Goldman Sachs Bravely Predicts that Gold Is Not a Promising Investment…After it Drops 25% in 2013

Gold Arrow

 

In August of 2011, the lead article in our quarterly newsletter questioned the wisdom of investing in gold, which at the time was trading near an all-time high of $1,600/ounce. (http://www.woodwardadvisors.com/pdf/wa-7.pdf)

We don’t play the market timing game, so we certainly weren’t suggesting or predicting what the price of gold would do going forward. Instead, we laid out the common reasons why people think they need gold in their portfolio, and then suggested why we don’t think it’s all that great of an investment.

It turns out we were a little early in expressing our skepticism. Gold rose in price later that month, all the way up to $1,800/oz. But since then it’s been nothing but a downhill plunge for gold bugs. As of December 6, 2013, the spot price for gold had dropped all the way to about $1,230/oz (-31.2%). In 2013 alone, the SPDR Gold Shares Exchange Traded Fund (GLD) has dropped by about 25% in value.

Anecdotally, we’re hearing a lot less from clients about why they think they should have gold in their portfolios. We’re also seeing a lot fewer commercials for pawn shops buying gold, and a lot less foot traffic to the “We Buy Gold” storefronts that seemingly popped up overnight back in 2010-2011.

With this backdrop in mind, Goldman Sachs released a forecast in November, 2013 and boldly decided that gold probably isn’t a good investment.

To be fair, Goldman Sachs had forecast a challenging environment for gold in 2013: in late February, Goldman suggested that gold prices would drop to $1,600/oz in 2013. They got the direction right, but they were laughably off in their price target to the tune of about 25%. (Incidentally, the spot price of gold right around the February forecast was about $1,577/oz.)

The moral of this story actually has nothing to do with gold, though we still think as a standalone investment it doesn’t make a whole bunch of sense. (We’re fond of one Warren Buffet’s many memorable quotes about gold: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”[1])

Instead, the story is about the silliness of forecasting. Did anyone take Goldman Sachs to task about their pretty off-base gold prediction for 2013? Did anyone even remember it? Probably not. Financial forecasters, political commentators and sports pundits seem to be the three jobs in this country where you can be so very wrong never have that impact your credibility.

Investment houses and superstar fund managers score big publicity when they make their forecasts, and the amount of the coverage appears to be directly correlated to the grandiosity of the prediction. No one ever gets on TV by saying, “I have no idea what the stock market is going to do in the next six months, and I won’t even venture to guess.”

Consequently, you’ll probably never see anyone from Woodward Financial Advisors giving their “market outlook” on CNBC or in the Wall Street Journal. We’re too aware of how painfully bad people are at forecasting. But more importantly, we know that our primary value to our clients is our ability to help them make smart financial decisions, rather than our (in)ability to peer into a perpetually murky crystal ball.

About Ben Birken

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