Another Big Price Target for Gold? Yawn.

by James Brumley | September 19, 2012 8:46 am

You want to be on TV? I think I’ve found a way.

Just make the most outrageous prediction you can about where the price of gold is going, without sounding like a complete lunatic. And good news — investors and the media are going to be very lenient about how far is simply too far to go with your outlook.

The latest extreme target for gold was unveiled by Merrill Lynch on Tuesday. The brokerage and research branch of Bank of America (NYSE:BAC[1]) expects gold to move to $2,400 per ounce within 24 months. That’s a 35% advance from the metal’s current price.

It would seem like an insane prediction, were it not for one thing: Gold soared from a low of $736 per ounce then to a peak of $1,934 in September 2011 … a 162%, $1,198 move over the span of three years. In that light, Merrill’s forecast might well be on target.

On the other hand, when you take a step back and look at how things were then and how things are now, that next $626 worth of price appreciation might not be so easy to come by.

More than anything, though, do we really need this many crap predictions about the price of gold anywhere from three months to two years into the future?

Enough already. Traders are listening — and getting slung all over the place as a result.

A Dime a Dozen

Click to Enlarge
The nearby chart says it all. We’ve got predictions all over the map. And those were hardly the only predictions I could have pegged on the chart — I just started to run out of room.

Some were close, some weren’t. But, had I paid attention to all of them, I would have been (1) trading like crazy, and (2) not been trading profitably.

And, if you look closely, you’ll see the same research houses changed or extended or contracted their targets and time frames as time went on.

To give credit where it’s due, the average of all the predictions for all time frames was actually a fairly accurate price path. Problem is, it’s tough to figure out “the average” on the fly, especially when the time frames don’t necessarily align with one another at the time you’re ready to crunch the numbers.

Is $2,400 Plausible?

Back to the original point: Is Merrill’s most recent projection of $2,400 even in the realm of possibility?

Actually, it is. It’s a stretch, but it’s possible. The only thing gold needs to do is stay on its present course. In that regard, Merrill Lynch’s people didn’t exactly go out on a limb. That being said …

I generally don’t like to wax philosophical, but now’s a good time for an exception.

One of the reasons gold did so well from 2008 through 2011 was the anticipation of rampant inflation being fueled by a couple of big huge doses of stimulus. It didn’t hurt gold prices that so many people were truly expecting a global currency crisis to make all currency worthless, forcing the world back to a barter society. The latter clearly never happened, but the former never came to pass, either.

Here’s where things get tricky for that $2,400 forecast.

In retrospect, I have to wonder how much of the 2008-11 rally was really fundamentally based, and how much of it was just a self-fulfilling prophecy fueled by a truckload of wild price targets. That unmerited fear might have been able to drive gold from $736 per ounce to $1,934, but is the market really going to send gold up another $626 per ounce without at least starting to see some evidence of steep inflation or a real currency crisis?

I’m not so sure it’ll be enough to squeeze out this last expected leg of the rally.

So why are so many analysts looking for higher gold prices from here? Because most analysts tend to think statistically rather than cyclically, which is why they have their heads handed to them so frequently.

Only time will tell, but in the meantime, bear in mind some of these guys might be making outrageous predictions just to get a little time in the spotlight.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. BAC:

Source URL:
Short URL: