Tomorrow's Monster Move in Gold

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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 2008 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.

Gold is still 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 dozens of companies; you'll find Christopher's comments on most of them.

This article was originally published on Feb. 26, 2009. It has been edited by Dan Caplinger, who doesn't own shares of the companies mentioned.

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. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (5) | Recommend This Article (9)

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 December 01, 2009, at 4:25 PM, lw67 wrote:

    Ho hum gold could be correcting to $800 or $900 or it could leap above $1200.Well it was above $1200 for part of today.So what is your point.Why don't you get out on a limb and predict something we don't already know.I just hate these wishy washy articles. Analyst my backside.Gold to $2000 now that is a limb.I also think that is where it is going.Maybe I should take your job.At least I wouldn't put out crap like you just did.

  • Report this Comment On December 01, 2009, at 4:43 PM, sleepingnuke wrote:

    What does gold actually do for us? Jewlery? Great. Going back to 1900 gold is the worst long term investment in history, even government securities beat the long term gold performance (as published on this site). Gold is simply used as a hedge but doesn't back our dollar any more.

    There are two ways to play gold. Get into the TA craze and pray you time valleys and peaks correctly because it is highly volatile. The other way is to buy the companies that produce it and hope that it stays at these high levels.

    Gold doesn't really do anything important for us, it's a "precious metal" for the same reason diamonds are precious. People like the way it looks around their fingers.

    Why don't we stop playing with gold and get into metals that are actually useful like copper and aluminum. Check out the % increases on those for the year Vs. gold. As China keeps building those are far more valueable.

  • Report this Comment On December 01, 2009, at 6:23 PM, silverminer wrote:

    lw67,

    You may have overlooked the part about this article having been written back in February, and if that is the case I can partially understand your reaction.

    If you were to take the time to explore my contributions to the discussion of gold here at the Fool, I think you would find that I have routinely gone out on a limb for my readers, and have done so with a consistently accurate track record.

    For the record, I have been calling for $2,000 gold publicly here at the Fool since 2006, back when notions of such extreme heights were met with derision and at times even ridicule.

    To place this article in its proper context, we have to think back to where we were in February. Gold had moved briskly towards $1,000 from that deep low around $700 at the worst levels of the correction. I perceived the likelihood of a slight corrective phase before continuing on through $1,000, and that is precisely what transpired. While some Fools interpreted technical indicators for a massive reversal, I offered a perspective tempered by fundamental analysis that suggested $900 as a more reasonable target for the pullback. See my comprehensive comments on the blog post linked in the article above, also from February 2009. Indeed, gold pulled back to $870 before launching back to test $1,000 one last time.

    The biggest impetus for my article was to warn people against attempting to either short gold, or to get too aggressive trying to play the near-term peaks and valleys. The thrust of the piece is that in the big picture, near-term oscillations are mere noise in the longer-term bull market move to $2,000 or higher. The trend is your friend.

    Fool on!

  • Report this Comment On December 01, 2009, at 6:48 PM, silverminer wrote:

    sleepingnuke,

    If you prefer to focus upon metals that are useful, may I suggest some consideration for silver? ;)

    Myself, I think the world is finding gold enormously useful at present as a currency that is not impaired by any implications of the financial crisis. Since silver is a better bargain at present, however, I will not attempt to dissuade you from focusing upon metals with heavy industrial demand.

  • Report this Comment On December 01, 2009, at 9:36 PM, XMFSinchiruna wrote:

    precious metal bubble?

    The same was said at $600 gold, $800 gold $1,000 gold, and now $1,200 gold.

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