Tomorrow's Parabolic Surge in Gold

Tomorrow's surge in gold is unlikely to strike tomorrow.

Of course, some would say that another major move higher will never come at all; perhaps viewing this entire decade-long event as an over-extended bubble of fear that popped suddenly and unceremoniously near $1,260 per ounce. For many of them, a next leg higher could force the overdue revision of an incredulous outlook on the sector.

For those with the correct mind-set for gold, tomorrow could come next week, next month, or even next year ... it makes little difference if you're already in position. Gold has already soared through previous monster-moves in price, but I believe the metal is now preparing to go parabolic.

Gilded fundamentals
Fiscal policy in the U.S. remains hyper-accommodative with no sign of impending hawkishness. Recently heightened deflationary concerns appear likely to trigger further rounds of stimulus or other debt-financed interventions. Furthermore, deep and pervasive budget deficits of states and municipalities throughout the land portend some very significant domestic challenges ahead.

China continues to play a key role in gilding gold's fundamental outlook, recently modifying its policy-driven, global resource investment blitz to explicitly target gold.

In a move that I consider a landmark precedent, the state-owned China National Gold Group Corporation inked a long-term supply agreement for half the life-of-mine gold production from Coeur d'Alene Mines' (NYSE: CDE  ) new Kensington gold mine in Alaska. Additionally, the 7.3 million ounces of gold believed to underlie the Galore Creek joint venture between Teck Resources (NYSE: TCK  ) and NovaGold Resources (AMEX: NG  ) was potentially a factor in China Investment Corporation's decision last year to acquire a 17% stake in Teck.

At the same time that China is ramping up its exposure to gold, the country continues to reduce its exposure to U.S. debt. Recent data reveal that China's holdings of U.S. Treasuries in June fell to $843.7 billion, marking nearly an 8% reduction from $915.8 billion one year earlier. In fact, China shed more than $56 billion in Treasuries on a net basis in just two months' time (April to June). It is my contention that without concerted buying activity by Japan and the U.K. over recent months, China's ongoing exodus from U.S. dollar exposure could have touched off a fresh crisis of confidence in the greenback.

Unfortunately, I maintain that such a crisis remains unavoidable. But don't just take my word for it.

Calling-in reinforcements
John Embry, chief investment strategist for Sprott Asset Management, recently offered his sobering assessment of the present predicament:

If the U.S. is lapsing back into some serious economic difficulty, there will be a sudden realization that the financial situation is hopeless. As a result they're going to have to create so much money or take such a brutal deflationary depression that people will change their philosophy and not invest in U.S. bonds at 2.85% for 10 years. It won't take much money coming in the direction of gold and silver to have a significant impact.

In another recent interview, Embry attached a time-component to his outlook for gold to which ardent skeptics can hold him to account. Embry laid his gold chips right upon the table, declaring: "If it's not between $1,500 and $2,000 in the next 18 months, I'm dead wrong."

Mark Bristow, CEO of noteworthy success story Randgold Resources (Nasdaq: GOLD  ) , believes that "a gold price of $1,500 per ounce in 2011 is not unrealistic."

Bradford Cooke, chairman and CEO of junior miner Endeavour Silver (AMEX: EXK  ) , offered the following in a recent Fool interview:

Gold typically bottoms in August and starts moving in September in advance of any other commodity. So I'm looking for probably an $1,100 to $1,140 bottom in August, and a fairly aggressive next wave in the fourth quarter ... certainly going through the old high of $1,260, and I'm looking for $1,350, and maybe even as high as $1,500 this year. I'll be even more aggressive next year.

Legendary commodity trader Jim Rogers reiterated his $2,000 price target for gold after economist Nouriel Roubini made what I have argued was his worst call ever.

High-profile gold expert Jim Sinclair, chairman and CEO of Tanzanian Royalty Exploration (AMEX: TRE  ) , took price-forecasting to a new level with a $1 million wager (issued in 2008) that gold would trade to $1,650 per ounce on or before January 14, 2011.

Will gold launch to $1,650 per ounce in time to save Jim Sinclair from a verbal whipping at the hands of gold bears? That would require an astonishing near-term move, a parabolic repricing event that in my estimation could be triggered by an acute currency crisis. I think such an event looms, though I am more circumspect about the precise timing. In the meantime, I stand steadfastly and confidently with my carefully selected basket of gold producers: including ultra-persistent value Yamana Gold (NYSE: AUY  ) and junior all-star Northgate Minerals (AMEX: NXG  ) .

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 57 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Endeavour Silver, Northgate Minerals, NovaGold Resources, and Yamana Gold. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (34)

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 August 19, 2010, at 1:19 PM, Revler1082 wrote:

    We're all betting on the decisions of a handful of people.

    If the government were not involved then I would be the first to say that we are entering a terrible deflationary period. And rightly so, as the last decade was characterized by lavish overspending based on perceived wealth.

