More than any other commodity, the gold price rises (and falls) with demand from investors; the demand from consumers and industrial users is very much a secondary consideration. Or to put it another way, what ultimately controls gold is mass psychology.
If you were an investor during the Internet craze, do you recall the absolute hysteria about NASDAQ stocks? Do you remember how everyone knew about them? Do you recall the excited banter about the latest Internet company you heard at work, at home, or with friends? Do you remember the stories of people getting rich almost overnight? I still remember a news report saying that local officials at Lake Tahoe were worried because all the dot-com millionaires from Silicon Valley were buying up lakefront property and building wall-to-wall mansions, blocking everyone else's view.
Those companies weren't really worth 400 times earnings, and many had no earnings at all. Yet most such stocks didn't just double or triple, but increased by a factor of 10 or more. There were Internet stocks that went up 100 fold.
Is this happening to the gold price right now?
Hardly. The general public is nearly indifferent to gold - which is evidence that the Mania stage is still in front of us, and it foretells the kind of hysteria that will come as the economy's troubles deepen. Except that tomorrow's mania for gold investments will be stronger than yesterday's mania for Internet stocks. With gold, we won't just have the greed factor, we'll also have the fear, or flight to quality, factor banging on the gold price.
If this is true, is it possible to project how high mass psychology could push gold prices higher? And just as importantly, is there a way to determine when you should sell? Predictions abound, but talk is just too easy. So I've devised a simple method for you to calculate, for yourself, where the price of gold will peak, so you'll know when to sell.
To get your personal gold score, take this 2-minute quiz about what you read and what you hear from the people you know. Here's the key to score each answer you give:
- If an answer is zero: Score 1 point
- If an answer is between 1% and 10%: Score no points
- If an answer is above 10%: Take away one point
Personal Gold Score Quiz:
1. Of all your family members, what percentage have told you they own gold in any form?
Nobody: Score 1.
Some but not more than 10%: Score 0.
More than 10%: Score -1.
2. Of all your friends, how many have told you they've purchased gold or gold stocks? Score 1, 0 or -1.
3. Of all your co-workers, how many have discussed anything positive related to gold? Score 1, 0 or -1.
4. Of the neighbors you talk with regularly, how many have initiated conversation about any topic centering on the gold price? Score 1, 0 or -1.
5. How many conversations have you had with any other party (at work, at a gym, on an airplane, after a religious service, etc.) who spoke positively about gold in any way? Score 1, 0 or -1.
6. Excluding any gold-related websites or publications you regularly read, what percentage of all the materials you read (magazines, newspapers, online articles, etc.) discuss gold in a positive way? Score 1, 0 or -1.
7. What percentage of the investment vehicles available through your company's IRA, 401k or other retirement plan include something explicitly related to gold? Score 1, 0 or -1.
Add up your score, and then multiply it by gold's current price (let's use $900 per ounce). And there's your personal forecast for gold's price peak. Excluding my co-workers at Casey Research, my total was 5, which gives me a personal gold forecast of $4,500. So maybe, just maybe, I'll be selling when gold hits $4,500.
Of course, this is hardly a precise or scientific way to calculate where gold prices are going. But it draws on a critically important point, and I bet you're thinking the same thing I am: I know hardly anyone who owns gold! Which means, of course, there are a lot of people who have yet to buy it...and a lot of funds that have yet to include it...and a lot of magazines and newspapers that have yet to cover it. Which means there's a long way up for gold yet.
Recall the Internet craze, substitute gold in its place, and voila - it's easy to see how gold goes to the moon on mass psychology alone. I'm confident that day is coming.
The current dip is calling. Will you benefit from it?
Jeff Clark
for The Daily Reckoning Australia
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About the Author
Jeff Clark is the editor of BIG GOLD, a Casey Research publication that pinpoints the safest ways to capitalize on the gold bull market. The next issue includes an interview with Doug Casey; learn what made Doug such a spectacularly successful gold investor, and where he sees gold and gold stocks going in the near future.
Comment by Coffee Addict on 15 August 2008:
There is nothing wrong about an anecdotal analyis of the gold price (and its volatility) but I prefer to just hang around junior "prospective" mine sites. What the Australian prospectives require is for the price floor to remain above the $700 mark and a finance strategy. Finance is the highest risk area.
Maybe gold will reach a value of USD4,500 per oz. (in current money). Maybe it will just fluctuate in the $700 to $1000 range . I don't know, and that's why I won't put all of my eggs into this one basket.
If you are bullish towards gold, you still need to do your own research on the risks.
Comment by Dan on 15 August 2008:
Ridiculous. Gold will go up because nobody is interested in it? There are quite a few things out there nobody wants, not all of them are going upwards.
Gold is at $790 at the moment. Anybody who bought this year has lost.
Comment by charles on 15 August 2008:
I really don't get it, if you invest there is a chance your return will exceed inflation, if you buy gold your hoping people will freak out and your gold will rise in value.
Seems a pretty one dimensional way to invest to me.
Comment by christina on 17 August 2008:
Here is my humble opinion, and I am by no menas a professional, but I think that : People always freak out when they are facing poverty and starvation. If you buy gold, you are not HOPING people will freak out and your gold will rise in value, you know from 4,000 years of history that people WILL freak out, and that your gold WILL rise in value. If you study history and economics, thats what always happens.
Comment by Dan on 17 August 2008:
Keynes noted that in the long run we are all dead. What if the world doesn't "freak out" for another 50 years? Or what if it freaks out so much that nobody gives a stuff about shiny metals?
Gold probably ain't a bad thing to have some of. Anybody who puts their life savings into the stuff is playing with fire. Follow the trend, but be ready to bail out when it reverses.
I wouldn't pretend to know as much about economics as the authors of this blog, but I do know that the majority of the worlds economists think that the "austrian school" is an ideologically motivated stream that has failed time and time again to make accurate predictions. The fact that (a couple of) these guys go on and on about what idiots and morons everyone else is and how obvious the solutions are doesn't exactly lend them credibility.
Still, entertaining, thought provoking stuff. Keep it up fellas!
Comment by Pete on 17 August 2008:
Let's face it, anyone who bought in the property market in the past 4 years and tries to sell in the next 20 years has lost. And yet they are out there still doing it on the advice of estate agents who proclaim the median price is still rising. As far as gold falling to $790........we only lose if we sell now! I'd rather be in gold than property in the shorter term. 20 years is a long time (ask the Japanese).
Great writing people.
Comment by justin on 17 August 2008:
So which 'school' do the worlds economists think has succeeded time and time again to make accurate predictions?
Comment by charles on 17 August 2008:
christina
In the last 1000 years gold has lost considerable value twice, once when the Spanish raped the New World resulting in an over supply of the stuff (no the supply of goods and services didn't magically expand), and once when the Black Death created an under supply of hoarders, but I suppose the dead hoarders didn't really care.
Comment by mel on 17 August 2008:
wouldn't it be nice if the Australian government allowed gold exploration companies to keep their gold in the ground, assay the quantity, have that audited and sell the companies shares offshore instead of the metal, so we all didn't have the waste so much nonrenewable energy to dig it crush it to then store it in a vault. Imagine when the oil runs out explaining to your grandchildren what resources we squandered to so accumulate a shiny metal.
Comment by Pete on 26 August 2008:
There is a third time in the past 1000 years that gold has lost considerable value (or manipulated to such ends)......the following link will probably be of no surprise......but consolidate your thinking. What can we do?
http://www.financialsense.com/Market/kirby/2008/0825.html