Tomorrow's Monster Move in Gold

Last October, when gold slid violently from more than $900 to $700 per ounce, I felt very alone in highlighting the fundamental strength behind gold, and the undeniable value which had been baked into quality gold-mining stocks at those levels. Since then, the precious metal's jumped to $1,000 before beating a hasty retreat. With the media awash in mixed signals about gold's future, I think it's time for us Fools to step back and collect our wits.

The essential gold quiz
As the massive and sustained correction of 2008 made clear, gold can be an extremely volatile and punishing asset class for unsuspecting investors. While gold finished the year ahead of every major equity index in the world, that fact belies the angst of countless investors who may have arrived late to the rally, or been chased away on the way down. From Goldcorp (NYSE: GG  ) to Gold Fields (NYSE: GFI  ) , the miners' declines were merciless.

To help prepare you for gold's next monster move, I offer this Foolish gold quiz:

  • What is your style? Are you a long-term buy-and-hold investor like me, or more of a swing trader looking to time those peaks and valleys? Given the highly complex set of variables in play, this Fool does not consider gold an appropriate venue for anyone in the latter camp.
  • How do you form your decisions about gold? The majority of gold investors are moved by fundamental drivers of the metal, like the state of the U.S. dollar or the prospect of inflation, while others are more attuned to technical analysis. I use both, but I place greater emphasis on the fundamental drivers and my resulting target price of at least $2,000 gold.
  • How much confidence do you have in your position? This critical question will help investors understand whether they are ready for the looming volatility in gold. I expect price volatility to increase substantially in the months and years ahead, with daily moves like this $90 leap after the Lehman Brothers bankruptcy providing a mere glimpse of what's to come. To avoid selling into weakness, I recommend that Fools reflect upon their own tolerance level for gold's painful corrections.

Where will gold go next?
The veritable rush into gold, triggered by spooked investors fleeing the specter of massive fiscal intervention and a deteriorating national balance sheet, has become something of a stampede. That sort of situation seldom helps keep prices stable. Hedge funds and professional traders, who use statistical algorithms to guide their moves, may occasionally test the mettle of the masses. They're hoping to leverage short positions to spook newcomers right out of the safe haven they were spooked into, targeting key support levels in the process.

The Fort Knox of stock talk
Anyone invested in gold who's not visiting the CAPS blogs is missing out on a wealth of free information and lively debate. In one informative post, CAPS All-Star GoodVibe4Ever detailed an array of technical indicators that indeed suggested some short-term pressure building against gold near the $1,000 mark.

I countered with an alternate interpretation of the charts that wove fundamental analysis into the picture; in short, I expect a far more modest correction than GoodVibe suggests. I took the opportunity to shave a small portion of profits from the recent rally in hopes of buying back in at a lower price. That's all the action I'm willing to take on the basis of technical analysis.

A golden future?
For those still undecided about gold, this dip could provide some excellent opportunities. Major miners Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) both booked substantial operating profits in the fourth quarter, despite an average gold price below $800. This bodes well for the industry, especially for low-cost intermediate miners like Agnico-Eagle Mines (NYSE: AEM  ) and Yamana Gold (NYSE: AUY  ) .

I am concerned, however, for the well-being of those who may decide to short gold. With the global financial system still highly distressed, I can scarcely conceive of a riskier strategy. True, a correction to test $900 -- or even $800 -- could now be unfolding. But I could just as easily see gold leaping beyond $1,200 in a heartbeat.

Swing traders (and especially shorts), beware. The multiyear bull market for gold remains in full effect. No one can predict what tomorrow's monster move in gold may be; instead, I counsel gold investors to tune out most of the noise regarding short-term price swings and focus more upon fundamental analysis.

All that glitters might be further Foolishness:

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view on this precious metal's prospects. The "Gold" tag at Motley Fool CAPS lists 35 companies; you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker sees a pot at the end of the rainbow for investors who obtain exposure to gold. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Agnico-Eagle Mines, Silver Wheaton, and Yamana Gold. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (17) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 26, 2009, at 4:24 PM, djemonk wrote:

    Thank you for this reasoned article on investing in gold. Too many of the articles and posts written about gold investments have been unabashed goldbugs or goldbears with a clear and obvious agenda. While I think your position on this topic is fairly clear, this was one of the more well-thought out descriptions of the situation.