    However, with men like Bernanke @ the helm, I have to agree with Chris and others on this one; gold will skyrocket.

    People through out gigantic sums, point their finger and say, see, there is so much deleveraging that must occur, there is no way for inflation to take hold.

    It's a piece of paper people, and they own the only printer. There is nothing stopping the fed from printing Gazillion dollar bills, and throwing them out of helicopters. So as big a number as you can imagine that the world must reel back in, the fed can throw double that number back into the pool.

  • Report this Comment On August 19, 2010, at 1:41 PM, XMFSinchiruna wrote:

    To clarify my own outlook for gold, I have maintained a consistent $2,000 price target publicly since 2007 (with gold below $800 per ounce). I believe the capacity exists for gold to extend significantly beyond the $2,000 mark, but I will update my conservative target price only in due time.

    If anyone is wondering how I voted in my own Motley Poll, I selected option 2: that gold will reach or surpass $1,650 before the end of 2011.

    I generally avoid placing specifically timed predictions on what has been a very gradual multi-year, secular repricing event, but I do think that next major move will be a powerful one ... and that time is fast running out for relatively inexpensive gold.

    Please share your own thoughts below, and please also join the discussion on my CAPS blog:

    http://caps.fool.com/Blogs/tomorrows-parabolic-surge-in/4358...

  • Report this Comment On August 19, 2010, at 3:04 PM, outoffocus wrote:

    I>>f anyone is wondering how I voted in my own Motley Poll, I selected option 2: that gold will reach or surpass $1,650 before the end of 2011. <<

    ME TOO!!

  • Report this Comment On August 19, 2010, at 3:05 PM, outoffocus wrote:

    My question is how did you get 127 responses to the poll and only 12 recs? Are we using government math here?

  • Report this Comment On August 19, 2010, at 3:51 PM, pawl442 wrote:

    I believe there are a few reasons gold will hit the $1650 mark as Jim predicted. First the obvious reason. The printing press that gives away free money UNFAIRLY to a few chosen financial institutions to the detriment of the rest of the country and especially the smaller and local banks. These local banks were the place for small business to get loans to carry them over, or start-ups. As we all know it is small businesses that employ most of the workforce. (Was it intentional that these banks were excluded in the financial bill? Was it political to make the majority in congress look bad?)

    Also I believe that the huge majority of the jobs that were off shored, will NEVER return. Not while the tax codes reward companies for off shoring and no one it seems, will convince (or allow) Obama to raise tariffs on imports from companies and countries that pay less than $1/hr wages. 9% to 10% unemployment may become the norm for years and years to come. Further scaring and discouraging the electorate and workers from investing in securities and 401K's and the like. Leaving GOLD and gold miners the default choice. Silver even more so.

    The boost though, IMHO, will be the midterm elections. The media, (Fox in particular) and the right wing talk show hosts, along with the Fox created Tea Party extremest, have many of the electorate believing (and wrongly so) that Obama and the Democrats have caused this great recession. This has caused such an unjust, psychological fear of the Democrats holding on to power, that if they do, people will run from the markets. This I believe, combined with the overblown rhetoric and pumped up fear of our deficit, will be the catalyst that starts the expected downward spiral. A self fulfilling prophecy, if you will. Of course the deficit is a big problem and NEEDS to be dealt with. Not right now though.

    I really didn't want to bring the politics into this but it IS the politics and the rhetoric causing allot of the fear. We all know that Fear and Greed are a major factor of the decision making in the securities markets. I find it most distressing though that much of the fear is contrived in this case. Like I said self fulfilling. But a great reason to buy GOLD and Silver and maybe into a well researched hedge fund.

  • Report this Comment On August 20, 2010, at 12:13 AM, ajstocks wrote:

    pawl442

    I agree the current recession was not solely caused by the Democrats but they have controlled the house, the senate, and the white house for more than 18 months and have done little to assuage the fears of people concerning the economy. Obamacare will lead to higher costs for businesses and individuals, financial reform will lead to higher banking costs across a wide spectrum of financial transactions, and the expiration of the Bush tax cuts will lead to higher taxes for individuals and businesses. (So much for not one dime of tax increases on the middle class.) So I agree on this point, yes politics is driving the fear. Any one of these would be difficult in good economic times, but all three unfolding simultaneous in an economy struggling to recover will eventually be devastating. Yes, the sky is (going to be) falling.

  • Report this Comment On August 24, 2010, at 4:11 PM, ChrisHastings131 wrote:

    debt bomb=gold higher

  • Report this Comment On August 25, 2010, at 12:21 PM, philkek wrote:

    Thanks MF and other fools. Good article and thoughtful comments on a golden opportunity. I have some gold in my teeth and will probably sink my teeth into some more gold soon. In my opinion gold will reach a "top" ( $1650.?) before the end of 2011. Fool on for profits.

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