128,525 people died in US car accidents.” The authors point out that close to 1600 deaths could have been avoided if people had flown instead of deciding to drive.
So, why did so many people take to driving in the aftermath of 9/11? The answer lies in what psychologists call “the illusion of control”. As the authors point out “The simple explanation is that, behind the wheel of your own automobile, it is natural to feel in control. Try telling drivers that they have no influence over the skills of other road users, the weather, the condition of the road, mechanical problems, or any other common causes of accidents – they will agree. But they still feel in control of their destiny when they drive. They can’t help it. Put them on a plane, and they think their life is in the hands of the airline pilot or, worse, a bunch of terrorists.” In fact, in the case of the disappearance of Malaysia Airlines Flight 370, pilot suicide is also one of the theories being bandied around and that definitely adds to the illusion of control.
The media plays a huge part in magnifying the illusion of control. “Plane crashes are turned into video images of twisted wreckage and dead bodies, then beamed into every home on television screens,” write the authors. The images of the crash lead people to conclude that flying is risky. In case of Malaysia Airlines Flight 370 there have been no images of the wreck till now, but there has been constant news coverage all over the world.
What people don’t take into account is the fact that many airplanes make safe landing almost every minute. None of this makes for news, though. “The thousands of airplanes which arrive safely at their destination every day hold no media interest. This isn’t news. So even the most logical of us are led to believe that the chance of a passenger dying in an airplane accident is much, much higher than it really is,” write the authors.
Also, car crashes rarely get talked about. “Car crashes, on the other hand, rarely make the headlines…Smaller-scale road accidents occur in large numbers with horrifying regularity, killing hundreds and thousands of people each year worldwide…We just don’t hear about them.”
What psychologists call the “availability heuristic” is also at work here. Daniel Kahneman defines the availability heuristic in Thinking, Fast and Slow as “We defined the availability heuristic as the process of judging frequency by “the ease with which instances come to mind.””
And given that more air crashes make it to the news than car accidents, it is easier to recall air crashes and deem air travel to be riskier. But driving remains much more risky than flying. As Kahneman puts it “Even in countries that have been targets of intensive terror campaigns, such as Israel, the weekly number of casualties almost never came close to the number of traffic deaths.”
In fact, flying has become more safe over the years. Data suggests that fatal accidents on commercial airplanes happened once in every 140 million miles flown. Now the number stands at once for every 1.4 billion miles flown.
Also, there have been improvements on other fronts as well. As Christian Wolmar points out in The Guardian “While extremes of weather and bird strikes continue to pose a risk, modern planes are far more resilient than in the past. Hijacking, a cause of several accidents in the 1970s and 1980s – and of course 9/11 – has been made very difficult thanks to the security passengers have to go through to get on a plane.”
Given these reasons, air travel remains the safest form of travelling, notwithstanding the air crashes that happen now and then.
The article originally appeared on www.firstpost.com on March 11, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Thinking Fast and Slow
Why we're not best-equipped to multitask
Vivek Kaul
Nidhi Pandey, a 17 year old girl died, after she was hit by a speeding bus in Dadar, Mumbai, on June 3, 2013. The Mumbai Police strongly believe that she was listening to music while crossing the road. As the Mumbai Mirror reports “Nidhi died around 10 am yesterday after she was hit by a private bus while crossing a road at Dadar TT. While her family denies she was wearing earphones at the time, the police believe it is highly likely that she was. Manisha Murumkar, sub-inspector, Matunga police station, said, “We strongly suspect that Nidhi was listening to music while crossing the road as she was found with her earphones plugged into her phone and both ear pieces near her ears.”
Prima facie it does seem that Nidhi was listening to music while crossing the road given the statement of the Mumbai Police, which claims to have reached the accident spot within ten minutes of the accident. “We reached the spot in 10 minutes and took her to Sion hospital in our police van. However, it was too late – Nidhi died before she could be admitted,” sub-inspector Murumkar told Mumbai Mirror. Given this, the conclusion one can draw is that Nidhi was so immersed in the music that she had no clue of the speeding bus.
