Tag Archives: The Economist

Goals Gone Wild

In these first months of the year many teams in many firms have gone or are going through annual interviews and goals setting for the year 2015.

Last week I read an interesting Schumpeter column in The Economist, “The quantified serf: Management by goal-setting is making a comeback, its flaws supposedly fixed”.

The article mainly covered two issues: one was the newest trend in goal-setting, “quantified work”, as promoted by BetterWorks, whereby employees collaborate in setting objectives for peers. This apparently improves performance and transparency. The article cautions, however, that rewards should not be linked to these goals and that an attainment of 60-70% of goals set in this way should be viewed as normal rather than failure.

The second issue covered by the article was side-effects of goal-setting. The article introduced the paper “Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting” [PDF, 500KB] by Lisa D. Ordóñez, Maurice E. Schweitzer, Adam D. Galinsky and Max H. Bazerman. In this post I wanted to comment on this paper.

Published in 2009, the paper makes a review of literature on goal-setting and even if admitting that studies have demonstrated specific and challenging goals can improve performance, it concludes that:

“For decades, scholars have prescribed goal setting as an all-purpose remedy for employee motivation. Rather than dispensing goal setting as a benign, over-the-counter treatment for students of management, experts need to conceptualize goal setting as a prescription strength medication that requires careful dosing, consideration of harmful side effects, and close supervision. […]”

Before reaching to that conclusion the paper examines several aspects of goals and why they may produce harmful side effects; to name a few:

  • When goals are too specific… people overlook other important features of a task. As an example the authors provide the case of the Ford Pinto, about which I wrote a post in the blog long ago.
  • When there are too many goals… individuals are prone to concentrate on only one goal.
  • When the time horizon is inappropriate… may harm the organization in the long run. Think of quarterly reports and companies trying to beat analysts’ estimates or their own guidance. That is why Coca Cola ceased to provide quarterly guidance back in 2002.
  • When goals are too challenging… they may shift risk attitudes, promote unethical behaviour. An example given describes how Sears’ automotive unit set a target of fee to be charged to customers. This triggered that employees started charging for unnecessary repairs to customers to meet the goals!
  • When goals are complex, specific, challenging… they may inhibit learning.
  • Goals may create a culture of competition instead of cooperation.
  • Goal setting increases extrinsic motivation… and thus can harm intrinsic motivation.

Linked to the message given in the conclusion (“experts need to conceptualize goal setting as a prescription strength medication that requires careful dosing, consideration of harmful side effects, and close supervision”), the authors also propose the following warning signal and a check list to be used when setting goals.

Goals Gone Wild Warning Signal.

Goals Gone Wild warning signal.

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The use of drones (how unmanned aerial vehicles, UAVs, are commonly called) in military operations has been very criticized in the past years, partly due to the collateral civilian casualties from such operations (close to 300 just in Pakistan in the past years). Nevertheless, the use of drones is here to stay. The US Department of Defense includes as part of its budgetary information an “Aircraft Procurement Plan FY2012-2041” [PDF, 332KB], see in the graphic below how it is planned to almost duplicate the drones in the fleet along the next decade:


Unammned aerial vehicles in DoD inventory.

The civilian use of drones has been lagging behind these years mainly due to its integration in the air space. To that respect, the Federal Aviation Administration (FAA) announced last month an initial plan for integrating unmanned aircraft  into U.S. airspace by September 2015.

There are plenty of possible civilian applications that have been raised; from monitoring crops, to pipelines, oil rigs, forest fires, photography… to the dispatching of personal packages being announced recently by Amazon (Prime Air). The Economist issue of this week includes an article, Game of drones, which estimates that by 2017 there could be up to 10,000 drones flying in the USA and by 2025 the civilian drone market could have a size of up to 82bn$ per year, according to the Association for Unmanned Vehicle Systems International (AUVSI).

In this general picture Europe has been left behind.

