Danger In Predicting Precious Metals Prices

This is the first of an occasional series I will be writing over the next several weeks re predictions, data analysis and similar subjects.  For several weeks I have been doubtful about the use of most predictions that would truly guide us in planning our financial security.

At this point, I read predictions and just use them as ideas for further thinking...  I will be discussing the rather small value of predictions based on three books I have recently finished in another article that I will publish in the days to come.

I would like to look at the dangers of making decisions about purchasing gold, as well as silver and platinum, based on predictions.  Mostly I examine predictions in the short-term, longer-term I think we can see trends that can be useful that can guide us in buying gold...

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Here are a pair of charts that will give some context to my comments below re predicting the price of gold (as always, *click* on any image for better view).  This first one is the price of gold in US$ (through 3 April 2013) over the past two years (both charts from stockcharts.com, annotations mine on the second chart).  Note that there has been "resistance" around about $1570 or so for almost a year and a half (I do not "do" technical analysis, but the price does look kind of bearish here).

Some of my readers are into technical analysis, perhaps someone will pass along comments re the above chart.

This next chart shows gold prices over the last six months.  Many of the technical indicators look bearish to me (again, T.A. comments are welcome).  But, it is not my point to look at the technicals, I would like to illustrate how I would have been wrong if I had been forced to predict the price of gold on April 1...

The pair of green bars above intersect at the date of April 1 and a gold price of about $1595.  If I had been forced to make a prediction in public, it is highly unlikely I would have foreseen the big price dip over the past three days...

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I have often noted, at pmbug.com and at Zero Hedge, that when I buy gold, the price seems to "almost always" drop in the days immediately thereafter...  I have not systematically looked at this, however, and it is possible that yes, the price drops, but that might be the next day, or after three days or after a week...  I just not have kept track.  This does lead to a problem though, an issue I have noted before:

"cherry-picking (a) time frame(s)"

Just the above statement above should be clear enough so that you know what I mean.  If I buy (which is not really a prediction), "and the price goes down soon afterwards", well that statement does not really mean much...  Of course the price will likely go down if I wait some time...

The point I am trying to make here is that my purchase decisions probably do not have any predictive power at all.  This would also likely be true of any predictions I would make as well.

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N. N. Taleb (Antifragile) and Nate Silver (The Signal and the Noise) in their books have both pointed out how bad the track records are of people who make predictions are, even for so-called "professionals".  I will be examining these two books and what we can learn from them regarding prediction (dangerous!) vs. identifying risks and vulnerabilities (and then fixing those, which is in essence what both authors recommend rather then predicting "Black Swans").

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Note that even while I have many doubts about the value of predictions about the price of gold in the short-term, I have many fewer doubts about further into the future.  George Friedman wrote a pair of books over the past couple of years in which he outlines his guesses as to what the world will look like in 100 years (the first book) and what it would look like in 10 years (his second).  He is more confident that he has the general trend better for 100 years than for the next 10.  Why?  Fundamentals...  He believes in geography and demography as being important over the longer haul.

For similar (fundamental) reasons, like our huge deficits and debts, I am confident that the price of gold will go way up as the consequences of the decisions made by our leaders become more clear over a longer time-frame.