But Nidhi Pandey was unlucky. There are so many people who have their earphones on and are listening to music while doing other important activities, like crossing the road, climbing onto trains and so on. A common sight these days is people smsing while walking on the pavement or even crossing the road. Then there are others who talk on their mobile phones while driving. The ‘smarter’ ones either use ear-phones or hands-free while speaking on their mobile phones while driving, thinking that using such gadgets makes the experience safe and risk-free.
But that is not the case. Christopher Charbis and Daniel Simons in their book The Invisible Gorilla – And Other Ways Our Intuition Deceives Us refer to this situation as inattentional deafness. “When people are focussing attention (visual and auditory) on (a) task…they are unlikely to notice something unexpected,” write the authors. So when people are engrossed listening to music while crossing the road, they are likely to miss the oncoming bus.
In fact Chabris and Simons conducted a very small experiment which has since then gone global. They made a small film which basically had students of Harvard University playing basketball. One team was wearing white and another team was wearing black.
After they had made the film, they ran a small experiment, where they asked volunteers to watch the film and count the number of passes made by the team wearing white, ignoring the passes made by the team wearing black.
Around a minute later, the volunteers were asked whether they had seen something else. Nearly half of them said they hadn’t seen anything else. But they had missed out on something major. As Daniel Kahneman writes in Thinking, Fast and Slow “The viewers of the film are instructed to count the number of passes made by the white team, ignoring the black players. This task is difficult and completely absorbing. Halfway through the video, a woman wearing a gorilla suit appears, crosses the court, thumps her chest, and moves on. The gorilla is in view for 9 seconds. Many thousands of people have seen the video, and about half of them do not notice anything unusual.”
As author Margaret Heffernan admits in Wilful Blindness – Why We Ignore the Obvious At Our Peril “The experiment has been shown repeatedly, around the world, in front of diverse audiences. I first saw it in Dublin, in an audience full of executives. Like them, I was so focussed on counting the passes I never saw the gorilla.”
In fact so stunning were the results that Chabiris and Simons did not believe the results initially. As Heffernan points out “Simons was so stunned by the results that he says that for several years afterwards, he still kept expecting people to spot the gorilla.”
So what happened here? Why did the people fail to see the obvious? As Kahneman writes “Intense focussing on a task can make people effectively blind, even to stimuli that normally attract attention…It is the counting task (counting the passes being made by the white team) – and especially the instruction to ignore one of the teams – that causes the blindness. No one who watches the video without the task would miss the gorilla….The authors (i.e. Chabris and Simons) note that the most remarkable observation of their study is that people find its results surprising. Indeed, the viewers who fail to see the gorilla are initially sure that it was not there – they cannot imagine missing such a striking event. The gorilla study illustrates two important facts about our minds: we can be blind to the obvious, and we are also blind to our blindness.”a
There was another experiment carried out by the Washington Post newspaper a few years back, with Grammy Award winning violinist Joshua David Bell being a part of it. At 7.51am on January 12, 2007, Bell started playing violin at the L’Enfant Plaza subway stop at Washington D.C in the United States. Bell had kept his violin cases open for donation as he played six classical pieces over the next 43 minutes. During the period 1097 people crossed him.
Gene Weingarten, a staff writer at the Washington Post, was the brain behind the experiment. After the experiment Weingarten asked Leonard Slatkin, music director of the National Symphony Orchestra, of what he thought would happen if a world famous violinist decided to play his violin incognito at rush hour time and with an audience of around 1000 odd people.
“Let’s assume that he is not recognised and just taken for granted as a street musician… Still, I don’t think that if he’s really good, he’s going to go unnoticed. He’d get a larger audience in Europe… but, okay, out of 1,000 people, my guess is there might be 35 or 40 who will recognize the quality for what it is. Maybe 75 to 100 will stop and spend some time listening,” replied Slatkin.
The actual result was very surprising and nowhere near what Slatkin thought it would be.
