Gray Rhinos? Gold is One of the Best Tools for Hedging Tail Risk
Gray rhino or black swan?
A few days ago, I had a conversation with American economist Michelle Wucker, author of the classic bestseller "Gray Rhino". Click to listen from Youtube link
The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore (Audible Audio Edition): Michele Wucker, Christine Marshall, Michele Wucker
The Gray Rhino is a risk event with a high probability of occurrence and a large impact on the system.
At the moment, the potential candidates for gray rhino in the international system are lined up like a string.
For example, China's real estate and municipal debt, the skyrocketing U.S. national debt, the two octogenarians of both parties in the 2024 U.S. election, the descending candidates and China-U.S. relations, etc.
Any of these systemic risks can cause the global economy to compete and move across the sea. However, there seems to be no adequate weapon to hedge against these systemic risks.
The difference between gray rhinoceros and black swan risks is that the former is a risk that is too huge to be ignored, while the latter is a low-probability tail risk. The difference between these two types of risk is ex ante and a posteriori.
However, whenever the risk breaks out, both animal risks will have a huge impact on the system. The ancient Greeks defined risk as the potential for more problems to occur than actually occur. There are risks beforehand and fluctuations afterward.
Simply put, it is also a risk hedging strategy. For gray rhinos, you may know what kind of insurance to buy. But for black swans, you may not know how to hedge at all. That's because black swans are inherently “unexpected” risks.
Taleb promotes a fund called Black Swan. The strategy of this fund actually makes it very difficult for investors to make money over the long term. Before the black swan comes, the premium paid alone is enough to lose the principal.
Just as few people make money buying $Cboe Volatility Index(VIX)$ futures. The famous inverse VIX of the year returned to zero overnight on the night of the 2018 market volatility "Volmageddon" (as shown below).
Of course, this does not deny the importance of the financial concept of “black swan”. But it's not practical. Taleb's best book is actually "Skin in the Game".
At the end of the conversation, I also discussed important related topics such as the investment value of gold with Phoenix host Li Nianxue. Gold $Gold - main 2312(GCmain)$ is one of the best tools for hedging tail risk. Since leaving the gold standard in the 1970s, the purchasing power of the $USD Index(USDindex.FOREX)$ relative to gold has dropped by about 98%.
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