European air forces are still relying on US and Israeli drones (just this week France has received its first 2 MQ-9 Reaper from the USA). That is why I hope that the conclusion at the recent EU Council  (see here a post I wrote about it) in relation to the launching of a European Medium Altitude Long Endurance (MALE) drone programme helps to put an end to that situation and enables Europe and its industry to bridge the gap:

[…] the development of Remotely Piloted Aircraft Systems (RPAS) in the 2020-2025 timeframe: preparations for a programme of a next-generation European Medium Altitude Long Endurance RPAS; the establishment of an RPAS user community among the participating Member States owning and operating these RPAS; close synergies with the European Commission on regulation (for an initial RPAS integration into the European Aviation System by 2016); appropriate funding from 2014 for R&D activities; […]

The bridging of that gap would not only ensure the security of supply of such drones for Europe but would help develop critical technologies to maintain the industrial base, its growth and employment; apart from the fact of being many of such technologies of dual use (as recognised in the EU Council conclusions) they would help Europe to access the market for civilian use of drones.

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On Boards of directors and CEOs

The Economist issue published last week included an article (“From cuckolds to captains”) about the transformation of corporate boards. However, I wanted to extract the following passages:

For most of their history, boards have been largely ceremonial institutions: friends of the boss who meet every few months to rubber-stamp his decisions and have a good lunch. Critics have compared directors to “parsley on fish”, decorative but ineffectual; or honorary colonels, “ornamental in parade but fairly useless in battle”. Ralph Nader called them “cuckolds” who are always the last to know when managers have erred.


The first is that boards should focus on providing companies with strategic advice. This sort of common sense is often in short supply in the ego-driven world of boards. Boardrooms contain too many people with different priorities: corporate veterans who give lectures on how they would have handled things; egomaniacs who like to show how much they know about everything; hobby-horse jockeys who mount the same steed regardless of the race; captives of compliance who are obsessed with box-ticking. The authors say that in their experience perhaps half of the Fortune 500 companies have one or two directors they would regard as “dysfunctional”.

While reading these passages from the article I couldn’t help but remembering Warren Buffett on board of directors in his 2009 letter to Berkshire Hathaway shareholders [PDF, 116KB] (the emphasis is mine):

“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe.

It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term.

The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.”


“In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.

Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 1 1⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.

If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.)


“I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”

After these paragraphs harsh on CEOs and directors, let me finish with two references to posts I wrote some time ago: “Is talent really worth it?“, a review of a book on CEOs pay, and “Buffett on shares buy back by companies“, excerpt from 1980 letter.

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According to Walk Free foundation there are almost 30 million slaves in the world. Of those about 14 million live in India, the country with the highest number of slaves, whereas in Mauritania about 4% of the population are enslaved. According to the same foundation slavery generates up to 32bn$ of profits for slaveholders around the world (about 1k$ per slave).

I came across this foundation and their figures (compiled in the Global Slavery Index) in an article from The Economist. You can see the following graphic published in the newspaper:

Graphic from The Economist, source: Walk Free foundation,

Graphic from The Economist, source: Walk Free foundation.

About at the same time I received a letter from the Africa Programme coordinator of another foundation I contribute to, Anti-Slavery (of which I have written before).

The letter tells the story of Ibrahim, a former slave from Mauritania. He was born a slave and found himself alone when his mother and siblings fled from their holder. When Ibrahim grew older, the master brought a woman-slave to mate Ibrahim so he would find it more difficult to leave a family behind. He nevertheless escaped. Ibrahim has tried to free his family without success. He found little help from local authorities and was beaten up in one of his tries.

Anti-Slavery role in the story is to help Ibrahim and others in his situation seek justice, to support them and help them rebuild their lives. Ibrahim is now receiving legal assistance so he can file criminal charges against his former master.

I normally don’t like very much when I receive letters from the charities and NGO’s I already support. My first thought is “if I already collaborate with you, save those euros of paper, envelopes, stamps, etc., and direct them to either projects or outreach towards people who don’t support you yet!”. This time I thought it twice and decided to try to voice the cause further.

Two final figures from that letter: it costs £48 to provide emergency accommodation for a month for a family released from slavery, and as little as £6 to provide a training session for a local support worker.

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My 2012 reading list

At the beginning of the year I set as a personal objective to read at least 15 books. This will be a low number for some of you and a high one for others. To me it looked challenging but achievable… though, I did not achieve it. I completed 10 books and started other 4 which I have not yet finished (they’ll be included in the next year reading list).

