Outcome bias

Spreads and interest rates were largely unchanged, with Europe a touch more buoyant than the US. The leading investment grade index, the Bloomberg Global Aggregate, which still has a negative five-year return, rose by 0.9% this month. The S&P 500 was up by 1.7%, while the STOXX Europe 600 returned a nice 3.2% and Nordic stock markets delivered between 4.3% and 7.2%.

Admittedly, you could have done even better – at least with hindsight. You could have put your money in precious metals. Gold rose by 14% this month, while silver climbed by more than 43%! Even more humble metals, like copper and aluminium, had a strong month. In this case, geopolitics certainly played its part, again orchestrated by a seemingly erratic US president.

In a particularly bewildering stretch, Trump threatened to impose additional tariffs on several European countries as punishment for their support of Denmark in the Greenland dispute. For days on end, he insisted that he had to wrestle Greenland from a previously allied country. In an unrelated move, he threatened to impose tariffs as high as 200% on French wines and champagnes.

No serious forecaster would have the fantasy to dream up such statements. No comedy writer either, I guess. They didn’t inspire cheers in financial markets, though. By January 20, the US 10-year yield had risen by 12 basis points, while leading stock indices were down for the month. For precious metals, the effect was quite the opposite: Investors rushed into gold and silver as a hedge against precisely such vagaries.

Trump then backtracked on Greenland in his speech at the World Economic Forum at Davos, Switzerland. Markets drew a sigh of relief; long rates fell and stock markets rose. Precious metals, while easing somewhat, still ended January with returns you don’t see in the stock market. From the end of 2024, gold and silver have racked up returns of 91% and 257%, respectively.

I may look stupid, but I still don’t recommend gold or silver as investments. It’s true that returns in recent years have been spectacular, but for me, it’s all about the kind of drivers you want for your returns. Corporate bonds and stocks produce returns because companies make money on whatever they’re doing. In this case, political news is mostly noise. For precious metals, it’s the other way around – this is exactly what fuels their ascent.

Hence, stating that you should have chosen precious metals because they’ve done so well is a kind of outcome bias, judging the decision by the outcome and not by the information at hand when you actually decide. It’s not like a lottery ticket is a smart investment if you win and stupid if you don’t. It’s stupid if the expected return is negative (which, in that case, it is).

Now, as it happens, after Trump at the end of January nominated Kevin Warsh as the new Chairman of the Federal Reserve, the tide turned. As Warsh did not look like a Trump puppet, confidence in US monetary policy rose again, while precious metals plummeted. On the first workday in February, silver plunged by 31% from its late-January peak. For gold, the decline was a somewhat more muted 13%.

I can’t help nodding to those declines; they are an effective reminder of the risk inherent in investments with no earnings and no payouts. But I have to stop short of saying something like “there you see”.

That, after all, would be outcome bias.

Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager’s skill, the fund’s risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments. This is marketing communication.