And why, when they are right, it’s just dumb luck.
Let me explain. First of all, analysts who want to appear on TV, and financial journalists, need to have something to say. You can’t be a guest on TV or have a financial column if you don’t have something to say each day. And they want to sound smart too.
So when gold prices go up, these experts have to come up with a reason why. (We are all addicted to being able to pair an effect with its cause.)
On any given day the rising price of gold might be attributed to what’s happening in China, or the weakness of the dollar, or rising domestic debt, or the implosion of the European economy, and so on.
The truth is, they really don’t have a clue why the price of gold went up on any particular day, or why it went down.
Things get even worse when these people offer their opinions on the future price of gold. They take their pick from the same choice of reasons and boldly tell their audiences what the future holds.
Again, they don’t actually have a clue. They are just guessing, and trying to sound smart at the same time.
Trying to predict the price of gold is a bit like trying to predict the weather. You’re looking at a complex system and then pretending you know what’s going to happen next. What’s the weather going to be like 10 days from now? You don’t know, and nor does anyone else.
As with any complex system, any discussion about gold or the economy in general is primarily noise, with very little signal. In other words, there is a lot of background chatter you need to ignore, and very few reliable signals that you should take notice of.
Media experts can’t make a living just looking at signals, so they have to talk about the noise. Otherwise they would run out of smart things to say each day.
Of course, the very worst experts are those who get lucky and can demonstrate they were right a couple of times in a row, At that point they will convince both themselves and their audience that they actually know what they are talking about. But they don’t. They just got lucky.
Which signals should you watch for? Well, I’m certainly not going to pretend I’m an expert. Heaven forbid. But I can tell you what I do.
For the most part, I look for persistence. I look for signals that are consistent. Not the shiny information objects that are hot today and gone tomorrow, but signals that endure.
For me, a couple of these signals right now are a) the dismal and decaying state of stock markets around the world and b) increased buying of gold among the world’s central banks.
Those two facts alone suggest to me that demand for gold will increase, and that gold prices will continue to rise.
Do I know this for a fact? Of course not. But it’s my best guess right now.
About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. Follow me on Google+
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