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After months of range-bound trading, gold appears primed for a significant breakout.
The last time I signaled a major move pending, short-term technical indicators pointed downward, entirely contrary to a long-term bullish fundamental outlook that has only gathered strength in the meantime. After dipping to $870 per ounce in the weeks that followed, gold has held the $900 line throughout the notoriously weak summer months, and now looks well positioned to forge new all-time highs.
Then again, I could be entirely wrong.
You see, at all the noteworthy pivot points in gold's long-running bull market, investors like me can't resist donning their traders' hats and offering speculative projections for near-term price swings. It is precisely at times like this, however, that maintaining the objective focus of a disciplined long-term investor takes on added importance.
Keep your eye on the eye
Precious-metal investors are tracking a hurricane, with a deteriorating U.S. dollar as its eye, a destructive wind of toxic derivatives swirling about, and a downpour of continuing reverberations for the economies in its path.
While the degree of certainty over a hurricane's track decreases as one projects further into the future, I believe the opposite holds true for gold. I claim no prescience over tomorrow's gold price, but my research continues to support an expectation that gold will surpass the $2,000 mark before this storm subsides.
I could point to technical analysis of gold's contracting Bollinger bands and inverse head-and-shoulders formation, or the fascinating discussions and Elliott wave analysis of CAPS blogger binve that suggest an imminent breakout for gold, but in truth gold is about as predictable in the near term as Robin Williams with a movie script. Still, the irreverent speculator inside me can't help agreeing with John Embry, chief investment strategist for Sprott Asset Management:
I think there is a very small probability that gold will fall below $900 in the very near term. Monetary debasement is driving investment demand, western central banks are running out of available supply, eastern central banks, who are awash in dollars, want to buy and mine supply is cratering. We are close to lift off and the gold price at worst will trade at several multiples of the current price.
Seasoned precious-metal investors maintain a staunchly long-term focus, and constantly hone their fundamental understanding to inform and tweak price expectations as the bull market roars onward. Choosing price targets will always be an exercise in speculation, and as with any storm those forecasts will remain subject to change, but that long-term focus is instrumental to success the way satellites are indispensible to meteorologists.
The case for $2,000 gold
I'm hardly alone in anticipating such a surge from the present gold price. Legendary commodity investor Jim Rogers and equity strategist Christopher Wood have each suggested a target of $3,500 per ounce. Eric Sprott, Peter Schiff, Citigroup analysts, and Goldcorp (NYSE: GG ) founder Rob McEwen headline a long list of industry experts and insiders forecasting a price of at least $2,000.
Concerted buying activity by hedge fund managers like John Paulson, with sizable stakes in Kinross Gold (NYSE: KGC ) and AngloGold Ashanti (NYSE: AU ) , adds fuel to the bullish fire. Tanzanian Royalty Exploration (AMEX: TRE ) Chairman Jim Sinclair offered a courageous $1,650 price projection back in 2001, before this bull market gathered steam.
Aside from a chorus of expert guidance, my own confidence in a $2,000 target is bolstered by the extent to which fundamental drivers for gold have accumulated since the first time the metal hit $1,000 in March 2008. The Federal Reserve's balance sheet has since exploded into the trillions of dollars, and budget deficit projections are expanding to unpalatable extremes. Even the massive interventions to date are proving insufficient, as the Federal Deposit Insurance Corp. is running low on capital and bank failures continue in earnest.
From a fundamental perspective, the fact that gold has remained below $1,000 through all these developments is counterintuitive, and gives context to John Embry's assertion that "without central bank dispositions (mostly clandestine) the gold price would already be dramatically higher."
China's unmistakable signals of discomfort with the state of the U.S. dollar, related efforts to diversify dollar holdings into strategic assets, and its formal call for a new global reserve currency round out this Fool's macroeconomic considerations in positing a $2,000 target for gold.
Two metals to play
While gold bullion could double in value, shares of miners offer potential leverage to the rising price ... even though that leverage has yet to materialize. My top stock pick for 2009, Agnico-Eagle Mines (NYSE: AEM ) , remains a compelling growth story.
Meanwhile, silver remains out of whack from its historical relationship to the gold price, and could offer investors still greater upside. At $2,000 gold, I expect silver to fetch more than three times its current price, and forecast a strong future for miners like Coeur d'Alene Mines (NYSE: CDE ) and this Fool's silver equity of choice: Silver Wheaton (NYSE: SLW ) .