See below the list with a small comment for each one, the link to a post about the book in the blog (when applicable), links to Amazon (in case you want to get them) and sometimes to the authors. I have also included a small rating from one to three “+” depending on how much do I recommend its reading:

  1. This time is different” (by C. Reinhart and K. Rogoff) (++): very interesting book offering a comprehensive book to economic and financial crises since 8 centuries ago. The book is full of graphics, statistics, example, anecdotes… I already wrote three posts about it: “The Republic of Poyais“, “The march toward fiat money” and “¿Cómo le ha ido a España en esta crisis?“. 
  2. Le Petit Prince” (by Antoine de Saint-Exupéry) (++): even if narrated as a children’s book, it contains several idealistic messages, fine criticisms of how adults behave, etc. The teachings are mainly transmitted through conversations between a child and the prince and encounters with other characters… I wrote a post about it “Le Petit Prince“.
  3. The consequences of the peace” (by John M. Keynes) (+++): the book was written at the time of the Versailles Conference after the World War I, which he attended as a delegate from the British Treasury. In the book, Keynes explained how the disaster in the making was being produced, due to lack of communication between representatives from USA, UK, France and Italy, and the intention from Clemenceau of taking as much as possible from Germany. Keynes makes a series of estimates of Germany’s production capabilities and that of the regions being taken from it and comparing them with the pretensions that were being included in the negotiations of the treaty. In the book, he warns well in advance the economic and social disaster that the treaty is going to send Germany into. (I have not yet written a specific review of the book, but since I had underlined several passages I don’t discard writing it).
  4. Le bal des ambitions” (by Véronique Guillermard and Yann le Galès) (+): the book tells the story behind the creation of EADS and its first years. Very much like in a thriller, it gives account about the characters involved, the battles for power, etc. I wrote a post about it “Le Bal des ambitions“.
  5. Desolé, nous avons raté la piste” (by Stephan Orth and Antje Blinda) (+): The book consists of a series of awkward situations in a flight described by passengers, pilots and cabin crew, mainly miscommunications between the crew and passengers or funny messages received from the cockpit. The book originated after a collection of the anecdotes posted by readers of the online version of Der Spiegel. . See the review I wrote about it “Sorry, I missed the runway“.
  6. Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger” (by Charlie Munger, compiled by Peter D. Kaufman) (+++): the book is a compilation of Munger’s speeches, quotes, interviews, articles, letters, etc. Some of his speeches are available in Youtube (e.g. this one given for the commencement of USC Law in 2007). One of the main takeaways is the use of several mental models to analyze situations we live in our lives (instead of being stalled in the few models which we are more comfortable with). Another recurring topic is the lack of training in psychology that we get (or even his criticism of how psychology is taught in faculties). I haven’t written a post about the book, but I think I should, if only to share more of his wit and wisdom with you.
  7. The Peter Principle: Why Things Go Wrong” (by Laurence J. Peter) (+++): the book is a hilarious account of situations that arise in companies and institutions of why and how people are promoted, cornered, etc., or in his words is a treatise on hierarchology. The name of the book comes from the Peter Principle which says: “In a hierarchy, every employee tends to rise to his level of incompetence”. I already wrote about it here.
  8. 2010 Odyssey Two” (by Arthur C. Clarke) (++): the book is a sequel to the famous “2001: A Space Odyssey“, and there is a movie as about this book. The story starts with doctor Heywood Lloyd travelling in a combined Soviet-American mission to Jupiter in order to find the spaceship Discovery One from the previous mission and what went wrong with it… I won’t tell more of the plot to avoid spoiling it for someone. I would say that I liked more this book (and movie) than the first one.
  9. The Litigators” (by John Grisham) (++): this novel is very much like most of John Grisham. In this one the plot is about a star young lawyer graduated from Harvard Law School who cannot stand the pressure from a big firm and quits it to join a mediocre small firm with two partners who chase victims of small accidents to help them get some  compensation from insurance companies, with the hope of reaching the big class action which could make the rich.
  10. Soccernomics” (by Simon Kuper and Stefan Szymanski) (+++): the authors use economics’ techniques, plenty of data, statistics, citing several papers, studies, etc., in order to bring up uncovered issues about football (such as transfer market, what makes some nations more successful in football…) or refocus the attention about other ones. See the review I wrote about it.

I also completed two other partial objectives: to read at least 2 books in French and 2 about politics/economy. And as always, on the learning side from reading there is Twitter (a source of information or distraction?), the subscriptions delivered to home of the weekly The Economist and the two monthly magazines Scientific American and Toastmasters.


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Crowdfunding science

I have written sometimes in the blog about crowdfunding. How I started funding loans for small entrepreneurs in developing countries via Kiva, or how I invested a small amount in the movie project “El Cosmonauta”, and more generally I have shared yearly contributions to other non-profits.

