A January 3 article by Gregory Meyer in the Financial Times has reminded me that ‘tis the season for the punditocracy to issue their annual forecasts.
Meyer’s story noted that this time last year, virtually every market analyst predicted that the price of gold would continue to rise. “Even the most conservative saw only tiny declines.” In fact, gold prices plunged 27% from December 31, 2012 to December 31, 2013. And if you owned gold through the popular ETF, GLD, your loss for the year was 28%.
The interesting irony here is not that the pundits were wrong–extensive research has shown that forecasts of stock prices, interest rates, inflation, GDP growth, gold prices, etc. etc. etc. are consistently worthless. No, the irony is that the circumstances on which analysts predicated their forecast of gold prices all came to pass. The Fed launched yet another round of quantitative easing, which should have exacerbated investors’ fear of currency debasement. Gold prices fell. Then Japan’s central bank added fuel to this fire by launching its own aggressive easing. Still gold prices kept falling. Fed chairman Bernanke made it clear that even if the Fed eased back on its monthly bond purchases, the bank would not raise interest rates before 2015. Surely this would boost gold prices? Nope.
So why did gold hit the skids? Meyer writes: “The biggest factor driving gold prices in the past year has been the behaviour of investors.” But that’s like saying the day warmed up because the temperature rose. Gold bugs are always spinning compelling narratives for why the price should rise, why investors should hedge their financial exposures with an allocation to gold, why gold is the only defense against impending runaway inflation, why rising demand from India and China will drive prices through the roof, blah blah blah. Gold prices rise when lots of people buy whatever is the story du jour and they sell when they’re subsequently disillusioned.
The reality is that gold runs on momentum. I’ve seen various attempts to calculate a “fair value” for gold that would enable one to determine whether it’s over- or undervalued. None are persuasive. Gold goes up when there are more buyers than sellers and it goes down when there are more sellers than buyers. As to why people buy or sell, who knows?
So what are the pundits predicting for gold this year?
Even after what you’ve just read, you still want to know, right?