    One question that arises is how you arrive at your target price. I can value stocks based on DCF analysis but the fundamentals on gold seem a little more nebulous so I'm hesitant to trust a target price, especially one that's nearly 100% more than gold's current high water mark.

    Thank you!

  • Report this Comment On February 26, 2009, at 4:33 PM, GoodVibe4Ever wrote:

    Chris – I would like to thank you for your unbiased prospective into your articles and willingness to bring those who don’t agree with your opinion to the forefront. It's what this community of Fools all about. As I mentioned in my blog that you linked to, I wrote this piece for number of reasons:

    1. For people to see how Technical analysis works.

    2. For other traders -bulls and bears- to share the wealth. We stay together, we survive and thrive.

    3. Most important for gold and silver believers to let them check their emotions at the door when making financial decisions. To pay attention to TA that they usually disregard and neglect when they can use it to their best interest.

    I hope I was a catalyst to achieve that, saved someone’s hard earned coins, or made aggressive traders some money that I still believe might turn to be pile of money. That said, this should not be taken as an advice to buy or sell anything. I will fool myself if I think that my risk tolerance, time horizon and goals fit all my readers. As a wise man always say; "we share what we’re doing, when we’re doing it and how we’re doing it with hopes that sharing the process adds to you."

    At this note, I wish you and all your readers as much as they wish for themselves and maybe a little bit more – including that golden pot at the end of the rainbow. I’ll be the first to congratulate you for your success even if it will be on my expense. :)

    GoodVibe

    PS. Still the beer on me using my fiat currency and the lunch on you using your silver coins. :) Be happy!

  • Report this Comment On February 26, 2009, at 5:12 PM, XMFSinchiruna wrote:

    Hi djemonk,

    I'm glad you enjoyed the article, and thanks for the comments. As for my process for establishing a target price for gold, there are more variables involved than I could list, and the target price remains fluid and is constantly subject to revision as more information becomes available. To be honest, $2,000 is my conservative initial target price. :)

    One element of my target price, however, involves using the inflation-adjusted high from the 1980 spike in gold as a guide. $2,000 is considered by many experts a conservative target given that the inflation-adjusted high from 1980 would be above that mark ... actually more than $2,300. Keep in mind that John Williams' site documents a strong case why even those official numbers drastically understate the real rate of inflation. Since everything about current events screams of a set of financial scenarios far more severe in scale and scope than the events of the late-70s, I believe it is very reasonable to conclude that gold will at least find that inflation-adjusted high before conditions reverse direction.

    This is but one of countless variables I examine in the process, but it is nonetheless an elementary one that participants in the gold bull market commonly point to.

    All told, the process could be the subject of another article entirely, but much of that case has already been made by some venerable experts in the field.

    Good luck, and I'm glad you enjoyed this article more than the last one you commented on. :)

    http://www.fool.com/investing/international/2009/02/19/86-tr...

    Fool on!

  • Report this Comment On February 26, 2009, at 5:36 PM, XMFSinchiruna wrote:

    GoodVibe,

    I believe that your blog posts indeed embody so much of what it means to be a Fool. Sharing ideas openly in a polite and respectful atmosphere makes us all better investors, and even more so when we challenge our own positions against the well-presented elements of an alternate perspective. I very much appreciated your post, and the invitation to express my interpretation of your analysis as well.

    I also really liked the reasons for your post, especially #3, and I echo the caution for Fools to check their emotions at the door when investing in gold (or anything, for that matter). I ignored technical indicators in 2006, and paid the price when emotion (fear) led me to exit some positions as my confidence was brutally shaken. That experience is precisely what I wish for my fellow Fools to avoid, and the reason for my question $3 in the quiz I offered above.

    Thank you for your excellent contributions to the CAPS blogosphere, and for being a Grade-A Fool. :)

  • Report this Comment On February 26, 2009, at 6:25 PM, 100ozRound wrote:

    Sinch,

    I really enjoy reading your articles but I usually just happen upon them. Is there a better way to follow your articles or could you link to them in your CAPS blog as well?

    You put out some great stuff! Thanks for all you do!

    Mike

  • Report this Comment On February 26, 2009, at 6:26 PM, TigerPack1 wrote:

    Tiger's Two Cents,

    I have traded gold and gold mining equities for some 25 years, and think your tempered enthusiasm right now is the correct course of action for most investors.

