Gold's Next Monster Move

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  ) .

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 when it comes to investing in gold. The "Gold" tag at CAPS lists 44 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Coeur d'Alene Mines, Kinross Gold, and Silver Wheaton. The Motley Fool's disclosure policy is 0.999 pure.


Read/Post Comments (24) | Recommend This Article (27)

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 September 02, 2009, at 3:40 PM, StopLaughing wrote:

    Gold is breaking out and the $ and interest rates are breaking down.

    The Nasdaq banking sector is near a sell signal. Hong Kong and Taiwan have sent sell signals. However, they follow China closely.

    The Vix has sent a signal that it has broken out to the upside. However, none of the major indexes indicate that they are breaking down.

  • Report this Comment On September 02, 2009, at 3:58 PM, jesusfreakinco wrote:

    Chris,

    Admit it... You've had this article written for months, just waiting for today! Our day seems to have come. PMs are being vindicated today!

    JFC

  • Report this Comment On September 02, 2009, at 4:08 PM, silverminer wrote:

    JFC,

    lol .... nope, I drafted it on Monday when gold was just over $950. The way those Bollinger bands were contracting, a breakout was clearly inevitable.

    Nailing the timing to within a day or two is fun, but please don't lose sight of the broader point of the article ... that these short-term movements are insignificant to the truly focused long-term investor.

    I think it's perhaps premature to say pms have been vindicated by a largely technical breakout that hasn't even launched us through the important $1,000 psychological barrier (although the move was likely also bolstered by China's caution that SEOs may be permitted to walk away from failed derivative contracts). Still, the action in the mining equities today was nothing less than stellar.

    Stay tuned, Fools, but keep your eyes on the long-term prize.

  • Report this Comment On September 02, 2009, at 4:14 PM, XMFSinchiruna wrote:

    P.S. For those who don't recognize my other CAPS moniker, silverminer = TMFSinchiruna. That silverminer portfolio enjoyed a fairly nice surge today, and now stands with an accuracy rating above 90% through 87 precious metal and commodity-related stock picks since last November.

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

  • Report this Comment On September 02, 2009, at 7:37 PM, NFLNostradamus wrote:

    The largest counterbalance for gold on the scale of true worth is platinum until platinum is no longer worth more than its weight in gold.

  • Report this Comment On September 02, 2009, at 9:26 PM, catoismymotor wrote:

    + 1 for Chris.

  • Report this Comment On September 02, 2009, at 9:31 PM, lexperto wrote:

    Where does AAUKY figure in all this excitement?

    Lexperto

  • Report this Comment On September 02, 2009, at 11:52 PM, XMFSinchiruna wrote:

    lexperto,

    AAUKY is not a gold or silver play, though they do mine plenty of platinum. If your question was aimed at the Platinum operations, both platinum and palladium should perform as the dollar devalues, but I refrain from placing price targets on those two metals because my focus remains targeted to gold and silver (which have a far more established monetary component to their market value).

    Since Anglo American mines so many other items, however, like base metals and coal, investors must weigh their outlooks for each of those resource groups before making an assessment on Anglo American.

    The delisting from the Nasdaq was most unfortunate.

    http://www.fool.com/investing/international/2009/08/11/a-cra...

  • Report this Comment On September 03, 2009, at 1:03 AM, silverincite wrote:

    Love the John Embry quotes, that was a good read in the Globe and Mail.

    Have you seen these grades from Exeter Resource:

    http://www.marketwire.com/press-release/Exeter-Resource-Corp...

    Still early, but those are smile worthy!

  • Report this Comment On September 03, 2009, at 9:48 AM, XMFSinchiruna wrote:

    silverincite,

    I believe you brought that interview to my attention in the first place. Thank you. It's another terrific example of how community intelligence works!

  • Report this Comment On September 03, 2009, at 2:05 PM, jrj90620 wrote:

    You're way too bearish on gold.Gold hit $850 about 30 years ago.Since then fiat currencies,worldwide, have grown huge amounts.I'm thinking before this bull run ends we should see gold approaching $10K/oz.

  • Report this Comment On September 03, 2009, at 2:19 PM, catoismymotor wrote:

    jrj90620,

    Wow! Now THAT is an uber-bullish statement! If silver, my PM of choice, were to keep up it would be $250 an ounce? That would be cool.

    Cato.

  • Report this Comment On September 03, 2009, at 2:33 PM, XMFSinchiruna wrote:

    jrj90620,

    I prefer to keep my targets from getting too far ahead of the bull market's progress. As $2,000 draws nearer, we may have better visibility to determine how far the run can ultimately travel.

  • Report this Comment On September 03, 2009, at 3:25 PM, silverincite wrote:

    Thanks Since, you've brought so much insight and information that I'm glad to be able to share some as well.

    Any thoughts on the results from Exeter in my last comment?

  • Report this Comment On September 03, 2009, at 3:43 PM, catoismymotor wrote:

    "Thousands of investors lost billions of pounds worth of gold during this episode."

