Stories | November 1, 2010

Where next for gold prices?

The “gambler’s fallacy” means investors can overemphasise the past performance of investments.

Former International Monetary Fund chief economist Kenneth Rogoff - who is now a Harvard University professor - writes on website Project Syndicate as gold hit another high that "it is dangerous to extrapolate from short-term trends".
He says: "Most economic research suggests that gold prices are very difficult to predict over the short to medium term, with the odds of gains and losses being roughly in balance."
Rogoff continues: "Yes, gold has had a great run, but so, too, did worldwide housing prices until a couple of years ago."

In balance
The "gambler's fallacy” is the idea that we have a tendency to think future probabilities are altered by past events. A classic example involves a coin toss. If we have flipped heads ten times, we might think tails is more likely on the eleventh try. In reality, the probability of getting tails remains 50:50.
This can apply to investment as well. For gold prices, past performance is not the be all and end all for predicting price - and it could pay for investors to weigh all factors that drive price rather than overestimate the importance of past performance.

Don't only go for gold
An eZonomics poll found 52% of respondents thought the price of gold would rise in the next year. At the time, we wrote: "Despite this golden run, investors should remember that a range of factors influence the price of gold. They should be wary about taking past climbs as a reliable guide to how the price of gold will move in the future." Investing decisions vary from person to person but people considering putting money in to gold should remember the importance of diversification. Or in other words, don't only go for gold.

eZonomics team
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