Gold: No Bold Predictions for the New Year

I’m not much of a fan when it comes to New Year’s predictions. There seems to be an almost fanatical obsession with ‘fortune telling’ when it comes to the financial markets.  And gold is no exception.

Some twenty years ago when I was advising my financial planning clients to own gold shares as part of a diversified investment portfolio, my focus was more permanent and long-term.  Of course, that is the way I viewed other asset classes as well. There were certainly no ‘predictions’ about performance over the next year or so.  Since I retired in 2005, I have noticed that the time periods which we consider and focus on with respect to analysis and investing –  be it stocks, real estate, etc. –  have become increasingly short-term.  In fact, the financial markets seem to be more characteristic of casino-type activity.  Investing has become speculation.

Also the volatility is exponentially greater.  At times it seems more like a crap-shoot than fundamental investing, with products such as leveraged ETFs, options on futures, and more.

Don’t get me wrong.  I am not against speculating.  Speculators serve the markets well and provide liquidity which otherwise might not be there.  Their role is critical to the orderly function of the markets. Things would always be worse without speculators.  But the nature of the financial markets has changed radically and investors need to recognize that fact.

The single most serious factor of concern with regard to orderly functioning of today’s financial markets is systemic risk.  This is true on a world-wide basis and no country or market is immune.

With these things in mind, can anyone really make predictions with any  degree of reliability or accuracy?  I think not.  And the predictions that are made seem to be either too traditionally conservative given the explosive – and implosive – nature of the markets; or they tend to be just plain ridiculous.

For example, if someone predicts that the S&P 500 will end 2017 up 5% over its current/2016 year-end value, does that really matter to an long-term investor?  What about a decline of 5%?  Should a long-term investor  get out of his stocks?  In other words, what is the efficacy of the prediction?

To a trader, whose outlook is more short-term, how does he know when he should get out and when he should get back in?  It wouldn’t be very productive to sit out an entire year if you are a trader.  This is where volatility becomes more important.  If the market goes up 10% quickly, and a trader takes profits, then he can wait for the eventual expected year-end results.  And without further risk.

But again, the nature of today’s financial markets make the reliability of the predictions suspect.  Timing and extreme volatility can make peasants out of prognosticators.  Case in point – gold mining shares.

In 2006, a little over one year after my retirement, I sold all of my gold shares.  My reasoning at the time was that physical gold was a better choice.  Also, I had accumulated substantial profits.  So I pulled the trigger.  At the time there was no shortage of predictions about expected potential profits still ahead.  Unfortunately, for most of the owners of gold mining shares, the profits were elusive and evaporated quickly.  The predictions of ‘leveraged profits’ turned into sheer folly.  (See my article “Gold Mining Shares Are A Lousy Investment”)

When gold was at $400/oz no ‘self-respecting’ financial adviser wanted anything to do with it.  The gold crowd writers and others at the time were touting $5000-6000/oz, even $10,000/oz.  None of these predictions were of any real help to current (then) or potential owners of gold.

As the US dollar price of gold continued its assent, the predictions became more numerous and more ridiculous; and less helpful.

Currently, some are still calling for gold at $10,000/oz or more.  And some are projecting gold as low as $700/oz.  (And, of course, pretty much anything in between those targets.)

There are perfectly legitimate and plausible scenarios that could make either of the above extremes a reality.  In the right context their validity can be enhanced considerably.  Otherwise, their value to investors is minimal.

A suggestion to the gold ‘swamis’:   rather than predictions, how about ‘resolutions’?  Some possibilities for your consideration…

Resolve to view gold for what it is – real money (NOT an investment)

Make it a point to continue to accumulate physical gold periodically, consistently

Study and learn the history of gold as money

Understand inflation and the Federal Reserve

Have a fabulous 2017!

 

 

 

 

 

 

 

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