As Weingarten later wrote in the Washington Post “In the three-quarters of an hour that Joshua Bell played, seven people stopped what they were doing to hang around and take in the performance, at least for a minute. Twenty-seven gave money, most of them on the run — for a total of $32 and change. That leaves the 1,070 people who hurried by, oblivious, many only three feet away, few even turning to look.”
And this for the same Joshua David Bell playing, whose concert tickets could cost as much as $100, and who earned as high as $1000 per minute, everytime he played. Weingstein was very disappointed with the way the experiment turned out. As he wrote “It’s what happens right after each piece ends: nothing. The music stops. The same people who hadn’t noticed him playing don’t notice that he has finished. No applause, no acknowledgement…If we can’t take the time out of our lives to stay a moment and listen to one of the best musicians on Earth play some of the best music ever written; if the surge of modern life so overpowers us that we are deaf and blind to something like that — then what else are we missing.”
But the people travelling through the subway stop had been inattentionally deaf to the great music being played. They were totally focused on boarding the Metro train from the station and were totally deaf to the great music being played around them. It was the same as what happens in the invisible gorilla experiment. People are so focussed on counting the passes that they totally miss the gorilla.
The basic point of these experiments is that multitasking is not something that human beings are good at, even though most of us do it all the time. One of the most the common multitasking situations is drivers using mobile phones while driving to talk, sms and these days even for posting something on Facebook. But as Charbis and Simons point out “the driving impairments caused by talking on a cell phone are comparable to the effects of driving while legally intoxicated.”
One solution that has emerged is the hands-free. Turns out a hands-free is equally bad. “Experiment after experiment has shown no benefit whatsoever for hands-free phones over handheld ones. In fact, legislation banning the use of handheld phones might even have the ironic effect of making people more confident that they can safely use a hands-free phone while driving,” write the authors. So while traffic police fines people for talking on their phones while driving, there is no punishment for talking using a hands-free or earphones for that matter.
Charbis and Simons summarise it best when they write”the main conclusion from studies of multitasking is that virtually nobody does it well: As a rule, it is more efficient to do tasks one at a time rather than simultaneously.” So the next time you are crossing the road, just cross the road, the music blaring through the earphone can wait for a few seconds.
The article originally appeared on www.firstpost.com on June 5, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Why is DU in such a hurry to introduce a four-year degree?
Vivek Kaul
Daniel Kahneman, a Nobel Prize winning psychologist (he won the Nobel Prize for economics) , in his book Thinking, Fast and Slow, writes about a very interesting experience in designing a course he wanted introduce in high schools in Israel. Kahneman is currently the Eugene Higgins Professor of Psychology Emeritus at the Princeton University in the United States. But he started his career in Israel.
As he writes “I convinced some officials at the Israeli Ministry of Education of the need for a curriculum to teach judgement and decision making in school. The team that I assembled to design the curriculum and write a textbook for it included several experienced teachers, some of my psychology students, and Seymour Fox, then dean of the Hebrew University’s School of Education, who was expert in curriculum development.”
The team used to meet every Friday afternoon. In a year’s time they managed to construct a detailed outline of the syllabus, write a few chapters and even run a few sample lessons in the classroom. At this point of time Kahneman thought of running a small exercise and asked the team he was working with, to write down the time they thought it would take to present a complete textbook to the Ministry of Education, which could then go ahead and introduce the course.
As a part of the exercise Kahneman asked Fox, who was an expert at curriculum development, what had his previous experience been like. How much time did the teams in previous cases take to complete, what they had set out to do, Kahneman specifically asked Fox. ““I cannot think of any group that finished in less than seven years…nor any that took more than ten,””replied Fox.
Now contrast this with what is happening at Delhi University, where Vice Chancellor Dinesh Singh, is trying to introduce a four year course to replace the current three year one. As things stand as of now, the four year course is expected to be introduced in a few months time, when the next academic session of the university starts.
