Investors should be wary of metal-price forecasts as we enter the season for optimists

We celebrate the vernal equinox (Latin literally for “new equal night”) on Saturday, March 20, when days and nights are of equal length. From an astronomical perspective, the Northern Hemisphere celebrates the start of spring.

Actually, the start of spring is far from clear-cut. For a start, the equinox varies from a day earlier than this year’s date to a day later, and spring began at the start of March from a meteorological perspective.

Moreover, spring in the U.S. is often regarded as beginning on the day after Presidents’ Day (the third Monday in February) and ending on the Friday before Memorial Day (the last Monday in May). In China, the traditional lunar calendar divides the year into 24 solar terms. Spring starts with the Chinese New Year (celebrated on February 12 this year) and ends with the start of summer (the seventh solar term, beginning on May 5 this year).

For many countries, spring starts halfway between the winter solstice and the vernal equinox. In the Celtic nations (Scotland, the Isle of Man, Ireland, Wales, Cornwall, Brittany and Galicia in northwest Spain), spring generally extends from early February (around Candlemas — the Feast of the Presentation on February 2) until early May (around the Gaelic May Day festival of Belta).

In Ireland, spring traditionally starts on February 1 in celebration of St Brigid, who was born in 451 and died on that date in 525. She is revered for converting Irish tribes to Christianity, and establishing a monastery (Ireland’s oldest) at Kildare. This Irish celebration is also called Imbolc (literally “in the belly” in Irish Neolithic, and refers to pregnant ewes), and coincides with a celebration of the Celtic goddess of healing, Brid, that goes back some 6,000 years.

It is even more problematic in some countries. In Sweden, for example, meteorologists define the beginning of spring as the first occasion on which the average daytime temperature exceeds 0’C for seven consecutive days. The start date therefore varies every year, and with latitude and elevation, but typically takes place between late February and mid-April.

The precise start of spring might be difficult to forecast, but market conditions are even tougher to predict. This is well illustrated by economic-surprise indices, which look at macro-economic outcomes relative to expectations. They are important because it is often the delivery of facts relative to expectations, rather than the levels themselves, that matter for markets. (We seem to feel this phenomenon especially sharply in mining!)

One of the best known measures of uncertainty is Citigroup’s Economic Surprise Index. CESI incorporates various data points (including jobs numbers and industrial production), and movements in the index indicate whether economic forecasts have not been met (a negative change in the index) or have been surpassed (a positive movement). Over time the average ‘economic surprise’ should be zero (i.e., the index will revert to the mean), and a ‘decay’ factor built into CESI means that a big recent surprise will influence the index more than the same surprise in the past. These features mean that extreme levels in the CESI will inevitably be followed by a reversal.

CESI was at a record negative level a year ago (Covid-19 leaving markets extremely disappointed) before rebounding to levels that were astonishingly positive in July 2020. Despite falling sharply since the middle of last year, CESI remains near its highest level since 2003, meaning markets are still being pleasantly surprised by economic performance.

CESI is extremely well correlated with the yield on 10-year U.S. Treasury Bonds, so it is no surprise that bond yields have moved higher over the past 12 months. These better financial returns are perhaps the main factor behind gold’s disappointing performance since reaching an all-time high in August 2020.

Another way of looking at the index is that economists have never been so inaccurate in their predictions. Of course, Covid-19 has made all forecasting problematic, but surely no-one has been worse at it than gold analysts? Admittedly I’m a coward; when I (briefly) plied my trade in stockbroking, the advice I followed on forecasting was the traditional one; give a number, or give a date, but never both. For months, however, pundits had been falling over themselves to predict ever higher prices for the precious metal, and (admittedly in hindsight) the forecasts on LinkedIn, for example, are hilarious.

Agreed, the demand for many metals is currently strong, and the fundamentals are certainly very good. However, as the CEO of Anglo American, Mark Cutifani, warned at the end of February, investors should not be “seduced by high prices.” Cutifani added that he had “seen cycles and super cycles” during his 44 years in the industry, and counselled against losing sight of the basics.

As we enter the most optimistic season of the year, my advice to investors is to ignore the frequently over-enthusiastic metal-price analysts. Instead, they should select investments based purely upon the current feasibility of the project and the caliber of the company’s management.

To borrow from a poem by Dylan Thomas: “Here in this spring, stars float along the void.” At this aspirational time of the year, I suggest leaving the metals-market stars well alone. No-one knows where prices are going; company executives are biased, and if analysts knew the future, they wouldn’t tell you and me.