    I was one of a short list of investment advisers in the late-1990s and early 2000 period that advocated a clear overweight in gold mining assets when gold was trading closer to, and even under, $300US an ounce. Despite being made to feel like a total lunatic and outcast versus normal investment advice behavior at the time (following a 20-year decline in gold pricing back then), my nuttiness and fortitude of will were rewarded the past many years as my pocketbook grew increasingly thicker.

    However, today gold valuations and investor interest/excitement are the highest since perhaps the 1980-81 peak in the precious metals boom of the 1970s, based on my independent work and research.

    I completely agree that in the next 5-10 years, gold prices will eclipse $2,000US an ounce, but my fear is the price of precious metals may only replicate the expanding breadth of money creation and soon to be rising rate of inflation, as opposed to sharply outperforming them the last 8 years or so. Without doubt, owning some gold and silver bullion and perhaps a few gold mining companies (including the GDX ETF) are sound long-term hedge strategies today.

    Investors that park their money in CDs or money markets currently earning zero interest rates, are guaranteed to lose purchasing power, after accounting for rising inflation rates and taxes the next few years. No question, a double in the gold price over say ten years, will do better than bonds and cash in relative terms of investment performance.

    Looking forward, the gut-check, long-term investors like myself willing to take on risk, that want to make a killing the next 5-10 years, SHOULD be looking into areas such as the near death-bed financials, home builders, real estate trusts, furniture companies, and former media/newspaper darlings as they will never again be as cheap again in our lifetimes, relative to other sectors. While many of the companies in these sectors will not survive the next year or two, if you can find and purchase some that can outlast the weak economy, the lack of competition in the next economic upturn will allow outsized profits and major stock price increases [vs. today's near zero business valuations] for years to come. Stocks like La-Z-Boy (LZB), Toll Brothers (TOL), Gannett (GCI), and Ultra Long Financials (UYG) represent a list of companies that have the cash flows to survive a few years, despite all the pessimism, hysteria and low business prices of today.

    Disclosure: I own large stakes in LZB, GCI and UYG currently.

  • Report this Comment On February 26, 2009, at 6:54 PM, XMFSinchiruna wrote:

    100-oz. Round

    I occasionally post a list of recent links to my blog, but I can try to make that a more regular feature. Thanks for reading.

    Tiger - thanks for your inflation-proof $0.02. :)

  • Report this Comment On February 26, 2009, at 6:56 PM, XMFSinchiruna wrote:

    Here's the last list of links to my articles compiled earlier this month. Thanks again for your interest!

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=141875&t=0...

  • Report this Comment On February 26, 2009, at 8:35 PM, djemonk wrote:

    TMFSinchiruna,

    Thank you for some of your insights into how you came up with your target price. That kind of window into the kind of calculations and reasoning that you're doing really helps investors gauge what sort of margin of safety they can build into an investment in gold.

    My prior hesitation to accept high future valuations of gold came from the position that I just couldn't see why you thought that gold, at current prices, could be a good investment. I have a much better picture of where you are coming from.

  • Report this Comment On February 26, 2009, at 8:55 PM, zgartz wrote:

    It's good to see Fools on the precious metals boat. However buying ETFs is no different than buying a piece of paper from Bernie M. There's no way in God's green earth that GLD could get their hands on 100 tonnes of gold that they would have needed in January.

    There are counterparties allowed in gold and silver ETFs.

    Real investors have to stick to physical product. To "play" the market stick to the gold miners that have current production and enough reserves to be in the game when the $2,000 price is achieved.

    Howard Ruff has good advice. You can read his comments along with mine at www.notesforinvestors.com .

    My favorite which I own is AZK (Aurizon).

    Happy days ahead for those with the guts to ride the roller coaster.

    ZgartZ

  • Report this Comment On February 26, 2009, at 11:42 PM, PrestonCheek wrote:

    Sinch, that has been the best debate I've read so far on the MF. Thanks for your participation with GoodVibe and being concerned about the fate of fellow fools. Thats the reason I joined this site, to be able to hear and sometimes interact with the conversations of experienced traders and investors.

    Fool on!

    Preston

  • Report this Comment On February 27, 2009, at 4:09 AM, JakilaTheHun wrote:

    Good article!

