How Far Can Gold Go?
By Dr. Steve Sjuggerud
January 9, 2008
How far can gold go?
Farther than you can imagine... That's the correct answer.
I laid out the case for gold back in 2002...
(If you don't know why gold is rising, I urge you to go back and read that letter. In addition to the case for gold, I explained how to buy gold for $250 an ounce AND get paid a 4% dividend.)
Quite frankly, the reasons to buy gold that I laid out in 2002 are still in place today. So it really could go much higher.
How about oil? How far can oil go?
The answer is the same... farther than you can imagine.
How much lower can housing go? Or financial stocks?
The answer is the same, much to my chagrin. They can fall farther than you can imagine.
I'm choosing my words carefully here...
They can go farther than you can imagine... but it doesn't mean they will. The point today is, most people don't believe they can...
You see, you and I have well-developed beliefs... behaviors... and survival mechanisms. We are built to survive. The problem is many of those innate behaviors are the exact opposite of what you need to make money in the financial markets. Let me test you about this by asking a few questions...
Do you think gasoline is expensive right now? Well, why do you think that? What do you think a fair price of gasoline is? $1 a gallon? $2 a gallon? And why do you think that?
It's easy to simply read the price each day as you drive by the station... then compare that to what it said five years ago. But as the chart below shows, your biases can mislead you.
The black line is the price of a gallon of gas. The blue line represents the ratio of a gallon of gas to a barrel of oil.
It turns out gas is extremely cheap... Relative to the price of crude oil, the gas you put in your car is actually cheaper than it's been in a very long time.
If you don't think gas is cheap, you're falling prey to two things that get most investors...
The technical names are "availability bias" and "anchoring."
Availability bias means that people are overly influenced by what easily comes to mind. And anchoring refers to people's tendency to arbitrarily set some initial estimate of value and use that as an "anchor" versus the present value.
True Wealth subscribers have made a fortune off of these biases... For example, we bought shares of BHP Billiton when it traded in the teens. We sold it once and bought it back again. We still own it, and it's now in the $70s.
We bought it when oil was around $50, and copper was around $1.50. Analysts were forecasting BHP using these two biases. They estimated the future price of oil at $25, and copper at 80 cents. Now, oil is at $100 and copper at $3.
To me, the best estimate of tomorrow's gold price or oil price is today's price. That's as far as my forecast goes. Anything else from anyone else is simply a guess.
I've seen these mistakes in real estate in recent years, too... The most recent information in people's heads was that "you can't go wrong in real estate" – the availability bias came up and bit 'em. And now they're hit with the problem of anchoring. They think their home is worth $600,000. But it's worth more like $400,000. We're not seeing many home sales because people are stuck with their anchors... they're not responding to reality.
You can do two things with this information:
| 1) |
You can try to catch yourself when you're succumbing to it. We all do it, all the time. But these biases can ruin investment returns. |
| 2) |
You can capitalize on it when you see others foolishly falling for these things, like analysts did with BHP Billiton a few years ago. |
Is a gallon of gas cheap? How high can gold go from here? How high can oil go? How far can housing prices fall?
Can oil go to $200? Or gold to $2,000? You betcha. I'm not saying they will, I'm saying they can...
Get rid of your anchors and your other price biases... and you'll discover that things can go much farther than you think can be possible.
By understanding this, you can make a lot more money than before, as you'll understand that things can go, and go, and go, and go.
Good investing,
Steve
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