How to Think Like a Gold Strategist (and Not a Researcher)
Recently, John Reade, the Chief Market Strategist and Head of Research at the World Gold Council offered interesting insights on how gold research differs from strategy. Reade clarified that researchers are simply using all available data to understand the current state of the market. Examples include an analysis of supply and demand, mining operations or an individual countries market share.
Strategist, however, take analysis and run with it. “A strategist tries to think about how these moving parts fit together and which elements will change going forward,” remarked Reade. A researcher is delving into the delicious steak dinner while the strategist is thinking about dessert.
The distinction is important because it underscores the inherent uncertainty behind market prognostication. Moreover, it elucidates the symbiosis between the two roles. Research has little value without the ability to synthesize the findings. At the same time, a strategist is only as good as their basis of research. Of course, more research is not necessarily the answer.
“What I look at now is quite different from what I looked at 20 years ago, and different again from 10 and five years ago,” Reade continues. To effectively leverage the power of research a strategist need to become adept at distilling what matters from the “static.” Author and statistician Nate Silver explored this topic in depth with his New York Times best-selling book The Signal and the Noise.
In his book Silver takes issue with assumptions that rely too heavily on the clean, sterilized conditions of models that fail to factor for the differing levels of importance among the data used. That is, a strategist must understand what set of characteristics are more important among the group. Knowing where the signal lies reveals what data points can be safely muted. Yet, to find the needle you need the entire haystack. Therefore, greater historical data offers the promise of more needles.
Reade’s comments seem to echo Silver’s devotion to using a substantial set of measurements for isolating more accurate predictions. “This is another way in which strategy is different from research: the frequency of observations is higher, ideally in real time,” explains Reade. In following this practice, Reade outlines his data pools explaining that he looks at data from four key areas. Reade follows purchase levels, interest rates, macro-economic data and commodities like oil and even other precious metals.
Of course, while his process is enlightening, most of us simply want to know what the picture will be when all the puzzle pieces are together. After citing that long-term, real interest rates are low and that geopolitical risk is high Reade asserts that this “combined with concerns about the global economy will, in my view, likely see investors interested in gold.”
Being a good strategist starts with being a good researcher. Yet, a solid bank of data is only the beginning. The real trick is pulling what is germane to your question from the heap of otherwise unimportant, unintelligible “noise.”
Be a researcher first, then a strategist and finally an investor.