The work towards introducing a four year course started only in September last year and in December a proposal to that effect was passed. As an article in the Outlook magazine points out “At a hastily called emergency academic council meeting, held on a restricted holiday (December 24), the proposal for the overhaul was passed. The agenda papers of the meeting were made available to council members only two days before the meeting.”
The new academic session of the university starts in July, later this year. In six months time, between July and December, the Delhi University is trying to change the fundamental way it teaches, when it took at least seven years to introduce just a new course in the high schools of Israel.
Now that does not mean that India should also take seven to ten years to overhaul its education system, just because Israel used to do that. But the larger point is that changing the fundamental way of teaching in a central university cannot be done overnight, which is what Delhi University seems to be trying to do.
The first question that needs to be answered is that why is the change being made? Satish Despande, who teaches at the Delhi School of Economics told Outlook, “Not a single public document has been distributed for the rationale behind introducing the four-year course. So, all we are saying is, tell us why.”
The purported reason that seems to be coming out is that it will help those students who want to go to the United States for further studies. As Swapan Dasgupta wrote in a column in The Times of India yesterday “Shashi Tharoor proclaimed his support for the four-year degree course Delhi University is set to introduce from July. Tharoor’s logic was simple: the American 12 + 4 pattern has become the norm. “Indian students with 10+2+3 were made to do an extra year in the US. It was frustrating for many.””
Tharoor passed out of St Stephens College in Delhi, and then went to do his PhD from the Tufts University in the United States. Given this, Tharoor’s concern for those students of Delhi university who go to the United States for further studies is understandable.
But what about the ‘lesser mortals’ who decide to stay back and carry on their education or work to make a living, in India? As Ramachandra Guha writes in a column in the Hindustan Times “The logic of converting an established three-year degree programme into one of four years has not been carefully examined. When all other public universities in India have a three-year programme, how can one university alone stand out? The argument that the change will help students get admission into American universities is extremely elitist, since that possibility is open to (at most) 1% of DU students.”
Even if one does not get into the specific reasons for this change, there are other practical issues that need to be addressed.
The new four year structure allows students to drop out at the end of two or three years. Where will these students stand? Will a student who completes three years at Delhi university be eligible for its Post Graduate courses?
As mentioned earlier, Delhi university is a central university, which attracts students from all across the Eastern and Northern India. So will students who complete three year courses from other universities all across India, be eligible for Post Graduate courses on offer at the Delhi university?
If yes, then shouldn’t that be the case with students who complete three years at Delhi university? And if that is the case then why have a four year course at all? These are practical questions which need to be answered for the benefit of students who plan to apply in the various colleges affiliated to Delhi university later this year.
Then there is the problem of how will others treat Delhi university students who drop out at the end of two or three years? Will these students be eligible for MBA/UPSC/PO/any other exam that requires a three year bachelors degree?
That’s the practical part of it. Now lets come to the learning part. A senior administrator of the Delhi university told The Telegraph “Students are not gaining adequate skills and fundamental knowledge on matters relevant to life. The four-year course aims to teach those subjects that are relevant for students for their career, personal conduct and good citizenry.” The question of course is why can’t that be done in three years instead of four? And if its not being done in three years time what is the guarantee that it will be done in four years time?
The way the university plans to go about doing is this is putting students through 11 basic courses in the first two years. As Jayati Ghosh writes in The Hindu “Regardless of their previous training or choice of subject, allstudents will be forced to take 11 foundation courses, which will occupy most of their time in the first two years. These include two courses on “Language, Literature and Creativity” (one in English and the other in Hindi or another Modern Indian Language), “Information Technology,” “Business, Entrepreneurship and Management,” “Governance and Citizenship,” “Psychology, Communication and Life Skills,” “Geographic and Socio-economic Diversity,” “Science and Life,” “History, Culture and Civilisation,” “Building Mathematical Ability” and “Environment and Public Health.”
While broadening the horizon of students is always a good idea, doing it in an unplanned way can have unpleasant consequences. There are multiple questions that crop up here. Who will teach these courses? Are the current lot of Delhi university equipped enough to teach these courses? The Delhi university currently has 4000 vacancies for teachers. So is it in a position to take on this extra burden? What about the text books for these courses?
