I write a lot about central banks, commercial banks, the economic cycle (the likelihood of a recession), valuations of other financial assets (particularly stock prices) and interest rates. All this, of course, for good reason. Every single one of these factors is of great importance to understand how gold prices will perform in the future. For clarity sake, I will just go ahead and answer the question I posited in the main title: gold prices will most definitely go below $1,200 per troy ounce. We currently find ourselves in a sideways market. And that means that the recent price rallies are mostly based on thin air. Of course: the current (global) debt levels are unsustainable and the Fed has no viable exit strategy (the same goes for all other major central banks). A painless way out from the impossible position in which central banks have maneuvered themselves does not exist. However, all this says nothing about the gold price in the short run. Is this a reason to, for the time being, not invest in gold? Let´s take a look at some very interesting data, because believe me when I say that you are in for a great surprise.
This is probably the worst investment advice someone could give you. Investors that “wait” for a market to turn around before investing in an asset or asset class, whether we are talking about gold, stocks or other securities, are losers. Losers on financial markets, that is.
Such investors are only hurting themselves, because they fail to understand that the long-term returns on an investment depend disproportionately on price fluctuations that occur in a matter of days, weeks or months.
In other words, in that brief period in which such investors think they are “outsmarting” the market by not holding a position in gold, they are able to turn an excellent long-term investment into a miserable one. They are not the princess who turns the frog into a prince, but the princess who turns the prince into a frog.
Let´s do the following just to illustrate my point:
- Let´s take the past seventeen and a half years (from January 1, 2000 all the way to July 1, 2017), which amounts to a grand total of 6,388 days
- Let´s take only the 10 best days for gold prices (the 10 highest daily returns) during this exact same period; that is, 10 out of 6388 total days, or 0.15% of the entire period
- Let´s assume that during these 10 days we do not hold a position in gold and therefore precisely miss the returns made on these days
What would be the consequences of missing out on these 10 days for our total return on investment? Let´s take a look at what the graph says:
Blue line: All days, orange line: All but the best ten days. Source: GoldRepublic, St Louis Fed, data modified by the author
Yes, you are seeing correctly: if you would have owned gold during the entire period of seventeen and a half years, then your total return would equal 177.5%, which translates to an average annual return of 10.14% (!). Not bad at all. In fact, much more than an average investor manages to earn.
But what would happen in case you would have missed precisely the best ten days for gold prices? Your total return after seventeen and a half year would be just 52%, or an average annual return of 2.9%. That would not even be sufficient to beat the IRS and the annual “inflation tax.” Gold suddenly becomes a losing proposition. A frog, not a prince.
But we are talking about exactly the same investment. The only difference between the former and the latter case, would be the fact that one of them missed the returns of ten days out of seventeen years and a half, whereas the other, more astute, investor did not.
On a side note, the highest daily return on gold – in a single trading session – is 10.12%.
Besides looking at what happens to our returns when we would miss the ten best days of gold because we think we can “time” the market, I also added a third scenario into the mix: what happens to our returns when we, instead of missing the best 10 days, miss the 10 worst days?
Remember, however, while we are doing this exercise, that avoiding bad days is a whole lot harder than simply hanging on onto our gold and making sure we do not miss out on the best days.
The results are remarkable. By avoiding the 10 worst days, our total return in the very same period would go up to 395% (!): that is an average annual return of 22.58%.
Astonishing, right? Ten days in almost two decades makes the difference between losing money (2.9%), earning a pleasant and without a doubt satisfying annual return (10.14%), and beating the legendary investor and billionaire Warren Buffett (22.58%).
It should not be a surprise that truly skilled long-term investors are scarce. The concepts are simple, but hard. But do not let yourself be fooled by thinking that it is a smart idea to remain on the sidelines until the market reverts and changes its course. If you wait for that moment, then the market will already have turned when you get in and you will miss out on all the upside.
This third and last scenario is, by the way, a convincing argument to avoid being invested in the stock market at any cost. Stock prices are extremely overvalued, and that means that only a few bad days could mean the difference between rags and riches. It is an equally bad idea to invest in the stock market to “rake in some short-term profits before the market turns bearish”. As many have said before me, that would be akin to picking up pennies in front of a steamroller.
Will gold prices go below the $1,200 dollar per troy ounce? I suspect they will. Better said, do not miss my previous articles in which I argue that the gold market is currently going through a bit of a rough patch. But is that a reason to sell your gold and/or postpone buying gold
? No, absolutely not. In fact, let this article convince you of this investment truth.