    I'ss assume the pounds you speak of are the monetary variety. If it was purchased with cash they were not going to miss and they managed to hang on to it they would have been the better for it. If they maxed out their credit lines or drained the saving account to make the purchase then they made a mistake.

  • Report this Comment On September 03, 2009, at 3:44 PM, catoismymotor wrote:

    I'ss = I'll

    It has been a lon day.

    Viva la Fool!

  • Report this Comment On September 04, 2009, at 2:19 PM, XMFSinchiruna wrote:

    Correction: Many thanks to one of my readers for pointing out that I mistakenly referred to an "inverse cup-and-handle formation" in the original version of this article. I must have been shy one cup-and-handle filled with coffee. :)

    The text has been corrected to read: "inverse head-and-shoulders formation".

    Fool on!

  • Report this Comment On September 05, 2009, at 10:05 AM, JeanDavid wrote:

    A problem with gold and its pricing...

    http://www.gata.org/node/11

  • Report this Comment On September 06, 2009, at 12:18 PM, wolfman225 wrote:

    I've got a "newbie" question, if I may?

    I've been interested in the possibilities of gold since I started hearing all the radio advertisements roughly 5-6 years ago (if I'd only bought then!). I agree that, given the current climate of increasing debt and the twin possibilities of inflation and devaluation of the dollar, that gold has a great upside. BUT.......

    Which would be a better play? Bullion or collectable coins? Investing in mining company stock or buying gold certificates? Should I try to purchase physical gold and store it myself? How does the premium (I've heard that some gold dealers charge as much as 10-15% above the spot price for bullion) affect investment performance?

    I'm generally bullish on the future of the stock market in general but I have great concerns for the next 3-5 years, given the increasing level of gov't intervention.

  • Report this Comment On September 07, 2009, at 4:00 PM, JeanDavid wrote:

    If you are in the market for small amounts of gold, you should take possession of the metal. There is a premium over the spot price unless you want a lot of it.

    You can get bullion grade gold coins and medallions for a relatively small premium (4% and up) from reasonable dealers. One is Liberty Coin Service.

    You can get numismatic grade gold coins for higher premiums, sometimes as high as 100% or more. This includes the price of gold and the quality of the coin and its value to collectors.

    If you just want a hedge against inflation, I suggest the lower premiums on bullion grade items. Usually the U.S. Arts Medallions are the cheapest. They come in 1-ounce and 1/2 ounce size (gold weight).

  • Report this Comment On September 08, 2009, at 10:10 AM, XMFSinchiruna wrote:

    wolfman,

    I personally think that quality miners offer terrific upside over the remainder of this precious metals bull market, with the obvious caveat that they can experience gut-wrenching volatility along the way (like the 18-month correction we're just now crawling out of).

    Take a look back through my blog and older articles ... you'll find lots of discussion of different vehicles for precious metals investment.

  • Report this Comment On September 08, 2009, at 2:43 PM, wolfman225 wrote:

    Thanks, guys.

    I'm trying to rebuild after a divorce and I'm looking at all potential options. I've just been wandering around Fooldom the last few months trying to educate myself as much as possible. As far as a % of my total holdings, how much exposure should I have to PM in my portfolio? I still have a need to accept significant risk in order to realize the needed returns for me to retire by age 70 (25 yrs).

  • Report this Comment On September 08, 2009, at 8:09 PM, XMFSinchiruna wrote:
  • Report this Comment On September 10, 2009, at 4:02 AM, bayoutrader11 wrote:

    Thank you all and my Compliments to the Author...This has to be one of the best articles I have read in years.........I have literally been sittn here at he computer screen for like 30 hours straight, Doing research and trying to learn as much as can in preparation for my entry position in the gold play....you fools are the best I have ever had the pleasure of participating with.........very intelligent bunch.........When read your articles and posts.....I am just floored by you guys intelligence and insight...Thanks gain...I do also have some insight to taking posession of gold from past experiences.....It is very beautiful and almost mezmerizing.......there are definite security risks with taking posession of bullion and coins.....also Liquidity is a point of concern.....you will pay a premium to purchase and a discount at sale......if your profit margin is good thats fine.....but you also need to be somewhat educated in the process, condition, grade, handling, types of bullion or coins, being carfull not get invested too deep in he Numismatic or Collector Value of the Gold "coins" if that is the route you go....Silver also....there are actually grades or "brands" of bullion which command a premium or discount and also contribute to the liquidity of the metals.....there is a certain amount of knowledge that goes along with physically investing the bullion, coins, bars, collectible coins, etc....all of which can and will affect our profit margins........Personally my experience as a past coin collector / investor is for the most part get a gold coin, or a few silver ones....but using funds, or stocks, or ETF's is a much cleaner , simpler, safer, more profitable, less stressfull and a much better experience...for investing..and absolutely More Liquid......Also you must find a Dealer that you Can Work With / Reputable...And trustworth......I was fortunate to find on of the Best Dealers in the Country......He has been around a long time...Southland Coins in Southwest Louisiana.....If you ever need ......Good day and God Bless.....each and every one of you fools............$2500 an ounce sounds like a good goal to me.......!!!!!!!

    bayoutrader11

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