Also what will be the level of these courses going to be? As Ghosh puts it “These courses will have to be pitched at a level that can be understood by anyone with a basic school qualification. So the course on, say, “Building Mathematical Ability,” must be comprehensible to a student who has not done Mathematics at the Plus Two level, which would make it too basic to retain the interest of students who have already done it in school.”
The multi-disciplinary course goes against the entire idea of the Indian education system where students are expected to pick up their broad specialisation at the 10+2 level.
There are too many questions which need to be answered before a four year course can be introduced. Introducing the course without answering these questions would amount to experimenting with lives of students. Something that should not be done.
Let me conclude this with a personal experience. My three year bachelors degree in mathematics from Ranchi University took me four years to complete. The university during those days was running a year late. Final year exams which should have happened in May-June 1998, finally happened in May-July 1999. In fact, we were told that we were lucky because in the late eighties and the early nineties it took even five and a half years to complete a three year bachelors degree from Ranchi University.
In the end it were students like me who lost precious time because the university system kept screwing up. If the Delhi university goes ahead with its four year programme in its current shape, it is the students who will have to pay for it.
PS: And who has come with the names for the new Delhi university degrees? The university will award an Associate Baccalaureate (after 2 years), a Baccalaureate (after 3 years), and a Baccalaureate with Honours (after 4 years). Can we at least have names for degrees which we can pronounce, the fascination of Delhi university and Dinesh Singh for French notwithstanding.
The article originally appeared on www.firstpost.com on May 6,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Don’t count gold out: it may be the last man standing
Vivek Kaul
At the very outset let me confess that this has been a difficult piece to write. When everyone around you is shouting the same thing from their rooftops, it is very difficult to say something which happens to be exactly the opposite.
Gold over the last one week has turned into a four letter word. Last Thursday (i.e. April 11, 2013) the closing price of the yellow metal was $1564.2 per ounce (one troy ounce equals 31.1 grams). A week later as I write this gold is selling at around $1375 per ounce. The price has fallen by around 12.1% over the period of just one week.
And this fall has suddenly turned investment experts (at least the ones who appear on television and write and get quoted in newspapers) all bearish on gold. They have been giving different reasons to stay away from it. But if they were so confident that the price of gold would fall, as it has, why didn’t they warn the investors before fall? Everything is obvious after it has happened.
But as the Nobel Prize winning economist Daniel Kahneman writes in Thinking, Fast and Slow “The ultimate test of an explanation is whether it would have made the event predictable in advance”. Those offering the explanations now, clearly did not predict the massive and sudden fall in price of gold. What is interesting is that before the price of gold started to fall the Bloomberg consensus forecast for gold by the end of 2013 was at $1752 per ounce. Hence, the broader market did not see this coming.
So why is the price of gold falling? One conspiracy theory doing the rounds has the investment bank Goldman Sachs at the heart of it. As John Cassidy of the New Yorker magazine puts it “Last December, Goldman’s economic team turned bearishon gold, saying the multi-year upward trend in gold prices “will likely turn in 2013.” And last Wednesday,(i.e. April 10, 2013) the bank’s commodities team advised its clients to start shorting gold.” Short selling refers to a scenario where investors borrow gold and sell it with the hope that as the price falls they can buy it back at a lower price and thus make a profit.
Goldman Sachs was not the only big bank turning negative on gold. On April 2, the French bank, Societe Generale, the also issued a report titled The end of the gold era, and turned bearish on the yellow metal.
This many believe is a conspiracy on part of the big banks to drive down the price of gold. As Paul Craigs, a former assistant US Treasury Secretary told Kings World News “This is an orchestration. It’s been going on now from the beginning of April…Brokerage houses told their individual clients the word was out that hedge funds and institutional investors were going to be dumping gold and that they should get out in advance. Then, a couple of days ago, Goldman Sachs announced there would be further departures from gold. So what they are trying to do is scare the individual investor out of bullion. Clearly there is something desperate going on.”
