What makes a great gold price prediction?

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If you want to recognise a good gold price prediction, then you need to understand some key concepts and you need to use those predictions wisely.

The most important thing to remember when making or assessing a prediction about gold prices is prediction involves uncertainty and risk. Thousands of factors influence the price of gold, some of them inherently unpredictable so you can never predict with complete certainty.

As a sensible investor you should always be looking for opportunities and planning ahead, while bearing in mind the need to mitigate risk.

Why gold price prediction is difficult

Gold is often seen as a “safe” investment because its price tends to climb during periods of political and economic uncertainty, which is often when stocks lose their value. Conversely, gold prices tend to come down as stock prices rise during times of stability and economic growth.

But predicting economic downturns is famously difficult, and political turmoil is also challenging to anticipate and many other diverse factors affect gold prices, including the strength of the annual Indian monsoon and the value of the US dollar.

All of elements these make price prediction challenging.

Gold prices do fluctuate significantly

Gold is not immune from sharp changes in value. For example, in the decade from the start of 1970 gold prices more than 1,200%. But the value then dropped by a third to by the spring of 1982. Similar steep changes occurred in the 2000s.

Prices can also be volatile over shorter periods. Between March and November in 2008 the price dropped nearly 30%, then rebounded to its original level again by the following March, with plenty of ups and downs along the way.

The lesson is simple: any prediction of the price of gold needs to at least consider the possibility of serious and sharp changes over short, medium and long term.

Predicting prices requires technical skill

Gold traders spend years learning their profession, which is underpinned by complex mathematics, powerful computer systems and decades of data. So experience matters when it comes to assessing the quality of someone else’s prediction.

You can develop this sort of expertise on your own, but it requires commitment and resources just to understand and measure gold supply and demand.

For example, just understanding gold demand is complex because not all demand drives prices. For example, demand for jewellery fluctuates depending on the price, and does not always affect the price. However, investment demand unquestionably drives price changes.

Reacting fastest to news is unlikely to work

Responding quickly to news to predict gold prices, and therefore make big profits, is something better left for Hollywood scripts than actual investment advice.

A quick reaction to a news event might secure a small gain, but gold prices now respond incredibly quickly to breaking news. This is because of the sophistication of communications technology and the power of computer-driven trading.

However, you might find opportunities by watching prices respond to news and making a qualitative decision on whether that is a correct response. You may feel that price response is disproportionate or wrong because of a range of other factors.

Making a prediction on this basis is often more sound than simply trying to act more quickly than the market.

Short-term predictions rely on technical factors

If you want to make a strong short-term gold price prediction then you need to have a firm grasp of the more technical factors driving prices.

This is because fluctuations to the price of gold remain within a much narrower range over the short term, and tend to be driven by a variety of technical factors.

For example, you need to understand support and resistance areas, which can drive short-term rises and falls even against a clear longer-term trend. Other phenomena, such as false breakouts, can be traps for the unwary or inexperienced investor.

Long-term predictions focus more on fundamentals

Price predictions over the long term are driven more by fundamental aspects of the market than by the day-to-day fluctuations of trading.

These fundamentals include political and economic stability at the global, regional and national levels.

Gold prices tend to rise in response to geopolitical instability, because gold is seen as a safe haven for investors. The opposite is also true, as investors are attracted by stock market rallies during times of stability and the price of gold drops.

The value of the US dollar is also vital, because gold prices are expressed in US dollars. If the value of the dollar goes down, then the price of gold goes up and vice versa.

Overall, predicting prices is a complex and challenging part of trading and investing in gold. Whether you’re looking for short-term or long-term predictions, you need good information and the skills to use that information well while mitigating risk.

Trying to predict news-driven price changes more quickly than the market is unlikely to bring consistent success, but careful, perceptive analysis can open up real opportunities.

Marcus Briggs is an entrepreneur and non-executive director of Icon Gold and vice-president of Citi Group. He specialises in identifying and developing opportunities in the gold bullion markets of the Middle East and Africa. Read more at his blog https://www.marcus-briggs.com/