Gold and momentum

It's a good idea to pay attention to fund managers' opinions, for the same reason that we should pay attention to dog turds on the pavement. So, we should be wary of this claim in the Times:

Fund managers said that investors would flock to gold and predicted the price could rise as much as 70 per cent higher.

Now, I don't recall too many newspaper articles telling us the gold price could rise 70% back when it was under $600. And gold's annualized volatility in the last 10 years has only been 17.7%, so a 70% rise in a year would be a four standard deviation event. So what's going on here?
Granted, there are goodish reasons to believe gold could rise further, even leaving aside gold buggery about the decline of fiat money, for example:
1. Asian economies are still growing fast and have high savings ratios. With a shortage of safe assets in the region, this'll maintain demand for gold.
2. A weak dollar leads to rising commodity prices, partly because countries who peg their currency to the dollar print more money when the greenback falls.
3. Negative US interest rates will sustain demand for gold.
However, these arguments are old ones. What gives them especial credence now is  not any new power they have, but rather the fact that $1000 gold is drawing attention to them. And we know that it's dangerous to buy assets that are attracting attention (pdf).
Maybe especially so now. There are reasons to be wary of the metal:
1. Many of the things that have pushed it up - higher credit risk, falls in the dollar and share prices - might be temporary factors. Only a fool would be certain of them persisting.   
2. There's a lot of noise in gold prices. The best paper (pdf) I''ve seen on the determinants of gold finds that over one-third of its movements are unrelated to obvious economic forces, even after throwing in lots of dummy variables.
3. High prices mean low expected returns. Yes they do.
So, when anyone speaks confidently of gold rising further, I suspect all they are doing is justifying what has already happened. As one of my old bosses was fond of saying, "it's the price that determines the story, not the other way round." But this, of course, is how bandwagons get started.

Comments

[Cassandra]

You've now filled your PSA requirements for the day. But they [goldbugs] are rabid, and unlikely heed your advice until AFTER it cools off.

But in principle, it's finally something I can reasonably agree with you on.

[peter richardson]

I use two different models. 1: Gold extraction costs driven by US CPI and
adjusted for gold price / ore quality
tradeoff (rising gold price leads to
higher cost production of lower quality
ore > lower production > supports price.
And 2: Econometric formula of Fed. Bank
Credit + oil price + JOC industrial
commodities composite... Both have gold
reasonable at around $600 oz. I have gold
price in bubble mode now.

[Fabian Tassano]

I agree that short term, headline enthusiasm for gold is a contrary indicator. "Fund managers say investors will flock ..." = "Smart money wants dumb money to chase it so they can sell a little higher".

Longer term, the decline-of-fiat-money argument is worth considering. "Gold bugdom" or "bugness", surely? I don't consider myself a gold bug, but the arguments the GBs have been making for years seem to have a ring of truth these days.

BTW, I'm not sure there's much evidence for the idea that gold has been rising because of equity weakness.

[kinglear]

The last time gold spiked all those years ago, it only took a very short time for the largest holders of physical gold ( ie Indian women) to start cashing it in and driving the price back down