Over the last week or so, I’ve run into probably twenty articles by investors explaining that they think the gold market is finally dead.
These are typically the same people who have been saying similar stuff for about a decade now, so on a very basic level, their understanding of the gold market should be suspect. But let’s consider whether the gold market is “finally” done with the decade-plus bull market.
This article isn’t just for people predicting the permanent end of gold — there are plenty of people with the opposite view who have a silly and oversimplified pro-gold view as well.
I realize the backlash to this might be intense, but really, the raw amount of very specific prices people attach to their future gold predictions are getting to the point of being silly and financially dangerous to whoever takes them seriously.
The “Problem” With Gold Prices
The problem with gold prices, and I’m sure plenty will disagree with this, is that there’s no inherent value other than buyers and sellers.
With a business that has actual profits, the value of the company can be tied — at least on some level — to what kind of profits you get if you own the company.
Gold is different. Its value is in demand by others. You can’t eat it, and it’s not going to give you a check. Its value is completely dependent on whether other investors are willing to buy it from you — or, in some sort of doomsday scenario, other people willing to trade items for it.
I’m not remotely suggesting that gold isn’t worth anything or is ever going to be in substantial danger of being worth nothing — that’s likely to never happen during our lifetimes. I’m simply pointing out what needs to be understood, even by the most passionate gold bug: gold’s value is based on demand alone, and demand can be a fickle beast.
This, of course, doesn’t include gold mining companies like Barrick Gold (ABX) or Newmont Mining (NEM). This is specifically about the physical metal and ETFs like GLD.
This is different even from stocks of companies that don’t pay dividends — at least those companies typically have future potential earnings or current earnings that are just being spent on something besides dividends — in theory, the company still has a cash flow that can be turned into an income by a large enough investor(s) if they choose.So why does this matter at all?
What This “Problem” Means
It matters because it makes the gold market harder to price. If Coca-Cola tomorrow fell to $1 per share while the rest of the market stayed constant, I would buy it because I would know that the inherent returns of the healthy company makes that price cheap — and my returns are likely far better than anything else I could find.
I would know that the price would be increasing to the point that
But if gold suddenly crashes 50%, that’s not necessarily a guarantee that I’ll see similar returns. I would, of course, still buy gold because I would believe it would increase — but it’s nothing close to being as predictable as Coca-Cola if it dropped by a similar percent.
Unlike an asset that has an instrinsic income, gold’s value as an investment requires predicting overall psychological and monetary demand in the future compared to now. It’s essentially impossible to do with anything close to precision.
Trading on ups and downs while assuming a gold bull is one thing, but specific gold price predictions are essentially crap shoots. This is the simplest reason so many people have been downright laughably wrong about their gold predictions for the last several decades. The more specific a long-term or even medium-term gold prediction is, the more certain you can be that the speaker is oversimplifying the pricing in their minds. And that’s a huge red flag.
What’s Next for Gold Prices?
At risk of being incredibly redundant, for things to be different, something has to change. Unless there is some sort of huge fiscal change that will make the debt problem go away, then we’re not even yet in the middle of a gold bull market.
And I don’t think our fiscal problems will likely go away – both political parties are having way too much fun playing chicken with the global economy to get anything done.
Does this mean that the gold bull market will stay stable? Absolutely not. Gold’s stability in price is only a long-term stability. It’s short-term volatility is pretty intense. If you’re looking for something to keep you safe over the short-run, the dollar is likely your best bet. As Doug Casey is fond of saying: “Just because something is inevitable does not mean it is imminent.”
Soros has made billions upon billions by trading assets knowing fully well that the “price” of assets are often overreactions. Maybe that’s why he sold his gold last year when it was doing great and just bought recently when it was doing poorly. It’s a good theory, and I’ve talked about Soros’ views on gold repeatedly and will continue to do so because it’s vital to understand.
Only by understanding how pricing works can investors move away from fantasy numbers and playing dice with portfolios. And part of understanding how prices work is understanding that gold prices simply can’t be predicted with any sort of exact consistency.
To learn more about why gold price predictions usually fail, check out my last gold price predictions article where I take this from another angle.
To learn more about basic gold investing mistakes investors make, check out “Are You Making These Investing Mistakes?“
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