Gold Outlook in 2011

In writing this article, I feel like the guy in the beer commercial: "I don't always drink beer, but when I do, I prefer DOS EQUIS..."

It's the same with me with television and radio ads currently: "I don't always watch or listen to TV or radio (much), but when I do there is always a gold commercial on! Always!"

Looking for the next market top

To some investors, this would be a pretty good indication of a "market top" for gold: a lot of gold based advertising. Contrary investors are always looking for signs that most of the public are over-bought in a certain investment and that it is time to go in the other direction.

Too bad the gold market isn't co-operating with contrary investors.

The perfect market top story, this one in equities, is the Shoeshine Boy Story with Joseph P. Kennedy (father of President John F. Kennedy). The story goes that Kennedy was heavily invested in the stock market during the 1920's until his shoeshine boy started giving him stock advice. Kennedy politely listened to the young man, knew this was the perfect market top indicator, and exited the market well before the 1929 crash.

One of the problems today with financial markets is that too many people are looking for that shoeshine boy, for that next market bubble, for that "black swan" (Nassim Taleb).

Bubble, bubble, I see a bubble

And for good economic reason. We've had several bubbles over the past couple of decades. The internet bubble, the real estate bubble, the credit bubble. The question many are asking, of course, is gold the current or next bubble?

What's an investor to do?

Buy more gold. (That’s the answer for those who don’t want to read ahead).

A fair market value for gold?

Another problem with looking at gold is that many (traditional) investors have valuation and measurement techniques that are applicable to financial investments and not commodities.

For example, for stock investors, there are price earnings multiples, dividend yields and company forecasts from Wall Street analysts.

Where is the fair market value equation for gold? Answer: There is none. We don’t have a capital-asset pricing model or something tangible to give investors a measure of predictive confidence relative to gold.

The global economy

But we do know why gold has risen.

There are numerous reasons: the devaluation of the U.S. dollar; the rise of oil; global political uncertainty; systemic risk; fiscal and monetary problems throughout the globe (and that’s just the short list!). You get the idea.

And then there is China. The Chinese are buying gold like there is no tomorrow. And will continue to do so.

Will these global trends continue along with new emerging economic problems? Of course they will.

Gold in 2011

As I type this, gold is priced at $1386 per ounce. Almost $300 higher than a year ago.

How is gold going to perform in 2011? It will be up by at least 10% this year. Guaranteed? Of course not. Nothing is guaranteed. But, let’s check this article a year from now and see if I’m right.

Disclosure: I have no relationship or vested interest in any gold related company or product; just a vested interest in market gains.

Gold Outlook in 2011

1/12/11