Plenty of Room for Gold to Go Higher

There is talk in the gold market of a ‘double top’ and evidence of climactic selling in India. But when I look at the gold chart it reminds me very much of the 2006 top and how investors got the jitters at $730.

Since then we have been to $1,000 twice, and have now slipped back to the mid-$900s per ounce. The danger is getting short-term selling cycles muddled up with the long-term cyclical bull market that looks as deeply entrenched as ever.

Bubble trouble?

Gold might be the last great bubble of the 2000s, along with bonds which are also wilting a little now, but there is not a climactic price spike on the chart worthy of the name.

Oil last year gave us a reminder of how markets behave at the extreme phase of a bubble. The doubling of prices in a matter of months was an alarming signal that should have served as more of a warning than it did for many investors.

There is no such price spike evident in gold. You look at the chart and it is a gentle upward curve over the past decade with a little bouncing around in the price over the past year.

Base-building

That could be the volatility often associated with a price peaking, but then this is also the kind of base-building pattern often seen before a major price advance, or indeed a spike.

Macro-economic conditions are not really that great for gold at the moment with deflation and not inflation evident. It has to be said that if gold can hold its own in this environment - largely as a safe haven and guarantor against future inflation - then think how it will rise when conditions change in its favor.

The pumping of huge amounts of money into the global financial system by central banks is the classic formula for future inflation, and the idea that central banks will be able to successfully manage this rush of liquidity is so obviously untrue it is almost fraudulent to suggest it.

Price spike

The golden scenario for the gold price is thus being set up, and further problems in the financial sector and a slumping stock market can only increase the safe haven appeal of gold. A few nasty shocks could yet power gold up to $1,200 over a few trading sessions.

Indeed, is there any current scenario that looks bad for gold? Even in an all out deflationary collapse, gold would hold its value better than probably any other asset, and decline less in relative terms.

The argument then of not to hold gold just does not make any sense at the moment, and the case for increasing investment allocation to the yellow metal, and associated assets like silver and precious metal stocks is overwhelming. That ought to keep the price up and send it higher.

Comments

[MarvinMBA:]

Certainly gold has the color of red and when our economy turns red does that mean we have to turn to the red stuff? I think in the long run investing in productive assets is where the opportunities are and I believe that Gold is going to turn out to be another bubble. When the average guy that might have a few bucks left in his IRA if he is lucky starts talking about gold, its time to get out....MarvinMBA

Mar 01 03:19 PM

[Mad Hedge F...:]

and th Panic buying of gold coins continues to overwhelm coins dealers around the world. According to the Financial Times, the US Mint sold 193,500 American eagles in the first seven weeks of this year, more than it sold in all of 2007 at prices 40% lower. Retail investors fleeing paper assets, like plummeting stocks and bonds, are paying 5% premiums over face values. The same phenomena is appearing in other countries were gold coins are available to the public. Does this have a toppy feel to it?

Mar 01 06:26 PM

[Gold Barron:]

There is not any "Panic" buying in gold right now. 200,000 gold eagles is nothing in a world of over 5 billion people.

Gold is not in a bubble. The price may drop in the short term to maybe $850/oz. When people use the word bubble they are implying that gold price will go back to $400-$500/oz. Never!

Is anybody expecting any good news about the economy anytime soon? If the economy ever recovers....which it probably will not in the next 5 years....then inflation will be our next crisis. Buy gold and sleep well at night.

Mar 01 06:43 PM

[oneoldude:]

Well, I am one of those people who liquidated all his "productive assets" in his Roth IRA and bought AUY. Those "productive assets" are down more than 30% and AUY is up 60%. Not too bad for an unwashed, uninformed member of the masses.

Now I have a nice buffer for that account looking into the future. And the future of gold seems quite bright in the long term.

The last time I made a trade like this was in the early 1970's when Nixon closed the gold window. I bought actual gold then at $35 per oz (in the form of double eagles) and rode it to $300 per oz. No I did not ride it up to the $800 peak back then. But the profit was sufficient to pay my way through college, law school, a divorce and left me enough to set up my law practice.

Back in the 70's the danger was stag-flation and gold was being held to a ridiculously low price by the open window before the window closed. At that time there was little intervention in the gold market by our Fed and the common cry was that gold was a barberous relic. The trade worked perfectly.

Today there is a great deal of manipulation in the gold market by central banks. We are facing a deflationary future in the intermediate term and a potential stag-flation or outright inflation when prices settle down and industry starts to crank up again. This should be due to all the fiat currency being printed all over the globe. I feel the price of miners does not adequately value the current price of gold given the cost of production, especially in the more efficient miners. Also there is dilution in some miners due to some share offferings among a host of other factors that tug on the price of gold and the miners. So the situation is not as pure and as sure as it was in the 70's.

But it seems to me that the dollar is going to weaken on an absolute basis relative to gold and perhaps other curriencies as well although a relative decline to other curriencies is not necessary for gold to go up relative to the US dollar and all other curriencies at the same time. I also believe that Fed long bonds will carry a higher rate in the future due to all the money being printed and the worsening US economic situation. These seem to be a good bet to me and I will keep my longs in AUY and in TBT (TBT has also been good to me) for the time being. Of course I may change my mind at any time and take profits depending on how the fundamentals seem to have changed.

Good luck all!

