Predicting the price of gold is a fool’s game
It is sometimes frustrating to see the focus on gold price predictions. The more sensational and spectacular the price forecast, the greater the cacophony.
It’s worth taking a look at some of these predictions to help put things into perspective.
HEADLINE: Gold Forecast $6000 and Gold Mining Analysis Through Visualization 23Jan2012
Quote: “If the current gold bull market were to follow the pace and scope of the 1970’s bull market, the price of gold would reach $6,000 by 2014.”
Gold price on January 23, 2012: $1,679.00 per ounce.
Gold price on March 14, 2014: $1,382.00 per ounce.
Price of gold on December 31, 2014: $1,181.00 per ounce.
How far off base can a price prediction be? Gold not only missed the price target, but went in the opposite direction, beginning that same month, and proceeded to decline by thirty percent over the next two years, ending at $1,205.00 per ounce on December 31, 2013.
The problem is not the plausibility of $6000.00 gold. It is very plausible and possible; maybe even likely. However, the prediction was specifically time-oriented and horribly miscalculated in terms of direction and time.
All of that is excusable. Unless you own a subscription service and/or make investment recommendations to others, or provide trading advice.
HEADLINE: JPMorgan forecasts gold $1,800 for mid-2013 01Feb2013
Quote:“JPMorgan sees gold at $1,800 in mid-2013 as South Africa is “in crisis” and with “increasing instability” in the Middle East JP Morgan Chase & Co. said gold will rise to $1,800 an ounce in mid-2013, with the mining industry in South Africa “in crisis”, according to Bloomberg.“
The price of gold on the date the headline appeared was $1,667.00 per ounce. Five months later, on June 29, 2013, the price of gold was $1,233.00 per ounce.
The $1800.00 gold call was a ‘safe’ prediction. Just an eight percent rise from the (then) existing level of $1667.00 would have resulted in a gold price of $1800.00.
But, as in the previous example, the price went south with revenge; this time falling twenty-six percent in five short months.
HEADLINE: Trump Victory Signs $1,500 Prayed… November 10, 2016
Quote: “A Trump presidential victory in the US indicates $1,500 an ounce of gold…in the medium term.”
Gold price on November 10, 2016: $1,258.00 per ounce.
Gold price on July 31, 2017: $1,268.00 per ounce.
Apparently gold missed the ‘sign’ as its current price is nearly identical to the price on the day the prediction appeared in print, just after the election last November.
And what does the writer mean by “intermediate term”? The longer the time frame, the lower the value of the prediction. The projected increase in dollars amounts to twenty percent. If it takes two years, that works out to about ten percent per year. In that case, or if it’s been over two years, is the bold headline worth it?
HEADLINE: Trump will send the price of gold to $10,000 November 10, 2016
Gold prices and dates are the same as in the example above. With gold right where it was ten months ago, when could we expect any progress towards that price target?
The most outlandish price predictions usually focus on a breakdown or collapse of the monetary system. The crash comes as a result of the total repudiation of the US dollar after decades of value depreciation. People simply refuse to accept and hold US dollars in exchange for the goods and services offered to them.
Now suppose you currently own gold. would you sell it At what price? How many worthless US dollars would you trade an ounce of gold for?
If someone offered you a billion dollar monopoly today for an ounce of gold, would you take it? How about ten billion?
Well, what if we see a precipitous drop in the value of the US dollar in the next few years? Let’s say the decline equals a loss in the dollar’s purchasing power of fifty percent from current levels. This would equate to a gold price of approximately $2,500.00 per ounce, double current levels.
This is true if gold and the US dollar are currently in equilibrium (I think they are). In other words, the current price of gold at $1,250/60 is an exact reflection of the cumulative decline in the value of the US dollar since 1913.
The fifty percent decline in the purchasing power of the US dollar would be reflected in higher prices for other goods and services; a pattern that has become all too familiar in the last hundred years.
If there is a functioning market, and assuming you sell some gold and make a profit, how much more will anything else you decide to buy cost? Do you really think you’ll be able to buy other valuable items at ‘reduced’ prices at that time?
Gold, in 1913, cost $20.00 an ounce. It is currently $1260.00 per ounce. That is an increase of more than sixty times. But it does not represent a profit. Because the general level of prices for goods and services today – roughly speaking – is sixty times higher than it was in 1913.
There are times when you can benefit from sharp moves in gold in short-term situations. Generally, these are just before major US dollar price movements that reflect the realization of the cumulative decline in the dollar’s purchasing power. And, to a lesser extent, recognizing when the expectations of others drive the price of gold beyond equilibrium vs. The U.S. dollar
In 1999/2000, the price of gold reached lows of $250-275.00 per ounce. Soon after, a decade-long period began, culminating in a peak price of nearly $1,900.00 per ounce in 2011.
After its peak in 2011, gold fell over the next five years to a low of just over $1,000.00 per ounce. A short-lived bounce in early 2016 brought it back to near current levels ($1250-1350.00) where it has generally held without breaking up or down to any significant degree.
Where were all these ‘experts’ in 1999/2000 and what did they predict then?
And since 2011/2012? They have been saying more or less the same thing over and over again. Buy now! buy more! Before it is too late!
One day, it will be too late. But now it is more a matter of financial survival than ever. The obsession with profits, prediction and trading has obscured the real fundamentals.
And one way or another, most people’s earnings are likely to be gone before they do anything meaningful with them.
Gold, physical gold, is real money. It is real money because it is a store of value. And its value is constant. The value of the US dollar continues to fall over time. The constant decline in the value of the US dollar and people’s perception of it, as well as their expectations, determine the price of gold.