Nevertheless, conspiracy theories are easy to talk about but difficult to prove. There are several other reasons being offered on why the price of gold will continue to fall. A major reason being offered is the improvement in the American economic scenario and that leading to the Federal Reserve of the United States, the American central bank, printing lesser money in the days to come.
The Federal Reserve currently prints $85 billion every month in the hope of reviving the American economy. Societe Generale in its report The end of the gold era believes that this will continue till September and come down to $65 billion after that, until being fully terminated by the end of the year.
The Federal Reserve on its part has guided that money printing will come down if it sees a ‘significant improvement in the outlook for employment’. The latest U3 rate of unemployment in the United States for the month of February 2013 stood at 7.6%. U6, a broader measure of unemployment, was at 13.8%. Both numbers have declined from their peaks. U6 touched a high of 17.2% in October 2009, when U3, which is the official unemployment rate, was at 10%. In December 2012 U6 stood at 14.4% and U3 was down to 7.8%.
So yes things have improved but they are still far away from being fine. U3 in the pre-financial crisis days used to be at around 5%. Also long term unemployment (where people are out of work for 27 weeks or more) has changed little and is at at 4.6 million or 39.6% of the unemployed people(U3).
(There are various ways in which the bureau of labour standards in the United States measures unemployment. This ranges from U1 to U6. The official rate of unemployment is the U3, which is the proportion of the civilian labour force that is unemployed but actively seeking employment. U6 is the most broad definition of unemployment and includes workers who want to work full time but are working part time because there are no full time jobs available. It also includes “discouraged workers”, or people who have stopped looking for work because the economic conditions the way they are, make them believe that no work is available for them.)
Another measure of the US economy turning around is the increase in real estate prices. As per the S&P Case-Shiller 20 City Home Price Index, real estate prices have gone up by 8.1% between January 1, 2012 and January 1, 2013. This after falling by 3.9% between 2011 and 2012.
One of the reasons the Federal Reserves prints money is to ensure that there is enough money going around in the financial system and interest rates continue to remain low. This ensures that people borrow and spend more. Hence, the low interest rates have helped in reviving the real estate sector in the United States.
But lets think for a moment on what will happen if the Federal Reserves stops printing money? Interest rates are likely to go up. People will take on fewer home loans to buy homes and that in turn will mean the real estate sector will go back to the dumps that it was in. So will the Federal Reserve take the risk of going slow or stopping money printing? Also, economic growth for the three months ending December 2012, was at -0.1%. So much for the American economy improving.
In this scenario it is unlikely the Federal Reserve will go stop money printing anytime soon, even though its Chairman Ben Bernanke, its Chairman, may keep dropping hints about doing the same.
As Stephen Leeb writes on www.Forbes.com “The Federal Reserve also wants to beat up on gold, via its drumbeat, suggesting that liquidity may be drying up and monetary easing might end soon. Never mind that recent economic data, on the whole, appears much weaker than expected, or that any halt to U.S. monetary easing could only follow higher inflation and commodity prices.
And as long as United States keeps printing money gold will remain a good investment bet, its current huge fall notwithstanding.
The last bull market in gold ended soon after the legendary Paul Volcker took over as the Chairman of the Federal Reserve in August 1979. As economist Bill Bonner wrote in a recent column “Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates…But what’s the Fed doing now? Has it reversed course? Has Ben “Bubbles” Bernanke been replaced with a tough-as-nails inflation fighter? Has the Federal Open Market Committee(FOMC) vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?”
And the answer on all the above counts is a big no.
Moving on, another reason given for the gold price falling is that Cyprus is selling gold worth $500 million in order to raise cash to pay its debt. As Peter Schiff president of Euro Pacific Capitalwrote in a recent column “Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold’s glory years.”
The stronger countries of the euro zone (the countries which use euro as their currency) led by Germany have been rescuing the heavily indebted weaker ones for a while now through multi billion dollar rescue packages. In case of Cyprus the rescue came with terms and conditions which included seizing a part of its banking deposits and selling its gold.