Mar 01 09:56 PM

[MartenC:]

Everyone is eager to call the next bubble. I even noticed CNBC suggested gold was in a bubble last week! (I strictly watch CNBC for contrarian ideas) Well if speculation and wariness of bubbles is abound, as it should be for some years to come, any potential 'bubble' will be popped before it can be inflated to dangerous levels

Mar 01 10:04 PM

[Tetrapod:]

I agree with your comments, especially regarding CNBC, but I think you're giving us investors a little too much credit when you say that the bubbles will be popped before they can inflate to dangerous levels.
I think "bubble" was one of the most used words last year when oil was going balistic. Yet everyone kept piling in. I don't think we've learned as much as you might hope from this crisis.
I fully expect that gold will become a bubble sometime over the next year or two, but I don't think we're anywhere close to it now. To paraphrase Lloyd Bentsen(former VP candidate): "I've known bubbles, and this, sir, is no bubble".


On Mar 01 10:04 PM MartenC wrote:

> Everyone is eager to call the next bubble. I even noticed CNBC suggested
> gold was in a bubble last week! (I strictly watch CNBC for contrarian
> ideas) Well if speculation and wariness of bubbles is abound, as
> it should be for some years to come, any potential 'bubble' will
> be popped before it can be inflated to dangerous levels

Mar 01 11:51 PM

[Zoltan L. K...:]

Gold has been rising with the commodity cycle for the last couple of years. Now it is rising as a portfolio insurance investment. The return on bonds is quite low and the long term consequence of state interventions in the economy could mean growing inflation. At the moment there is not that much liquidity around so as to cause a buble.

Mar 02 04:21 AM

[SugarDaddy:]

It's just about not worth listening to the media, the world "Bubble" is attached to anything with a current price rise that is in the public eye. Idiot's at CNBC for years have been "Gold Haters", knowing full well it's in the best interest of it's advertisers to not promote the funny yellow stuff.

Mar 02 04:42 AM

[Vuke:]

Bubble fears of gold at $1,000 are unrealistic given the costs to find and mine this very rare metal. With some existing mines reporting cash costs as high as $600 to $700 a "bubbled price" has to have some air space to fall.

Adjusted for inflation gold is nowhere near its all-time high reached in the early 80's. The reality is gold is gradually working its way towards a price that balances costs with sufficient profit to bring new mines to production. That level, given uncertainties in energy and other inputs, may be as high as $1,500/oz. Should inflation emerge in a world recovery $1,500 gold may be seen as a bargain.

Mar 02 07:53 AM

[Cesato:]

I'm sorry to disagree once again, but treating the rise in the price of Gold as a bubble totally ignores strong fundamentals under which Gold has been bought for years. I understand that Gold can go up and down in a broad range, however since 1998 the bubble theory in Gold has not found fundamental support and it fact the biggest correction since 2000 has been to around 50% retracement of the previous year rally. So I'll be carefully watching how the price bounces for USD 900/USD 850 or tries to break through USD 988 in a sustained fashion. Neither gold bug nor gold hater, just gold trend watcher.

Mar 02 08:43 AM

[Mark123:]

come-on now.....you read it..... who are you kidding????

Mar 02 10:11 AM

[User 367844:]

There is no such thing in economic history od a gold bubble = it goes upm and down - stupid are selling. Investors are buying. The stupids run out and the investors amke real money GOLD - not paper. The US $ is paper. It has made gains - but for how long before that buuble bursts and you see £ sterling worth $2 again - not long. But Gold with outdo both currecncies. You know what to wipe with paper. Gold is real.

Mar 02 11:20 AM

[5142152-337:]

theoldude: You have it exactly right! Buy more now! You will be pleased.
Gold Barron: Solid post!
Cesato: Your not a hater, I think you may be OVERanalyzing gold. Its rather simplistic, really. Just accumulate.

Mar 02 12:20 PM

[auto44:]

He loves attention like a little kid. I wouldn't bother to respond to him.


On Mar 02 10:11 AM Mark123 wrote:

> come-on now.....you read it..... who are you kidding????

Mar 02 01:59 PM

[Bundee:]

oneolddude-Congratulat... on your move into, and then out of, gold back in the 70's.

You didn't try to time the market
You didn't act greedy and try to ride the gold price to the top
You decided to sell when you thought it was time to sell
-in the simplest of terms, you had an exit strategy and executed it.

That is the mark of a wise and successful trader.

May we all be as successful in our trades.

Mar 02 05:53 PM

[mr freddo:]

Theoretically speaking, gold should be moving up smartly as our financial markets deteriorate but it hasn't. These days when everything falls in unison are the toughest.

Gold did not perform well today. It fell with the crowd. Silver tried to rally but finally capitulated to the falling market and fell late in the day.

This reminds me of the early days of this bear market when Apple and Google got pounded because? well because they had done well and traders needed cash.

Dow 6700. This is a bad dream right?

Mar 02 09:14 PM

[silver-bullet:]

If recent history is any guide (think 2008), a second wave of deleveraging is happening as mortgages reset, student loans start defaulting and malls are starting to go empty.

I am of the opinion that PMs will go much higher, however now is the time to keep your powder dry. And when you buy, average into a pre-determined position. Most importantly, don't be too greedy, that almost certainly kills you.

Mar 03 07:01 AM

[raytayzmd:]

...hey, Pete, how's your Dubai real estate investments doing:

www.ft.com/cms/s/0/5db...

...oops!...better buy some more gold!

Mar 03 10:53 AM