Even In a Crisis, Gold Is Fragile

With Cyprus dominating the financial markets news this week, the "risk on/risk off" switching process has governed stock market action this week. On the back of Thursday's losses, stocks mirrored Wednesday's gains, with the S&P 500 (SNPINDEX: ^GSPC  ) gaining 0.7%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 0.6%. On the week, the S&P 500 lost 0.2% -- only its second weekly loss this year.

Reflecting the day's gains, the VIX Index (VOLATILITYINDICES: ^VIX  ) , Wall Street�s fear gauge, fell 3% today, to close at 13.57. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Gold: not anti-fragile
Philosopher-trader Nassim Taleb, the author of The Black Swan and, most recently,�Antifragile, has been a harsh critic of the Federal Reserve, both under Ben Bernanke and his predecessor, Alan Greenspan. According to the argument he develops in Antifragile, the national economy is like a living organism in that it requires an environment that changes -- sometimes in an adverse or hostile manner -- in order to become stronger. Or, as he puts it, "Anything organic requires �variability stressors.'"

In this model, which I think is a powerful example of consilience, any efforts to artificially suppress that variability -- such as quantitative easing -- are doomed to weaken the organism and sow the seeds of larger, more damaging crises.

Consistent with this reasoning, you might think Mr. Taleb is very bullish on gold -- a store of immutable value, according to its supporters. Not so. As reported by Barron's Michael Santoli, at an investment conference in New York yesterday, Taleb told investors: �It�s too neat a narrative, gold. Central banks own gold,� before adding, �something that doubles [in value] in no time can�t be a real store of value.�

I'm not sure that the fact that central banks own gold is, in itself, relevant to the investment case -- after all, Ben Bernanke himself said this is a matter of long-term tradition, rather than economics. �However, I think Taleb is dead on with his two other remarks, particularly the third. Something that doubles in value is highly unlikely to be a real store of value. Why? Because if it behaves that way, it's probably equally likely to halve in value in the same amount of time (or faster). By definition, a store value cannot exhibit that sort of volatility. Shareholders of the SPDR Gold Shares�and the iShares Silver Trust�may want to ponder Mr. Taleb's words.

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