Dear Reader, are you still invested in gold? - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 7 April 2015
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Dear Reader, are you still invested in gold? A  A  A

- By Vivek Kaul

Vivek Kaul
In my previous avatar as a full time journalist working for a daily newspaper with a very strong business section, I happened to interview many gold bulls. This was primarily during the two year period between September 2008 and September 2010, in the aftermath of the financial crisis that broke out in mid September 2008.

I got a lot of predictions on what levels the gold price would run up to in the years to come. Almost each one of these bulls agreed that gold will cross $2,000 per ounce (one ounce equals 31.1 grams). Some of them thought gold would touch anywhere between $5,000 and $10,000 per ounce.

The highest prediction I got for gold was $55,000 per ounce. The trick with all these forecasts was that none of these gentlemen predicting the price of gold, gave me a date i.e. by such and such date, the price of gold would be at this level. All of them just gave me a price.

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Interestingly, more than four and a half years later, gold prices have not gone anywhere near the levels the gold bulls had predicted. The logic offered was very straightforward-with all the money being printed by central banks all around the world, very high inflation would be the order of the day.

And in this environment people would do what they have always done-buy gold. This expectation drove up the price of gold and it touched around $1,900 per ounce, sometime in August 2011. After this, the price fell and currently stands at around $1,220 per ounce. In fact, the price of gold never even crossed $2,000 per ounce, let alone crossing $5,000 per ounce.

There are important lessons that emerge here. As Humphrey B. Neill writes in The Art of Contrary Thinking: "The whole field of economics remains a "guessy" one. Little, if any, progress has been made over the years in attaining profitable accuracy in economic forecasting. And, mind you, this condition still exists, notwithstanding the extraordinary volume of statistics that is now available...which was not known to former forecasters."

The Art of Contrary Thinking was first published in 1954 (even though I happened to read it only over the long weekend and I really wish I had read this book a decade back), and what Neill wrote then still remains valid.

Another interesting point that Neill makes is that people love opinions and forecasts which are definitive. Almost every gold bull I have interviewed over the years has told me with great confidence that the price of gold is going to explode in the years to come. And it's the confidence with which they spoke that made their forecasts believable at the point of time they were made.

As Neill writes: "Forcing oneself to be definitive and specific can cause more wrong guesses and forecasts than anything I can think of. It has given rise to the cynical expression: "Often in error, but never in doubt." It is this writer's contention after over 30 years' acquaintance with, and observation of, economics and Wall Street that being positive, specific, and dogmatic is about the most harmful habit one can fall into."

What was true in the mid fifties when Neill wrote the book is even more true now, in the era of television and the social media. When you have to voice your opinion in 30 seconds or write everything that you know in 140 characters, there is no opportunity to be nuanced. You have to be as definitive as you can be, because that is what people love and there is no space for a detailed argument.

But as we have seen very clearly in the case of gold this clearly does not work. "The fault likes (1) in the pernicious desire of writers in the financial economic field [like yours truly] to forecast-to be oracles. Once bitten, it is difficult to effect a cure! Readers (2) are equally at fault in expecting that anyone can predict economic or market trends accurately and consistently," writes Neill.

The gold bulls have been way off the mark in their predictions until now. One reason for this lies in the fact that all the money printing carried out by central banks hasn't led to much conventional inflation. The reason as I have explained (you can read the pieces here and here) in the past lies in the fact that people haven't borrowed and spent money at low interest rates, as they were expected to. Given this, a situation where too much money chases too few goods and leads to inflation, never really arose. Though a lot of this newly printed money found its way into financial markets all over the world.

The broader point here is that it is very difficult to predict human behaviour. As Neill writes: "you may have all the statistics in the world at your finger tips, but still you do not know how or why people are going to act." And given this, just because people have borrowed and spent money when interest rates were low in the past, doesn't mean they will do so again.

Where does that leave gold? Will gold prices go up again? The answer is kind of tricky. Let me quote Nassim Nicholas Taleb here. As Taleb he writes in Anti Fragile: "Central banks can print money; they print print and print with no effect (and claim the "safety" of such a measure), then, "unexpectedly," the printing causes a jump in inflation."

James Rickard author Currency Wars: The Making of the Next Global Crises says the same thing: "They can't just keep printing...All major central banks are easing...Eventually so much money will be printed that this will lead to inflation."

What no one knows is when this will happen. And a forecast which does not come with a time frame is largely useless. What this also means is that if you are still betting your life on gold, please don't. Okay, I think I am making a forecast again. Let me stop here.

Disclaimer: This writer has around 10% of his portfolio still invested in gold through the mutual fund route.

Where do you think is the price of gold headed? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer:
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2 Responses to "Dear Reader, are you still invested in gold?"

Sadasivan

Apr 7, 2015

Gold price is being suppressed for the sake of a strong US Dollar.TPTB,want money to go into Equity.they want a cashless Society.For that tangibles are taboo.
Gold price is being suppressed misusing the derivatives[Huge shorts in Gold futures].
In India high taxation on import,discourages people from buying it.Weakening the Rupee makes Gold cost;lier for Indians.
Inflation does not rise,in the USA and the developed economies, because the these export their inflations with QRs, while they get very things cheap from China etc.
Gold is bullish when it is rising in 3 Currencies and it is doing exactly that now.
Please google for:-
Gold price suppression Arabian Money

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M Subramanian

Apr 7, 2015

The difference lies in whether you are a pessimist or optimist. Pessimist it will go to $ 1000 by Mid 2016 and optimist it will be $2000 again by Mid 2016. It is anybodies guess. There are so many uncertainties attached and any one event could trigger either way. This is like crude oil price

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