    I agree for the most part. My only real concern with gold as an investment is that I think there are better plays out there. If inflation indeed does hit and commodities remain scarce as a result of rising demand in Asia, the price of industrial metals and oil are going to continue to rise, as well. Rising oil is going to trim into the profits of gold miners --- which is why I like physical gold better than the miners. (I do like AUY, though; especially if it pulls back a bit).

    At this stage of the game, I almost think buying an S&P index fund could be just as good of an investment as gold. Stocks are going to go back up; especially if we get hit by inflation. Doesn't mean that the economy will be in fantastic shape, though.

    In sum, I agree with your analysis on gold, but I simply think one might be better off buying into other hard assets and commodity stocks right now --- particularly oil, palladium, platinum, titanium, and copper. Given the depressed prices right now, downside is somewhat limited on a lot of commodities.

  • Report this Comment On February 27, 2009, at 10:25 AM, OleDrippy wrote:

    TheHuney is right... If hyperinflation hits, which I feel is the primary concern, the only thing you DON'T want to own is cash. The stock market will perform just smilingly as many, many more paper dollars chase all assets looking for a place to hide... Zimbabwe's market has gone gangbusters!

    Thanks for the lively, coherent debate!

  • Report this Comment On February 27, 2009, at 11:29 AM, oregonrogue wrote:

    This is the best exchange of ideas and banter since joining in Nov.

    CAPS and you masters are sooo valuable to us little folk!

    Thanks Sinch and everybody!

    God Bless the USA!!

    Oregonrogue

    One month left to go in this festering sewer known as Iraq!

  • Report this Comment On February 27, 2009, at 11:51 AM, Kmunk wrote:

    I agree completely. I am long only my core gold holdings at the moment and looking for a dip to 850-900 to reload for the next upleg. I was a big buyer down below 850 last dip and a big seller above 950.

    2,000, at least at the moment, is when I will start looking at getting out of gold, with perhaps as much upside as 8,000 and above. Really it all depends on what the future holds in store, where the markets are at, and where interest rates are at. So it is hard to "pick a dollar based number".

    Gold shorters are nuts IMO. Of all the things to short, gold would be the worse fundementally speaking at this juncture in history. You do not want to be in the wrong position should some overnight currency disaster takes place, particularly since there will probably be banking holidays and market shut downs that will prevent any types of sells. In particular, if you are shorting gold futures, the amount of risk is phenomonal. Any safe shorts should be buyers of put options, nothing else.

  • Report this Comment On March 02, 2009, at 7:16 AM, ValuePEG wrote:

    First I want to state I do own 1500 shares of FRG & 100 shares of SA, but I just don't understand literally any of this groups bullishness on gold. Gold hitting $2000/oz in the next 10 years is extremely doubtful. I can see it definitely having a chance to hit $1200 in 2009 & maybe $1400 in 2010 if we are still in a global downward spiral.

    But then it will fall back to it's normal range closer to $600-700 because there just isn't that much real need/demand for it not compared to inventory - check out the following link:

    http://caps.fool.com/Pitch/SLV/345001/there-is-more-gold-tha...

    Sometimes I wonder if anybody really remembers much at all, the high 1/21/1981 of $850/oz was not legitimate. The boom in 1980-81 as referred to by TMFSinchiruna & TigerPack , just a fictitious boom following the Hunt brothers manipulation of silver, which in turn also played havoc on the stock market.

    http://www.buyandhold.com/bh/en/education/history/2000/hunt_...

    If you look at historic prices gold was at or below $200/oz in 1978 before the affair, and back down to $300/oz by mid 1982. So lets say without massive manipulation we might have had an actual high in 1981 of $400-500/oz which would give an inflation adjusted range of $900-1150 today.

    Bottom line is just as in 1980 the worse we get off during this recession the more precious metals that will hit the smelters, from old jewelry to coin collections / bullion all held by private individuals, and not accounted in corporate / national stockpiles.

    Higher prices / demand will ALWAYS bring out higher SUPPLY. News is already reporting huge increases of jobless people cashing in to pay bills, imagine 6-months from now. There have been over 46 million ounces of Krugerands minted alone, equal to about 2/3 of total 2008 world production:

    http://www.krugerrand.org/

    http://www.goldsheetlinks.com/production.htm

  • Report this Comment On March 02, 2009, at 7:23 AM, ValuePEG wrote:

    I do have to agree w/ TheHuney though he kind of echoes my stock picks on my Caps page:

    http://caps.fool.com/player/valuepeg.aspx

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