I heard for the first time about crowdfunding science some time ago, but didn’t keep track of it. Thus, when I read the last week in The Economist an article featuring some platforms where to crowdfund science I decided to take a look at those and to post about it in the blog. The purpose of the post is twofold: raise awareness about an initiative that I support (even if not yet with money) and to let myself keep track of them from now on.

The article mentions 4 platforms. Two of the platforms look more science-focussed and the other two more generalist:

  • Petridish: “Petridish lets you fund promising research projects and join first hand in new discoveries.”
  • Microryza: “We’re researchers and scientists. We live and breathe this stuff. We know that too many important research ideas go unfunded. So we created Microryza. We believe that the discoveries made through research help make the world better, that researchers should keep 100% ownership of the research and results, and that a community of people who care about science is all that’s needed to help seed fund new ideas.”
  • Rockethub: “RocketHub is the world’s funding machine. RocketHub is an international and open community that has helped thousands of artists, scientists, entrepreneurs, and philanthropists raise millions of dollars. We offer an innovative way to raise money (Crowdfunding) and tangible opportunities to take creative products and endeavors to next level (LaunchPad Opportunities).”
  • Indiegogo: “Everyone should have the opportunity to raise money. Now everyone does. People all over the world use our industry-leading platform to raise millions of dollars for all types of campaigns. No matter what you are raising money for, you can start right now with no fee or application process.”

I will let you know the moment I opt to engage with a particular scientific research :-).

Note: I leave aside the debate of whether budget for science should be ensured by the states.

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Summary of (my) 2011

Let me share with you a brief recap of my 2011 (as I already did last year).

If I then characterized 2010 as a learning year, I would say 2011 was a year on the run.

At the beginning of the year I set out my objectives for 2011, of which I have achieved 71.4% (just above my 70% target!). One of them was only to “become again a frequent runner”, for which I set up some modest steps, e.g., buy new running shoes, run 3 days before mid-January, run a 10k popular race before November, lose some 10kg by June… If there was a yearly objective which I widely met, it was this one:

Último kilómetro de los 100km de Millau 2011.

Last kilometre at the ultramarathon "100km de Millau".

  • I ran over 170 days along the year, covering over 1,800 kilometres.
  • I took part in 11 popular races, including 6 of 10km, 2 half marathons, 1 marathon (42km) and 1 ultramarathon (100km). More races and more kilometres than ever before.
  • I found myself running in Granada, Villa del Río, Madrid, Torrelodones, Luarca, Rijswijk, Wijchen, Toulouse, Luz Saint Sauveur, Chicago, Washington DC, Des Moines, Montreal…

Learning. After taking some classes in Madrid, I continued studying French and now I feel more confident when facing shop attendants :-). I had to learn and continue to learn lots of new things every day at the new job where I landed about a year ago.

I still enjoy as learning moments the print weekly issues of The Economist or the monthly issues of Scientific American. I delivered the necessary speeches to become ACB within Toastmasters (though lately I’ve missed more meetings than I should). Finally, I read a dozen books along the year (a bit less than in previous years, though some in the new eReader!), being the ones I liked the most the following: first, second and third.

Investing & helping others. I set myself a high objective of saving and investing: I overachieved it by around 50%. I once mentioned it in Twitter: the best thing behind investing is the discipline of saving that is behind it. I not only dedicated a percentage of personal income to savings but as I announced in a post at the beginning of 2010, I directed a percentage to different charities. I initially set it out to be 0.7% of my income, but after raising some funds and contributing others to charities related to the races in which I am taking part, in the end this percentage has been well over 1% in 2011.

Travelling. We together visited Montreal, Ottawa, DC, Chicago, Omaha, and several places in the south of France and throughout Spain. The moment that I liked the most was attending the Berkshire Hathaway annual shareholders meeting, no doubt.

Javi 2.0. I continued to often write in this blog with some remarkable posts. I admit that my twitter account is one of my biggest sources of information / distraction.

Sports. Apart from the running, I recently re-started playing paddle with colleagues, became a kind of fan of the rugby local team, Stade Toulousain, had to subscribe to Canal + not to miss any of Real Madrid matches while living abroad.

