Analysts Opinions on Gold

December 2, 2008

Recently published commentary from analysts at Citigroup and JP Morgan both paint a bright picture for the future of gold. Citigroup specifically mentions the $2,000 level as attainable. JP Morgan recommends buying gold for the run into the holidays.

The Citigroup report runs down many factors that are well known to gold investors. Citi mentions the possibility that recent financial actions of world authorities will either result in massive inflation if the actions are successful; or further economic deterioration that leads to political instability and unrest if the actions are unsuccessful. Either scenario would have positive implications for gold. Citi also mentions the finite supply of gold in the world, and gold's indisputable status as a monetary instrument. The full report can be found here (pdf link).

By mentioning the $2,000 price level, Citigroup has trumped Morgan Stanley's lame recommendation that gold will reach $1,000 in three years and Merrill Lynch's call for $1,500 gold. If you're going to make a prediction on the price of gold, I guess you have to make it $500 higher than the last analyst...

JP Morgan's analysts also mention a collection of well known factors pointing in gold's favor. They see the strong dollar/weak gold link decoupling, the shrinking supply of gold discoveries, the declining pace of central bank gold sales, and the "seizure" of the gold coin and small bar market.

As a gold investor, should you be worried about analyst's latest love affair? Analysts have a less than stellar record for timely recommendations about emerging trends. In many cases, their most bullish predictions have come towards the end of a major move and merely represent an extrapolation of the recent past for reasons already well discounted. Is this time different?

In a word, yes.

Although gold has increased roughly 300% from the lows reached seven years ago, gold is still showing a loss for the year. If this was the typical pile-on of bullish analyst calls, it would more likely be taking place amidst a sharp, upward move.

Secondly, analysts are not jumping into a hot market, they are wading into a very confusing market. A continually evolving array of factors are at play which have baffled and frustrated even long time followers of gold. On one side, there are glaringly obvious reasons why gold should be moving higher. On the other side, there are plenty of credible reasons why gold is stuck in neutral.

When this current "tug of war" in the price of gold eventually resolves itself and gold starts to move higher, analysts will likely respond by ratcheting up their predictions in tandem with the rising price of gold. Even when this starts to happen, I still wouldn't be worried.

Wait until you hear an analyst report come out with the boldest of the bold prediction yet, "Gold to Reach $10,000 Per Ounce." The report will likely contain countless, well considered reasons that make $10,000 gold seem not only possible, but probable. Handy charts will extrapolate recent moves to harrowing peaks. Around the same time, any arguments against gold investing will seem downright silly and "man on the street" interviews will elicit sage advice on the merits of buying gold...

That's when you should be worried about rosy analyst predictions on gold.

Comments

By Hal on December 3rd, 2008 at 7:54 pm

What I think is telling, is that no one that I’ve read is forecasting lower prices on gold. So the fact that there’s been some neutral forecasting with the others talking about highs coming, means it’s a good time to buy in my mind.

Of course another reason in my mind is that Peter Schiff sees it hitting 2,000 by 2009. He’s been pretty well spot on forecasting over the last 2 years the coming economic troubles that I’m willing to give him some weight.

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