The gold price has declined from the roughly $1750 level back in February to less than $1550 (more than 10% in 3 months). It could be a screaming buy, but I’d discourage anyone from jumping in at this juncture. What inspired me to be bearish the gold price early in the year when most were just piling back into gold? My reticence was inspired by this news (name of fund company removed in case they are sensitive folks):
“……Funds has launched a Gold Share Class for the …… Performance Fund, positioning investors to benefit from a rising gold price.”
Read the following…
From my commentary dated Feb. 22, 2012:
“Investment firms are loathe to introduce (for reasons having to do with economics of course) any fund or investment product that isn’t going to sell well. I am not being cynical or critical – it just makes good business sense. Needless to say, the price of bullion has since recovered some of its lost ground – no doubt due to continued financial turbulence in Europe. Once again, both novice investors and investment committees will have been reading about the rebound and should be about ready to climb aboard the theme, even though each new “high” point in the price is lower than the previous one (suggesting a downward trend).”
Am I a genius? Hardly! Investors have a tendency to wait, or spend weeks discussing an idea in committee meetings, hoping a pattern that is evident is ‘confirmed.’ By that point it’s already too late.
But surely with the price of gold having been hammered by recent selling, it might be time to average down?
It would almost seem foolhardy to expect the price NOT to KEEP going higher – after all, despite volatile interruptions (made less dangerous looking in this logarithmic graph) to the downside, hasn’t the price of gold been on an upward trajectory for 11 years?
In my first book, Resources Rock (Insomniac Press, 2004) I wrote about one common rule of thumb that has worked for me over many decades related to commodity (oil, copper, pork bellies?) forecasts. Professional prognosticators generally lag upward trends in the price they are attempting to predict, and also lag downward trends. I am sure there is a plethora of behavioural reasons (group think, personal risk avoidance) this happens, but it does indeed happen often. Now read the following quote from Bloomberg today:
The metal will average $1,740 in 2012, compared with $1,673.76 so far this year, according to the median estimate of 11 analysts tracked by Bloomberg since March. Barclays cut its outlook by 8 percent to $1,716 last week and RBS lowered its forecast by $25 to $1,725 on May 4. ABN Amro said May 2 its prediction dropped to $1,550, from $1,600 in January.
The selling is bound to continue, and be sure to ignore gold price predictions while they continue to be above the current price. The reverse will also be true. When there’s very little mention of the price of gold or gold stocks in the press, if at all, and you begin to notice that all forecasts are below the current price (especially as it is rising) then by all means remember the video below and buy some.