How many times have you been influenced by a price prediction? Most of us have been, undoubtedly. At the beginning of each new year, it is a tradition to forecast the price of gold or silver. So the timing is perfect to tell the truth about these predictions, no matter from who they are (guru, expert or average analyst). The truth about forecasts and predictions is what this article is about. Listening to it can save you (a lot of) money in the future.
In an recent article, one of the contributors of this site made a very valid point by stating that “It does not matter what others say about the market. What matters is what the market says about others.”
The quality of forecasts related to the gold price is visualized in the following chart, by Casey Research. It shows the average of the gold price predictions since 2007. As usual, analysts tend to forecast for a longer period of time, which is what the chart shows as well. The gold price forecasts have proven to be badly wrong. The 2008 and 2009 forecasts predicted a gold price below $1,000 for today.
When it comes to helping you make an informed decision about where the gold market is headed, bank and brokerage analysts have, as Rick Rule is fond of saying, a record unblemished by success. Every year major banks and brokerage houses provide their four-year forecasts for the gold price. The following chart documents the average price projection of 25 top analysts over the past seven years, many of whom specialize in the resource industry. I might suggest pushing away from your desk so that when your jaw drops it doesn’t hit the keyboard.
It appears from a new research (outside the precious metals sector) that market predictions have only been accurate in 48 percent of the time. Researcher CXO Advisory Group has been collecting data from forecasters since 1998. The company has tracked and analyzed thousands of forecasts from dozens of popular gurus. The same result was confirmed by Inalytics earlier. They reported that fund managers only get around 50pc of their decisions right.
Rick Ferri writes: Forecasting isn’t about predicting the market; it’s about marketing the prediction. As one newsletter guru told me years ago, “Given a choice between great marketing and great forecasting, I’d pick great marketing every time.”
We asked K. Xeroudakis, Precious Metals strategist, for his opinion and experience in this matter. He confirmed the above data and revealed the following key to investing success: The real secret lies in how to anticipate your losses and keep them as small as possible in order to maximize your profits. Risk control must be part of every kind of investment hypothesis. The three important questions everyone should ask himself before spending any euro or dollar: (1) What is my time stop? (2) At what price will I be proven wrong and should I get out of my position? (3) Can I handle that loss or should I lower my position size? No analyst or guru out there will bring this message along with his / her predictions. A good example of a public forecast is in Global Gold’s 2013 outlook report, in which the author worked with probabilities for future scenario’s.