This experts feel is likely to be repeated in the days to come with other countries as well. What they forget is that if the euro zone makes a habit of seizing deposits and selling gold, countries are likely to opt out of the euro and move onto their own currencies. As James Montier writes in a recent research paper titled Hyperinflations, Hysteria, and False Memories “If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone.” Another reason to keep holding onto gold. If there is even a slight whiff of a euro breakup gold is going to fly.
Another logic being bandied around (especially by some of the Indian analysts) is that with the price of gold falling the investment demand for gold is likely to go down. Fair point. But a falling gold price can also push up the jewellery demand for gold. In 2011, gold jewellery consumed around 1972.1 tonnes of gold. This was down to 1908.1 tonnes in 2012, as prices rose.
A slowdown of Chinese growth has been offered as another reason for gold prices falling. As Cassidy of New Yorker writes “Many of today’s news storiesabout the gold price emphasized disappointing economic figures from China, which showed economic growth slowing down slightly in the first three months of 2013. China is a big consumer of virtually all natural resources, and gold was but one of many commodities that fell sharply after the report from Beijing.”
But this theory doesn’t really hold either. “The purported slowdown in the Chinese economy was very slight. First quarter growth came in at 7.7 per cent, compared to 7.9 per cent in the last three months of 2012. Allowing for the vagaries of the statistics, the difference is inconsequential,” writes Cassidy.
Also the gold bears who have suddenly all come out of the closet are not talking about what is happening in Japan. Japan has decided to double its money supply by printing yen to create some inflation. The hope is hat all this new money will create some inflation as it chases the same amount of goods and services, leading to a rise in prices. When people see prices rising, or expect prices to rise, they are more likely to buy goods and services, than keep their money in the bank. This is the logic. And when this happens businesses will do well and so will the overall economy.
A side effect of this money printing which is expected to be thrice as large as that in the United States, is the Japanese yen losing value against other major currencies because a surfeit of yen is expected to flood the financial system.
A weak yen also makes Japanese exports more competitive. (For a detailed argument click here). But it puts countries like Taiwan, South Korea, China and even Germany in a spot of bother. As Societe Generale analysts write in a report titled How to make profits from the Sushi-style QE in Japan “In effect Korea, Taiwan and China are losing competitiveness while Japan regains it.”
Printing money is not rocket science, if Japan can print money, so can the other countries in order to weaken their currency and thus keep their exports competitive. Hence there are chances of a full fledged global currency war erupting. And this is another reason to own gold.
The final argument against gold has been that central banks have been printing money for more than four years now. But all that money has not led to high inflation, as the gold bulls had been predicting that it would. So central banks have managed to slay the inflation phantom. “After more than four years of quantitative easing in the United States, the inflation rate, as measured by the consumer price index, is running at just two per cent…In Britain, where the Bank of England has followed policies similar to the Fed’s, the inflation rate is 2.8 per cent—a bit higher, but hardly alarming,” writes Cassidy.
But just because money printing hasn’t led to inflation till now doesn’t mean we can rule out that possibility totally. There is huge historical evidence to the contrary. Let me quote Nassim Nicholas Taleb here, something that I have done in the recent past. As Taleb writes in Anti Fragile “Central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.” James Rickards author Currency Wars: The Making of the Next Global Crises says the same thing “They can’t just keep printing…All major central banks are easing…Eventually so much money will be printed that this will lead to inflation.”
And in a situation like this, gold will be the last man standing.
To conclude, this is how I feel about gold. I maybe right. I maybe wrong. That only time will tell. Hence its important to remember here what John Kenneth Galbraith, an economist who talked sense on most occasions, once said: “The only function of economic forecasting is to make astrology look respectable.”
Given this it is important that one does not bet one’s life on gold going up. An allocation of not more than 10% in case of a conservative investor is the best bet to make. And if you are already there, stay there.
The article originally appeared on www.firstpost.com on April 18, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)