Other reasons for joy have been:

  • our friends Teresa & Alberto, María & Óscar, Isa & Pedro got married,
  • we welcomed the newborns Mar, Hugo, Luis and Eneko, while another of our friends is pregnant today (that we know),
  • my sister Beatriz started working as an intern; my brother Jaime continued to enjoy his job in Airbus and moved to a new apartment; my mother Fidela continued to take several courses (and to give wonderful massages) and my father Juan Bautista finally and happily retired (after working for 43 years!).
  • Luca completed all the requirements to become a full-fledged lawyer, winning some court cases in the process.

To close the year, I started taking flight lessons, pursuing another childhood dream. This will allow me to continue learning and experiencing new things!

Now it’s time to update the objectives setting for 2012. This year the exercise will be easier as I already have the methodology and the habit. If the objectives are well chosen and challenging enough, next year’s account will be even shinier.

I wish you the same: a shinier 2012, enjoy it!


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What actually happens when there is a default?

A couple of friends of mine used to point to me some months ago, jokingly or seriously, who knows,  whether it was a good time to buy Greek bonds due to the hight yield they had.

My response was always the same, I prefer not to meddle with state bonds, a lesson learnt from various sources and which I wrote about some weeks ago (“Inflation and assets” and “Hyperinflation and defaults in Europe”).

I guess that with all the recent turmoil in the markets and the news, one would feel less appetite for such bonds, but I still had a question: What actually happens when there is a debt default? Is the state not giving you a monthly coupon but re-starts paying the next month? Is the payment along a year postponed and re-started the coming year? Is the principal recovered?

Last week, while flying to Amsterdam I read an insightful article from The Economist about last Argentina’s debt default. The article is an eye-opener. It gives detailed account of the different difficulties and steps that creditors are going through to recover part of their money.

But as a point of reference, take the following passage:

“Argentina’s default, after a severe economic crisis, sparked social unrest and runs on banks. It subsequently presented creditors with a take-it-or-leave-it offer of 35 cents on the dollar. They considered this derisory: previously, delinquent countries had typically paid 50-60 cents. But the government stood firm and roughly three-quarters of the bondholders took part in a debt exchange in 2005. More joined in 2010, bringing the total to 93%.”

Then, what typically happens is that monthly coupon payments are stopped and creditors are presented with a take-it-or-leave-it offer of paying them back about 50-60% of what they had invested…

The 7% who didn’t join that deal are still going through legal battles. For you and I, that most probably are not going to enter into any legal dispute with a country, we are much better off far away from state debt bonds.

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Long-term commodity prices

On previous posts I have written about the long-term prices of housing and why I didn’t considered a house a sound investment, about why it is better to invest in any asset than having cash, why pencils would be as safe as an asset can be (even if not productive) and why gold is not more worthy than pencils. I, then, included some interesting graphics showing quite long-term views on the issue.

Weeks ago The Economist showed another interesting long-term graphic that I wanted to share and also to leave it here as a note to self as a reminder of the long-term worth of commodities.

Commodity-price index, adjusted by US GDP deflator.

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Gold as an invesment?

If in a previous post, pencils were treated as a supposedly safe haven in case of a recession. In this post I just wanted to mention that I don’t see anything more value in gold or silver than I see in pencils.

That may sound shocking, as we are used to have gold items in great praise. Well, as a commodity, as an asset, I don’t see much difference between gold and other materials. What it is valuable is the company that continues to produce goods out of those commodities, with ever greater productivity and value added to its products.

Gold by itself is just like a pencil, assuming that you continue to find someone in the future willing to pay something for both commodities (certainly not more than it is worth at any given moment).

It is easy to say this now that both silver and gold have seen its prices plummet after the summer, but more than using the recent fall as basis for the argument, I have in mind these other long-term (as in centuries’ trend) graphics below:

Gold price fluctuations since 1800. Source: The Economist.

From the previous graphic, gold went up to 1,900 in the summer of 2011 and then fell again to around 1,600$ per ounce, in September. Well, I see no reason why it shouldn’t be around 300-600$ again, as it has always been.

Gold as an "investment"... Source: Jeremy Siegel

In this other graphic you may see how much gold is worth as an investment… well, it is more valuable than cash, but we already discredited cash in a previous post.

And still, you’ll find people running towards gold when there is a crisis… I never understood that. What are the gold price fluctuations based on?

Personally, I prefer to go to the Casino in Torrelodones once a year, lose at most some 50€, if that is the case, and kill altogether the speculative behaviours until the next year.

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