Gold Expected to Reach $1,400 by Week's End?
This post was updated on October 25, 2010.
I was watching the local news last week, when a clip came on that made my ears perk up. The subject was gold, and the prediction was that it was "expected to reach $1,400 by Friday." I was amazed, mostly that the reporter really seemed to believe it.
Listening to this bold prediction, I was reminded of another bold prediction I heard back in early 2000. Then, a local TV anchorperson claimed that the NASDAQ was "expected to reach 6,000 by the end of the year." I remember how skeptical I felt. And it appears that skepticism was justified because, more than ten years later, it's at 2,458, less than half the level when that "expectation" was announced.
Expectations are dangerous
Hearing the words "expected to ..." in investing, will always bring out the skeptic in me. Because what those words really mean, is that someone is extrapolating the recent past into the near future. Looking at this gold chart last Monday, it actually seemed like a pretty safe bet if one extrapolated the price from the beginning of the month until last week. Unfortunately, as of Thursday, the trend didn't hold.
Let's look at a longer trend. I recently noted that, since I bought gold in 1979, I've earned 2.3 percent annually. Personally, I'd place a little more credibility in 21 years of history than I would in the past few weeks.
Expectations are also warning signs
Of course, gold closed at only $1,324 on Friday, but let's not declare victory yet. For all I know, this "expectation" of gold reaching $1,400 may be right this week or the next. (The metal is climbing now in the wake of G20's communique this weekend.) But if you examine the statement, you must conclude that it is irrational. If markets expected gold to reach $1,400, it would have already reached that level. Or at least the market future on that date would already have reflected that price.
I can't say with certainty that gold is a bubble, but it does share a couple traits with those I've seen in both the tech and real estate bubbles:
- Rapid price increases.
- Firm expectations that the price increases will continue and are predictable.
Whether it's gold or any other investment, be careful that you don't end up buying high with the rest of the herd. And when you hear people making short term predictions, be particularly cautious. When someone says an investment is expected to reach a certain price on a certain date, ask yourself what they're basing their expectation on, and why they would know something the market doesn't.
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