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Don't Let Analysts Skew Your Metals Portfolios

Commodities / Gold and Silver 2010 Mar 04, 2010 - 04:17 PM GMT

By: Dr_Jeff_Lewis

Commodities

Every time an investment outperforms much of the market, the entirety of the financial services community reaches in to offer their two cents.  We saw this in real estate, the bull run in commodities throughout the early 2000s, and in many high performing investment sectors before these booms. 


However, it is important to keep a level head when the pundits and financial commentators start buzzing about the next best investment.

What Analysts’ Projections Really Mean

What do the analysts’ projections mean?  Nothing. 

Analyst forecasts about a specific investment or security mean virtually nothing about the future returns of a security, commodity or any other investment class.  These statements and predictions are released largely for the press value and free advertising large investment banks receive every time they make a forecast about an investment. 

If you remember back to the oil bubble, two companies in particular, Goldman Sachs and JP Morgan Chase, made a new prediction each and every week as oil went higher.  This was done for three reasons: to increase the interest in oil, as well as work as a self-fulfilling prophecy to drive oil prices higher and to bring their company to the main stage of financial commentary with each new release. 

Most of their predictions came true, but this wasn't due to any amazing forecasting on their part.  Instead, it was due to the fact that the investment banks were making forecasts that anyone with a chart could plainly see. 

Also, each new forecast was rarely more than 10% higher than the previous forecast, allowing the bank to claim it had placed appropriate target prices each time one was reached.

Analysts Lining up in Precious Metals

Ultimately, the oil bubble popped as the economy turned sour, and the last of all predictions was the only one to prove untrue.  JP Morgan had been correct all the way to nearly $150 per barrel before it released a ridiculous forecast of $200 per barrel, and it was only weeks later that the oil bubble came crashing down.  Of course, the investment banks were already selling to the new interest, and just a few weeks before the bubble burst, most were again short oil, which is a complete 180 from their own forecasting. 

Now investment banks are doing just the same with gold, putting out ridiculously low price targets of $1300, which almost anyone with experience in metals knows is still exponentially lower than its inflation adjusted high. 

Noise Only

Financial analysts are in the marketplace to make noise to excite investors about the next greatest investment.  They're not there for any meaningful purpose, and most really don't care which way the investment itself chooses to go.  The analysis division is mostly there for positive press, and each time the investment strikes a forecasted target price, the investment bank has the ability to inflate its own ego. 

It is important to remember to never get caught up in what analysts are predicting about precious metals because they know little more than the average investor who can read charts and understand economic fundamentals.  We can all agree that government spending is out of control, inflation is continuing on, and the underlying fundamentals for precious metals remain strong.  With that said, it would be ridiculous not to predict higher metal prices for the long term horizon.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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