Watching gold prices can drive you crazy.
When prices are on the rise, every pundit and expert on the planet jumps out and has their say. And what they predict for the next few weeks is almost always based on what has happened over the last few weeks.
That’s always an easy way to make predictions, and it certainly resonates with their audience, who fervently want to believe that gold prices will continue to rise indefinitely.
As the hype continues, these pundits will congratulate themselves for being incredibly smart. And they do appear smart – right up to the moment when gold prices correct themselves and fall. None of the pundits predict the correction.
Why do gold prices stop rising and correct themselves? Put simply, it’s because professional investors find better places to put their money.
Right now, with huge debt problems in the US and Europe, those better places are often safer places. Or, for more courageous investors, those places are high-risk with high potential returns – like shorting European debt.
Gold prices rose this year on the back of uncertainty. It was a safe place to put your money. But it isn’t the only safe place. Nor is it where you might expect the best return. And gold bugs forget that sometimes.
Nor are ever-rising gold prices inevitable, even with a backdrop of global financial uncertainty. That’s something else gold bugs forget.
Gold prices will rise or fall over the months to come according to its relative safety in the eyes of big investors, or the relative strength of the returns it can deliver.
In the meantime, don’t beat yourself up over the lackluster performance of gold over the last few weeks. A year ago the price was at about $1,400 an ounce. Today it is at about $1,700. That’s still a pretty strong growth rate.
As for whether gold continues to rise over the year to come, that will depend on two things. First, will the global financial situation deteriorate further? Second, how attractive will gold appear to be when compared with other investment options?
To my mind, it’s still a time to be bullish about gold prices. But take off the rose-tinted glasses, and stop listening to all those self-appointed pundits.
There is nothing inherently magical about gold. It is just one of many investment options.