Can $1,000 Gold Last?

Gold has cracked the $1,000-an-ounce barrier for a second time. The first time, in March 2008, the price fell back to three digits within a couple of days. What about this time?

No one knows the answer to that question, but there are some plausible reasons why the gold price could stay higher longer this time around.

The first reason is one that we’ve discussed before—we are now in what has historically been gold’s strongest season of the year. September is gold’s best month of the year in terms of month-over-month price appreciation, the key driver being jewelry makers stocking up for holiday buying in Asia, the Middle East and North America.

A second reason relates to the weak dollar due to prolonged rock-bottom interest rates and massive deficits being piled up in the U.S. Gold and the dollar typically move in opposite directions, so a weak dollar tends to be good for gold. That inverse relationship is intact so far in September—the DXY dollar index has lost 2 percent of its value so far this month September and on Friday hit a 12-month low, and over the same period spot gold has risen about 6 percent.

A third reason is rebounding interest in commodities overall. Prices for copper, zinc and other metals have seen strength recently. This isn’t surprising, given the growing signs of economic recovery and the dollar weakness.

In addition to these factors, Barrick Gold (ABX) has reportedly purchased more than 2 million ounces of gold and is expected to buy another 3 million ounces to cut its hedge position by more than half.

Many are afraid that a global economic recovery will unleash inflation. Stimulus spending by the Federal Reserve and central banks around the world have added several trillion dollars to the global money supply. This will eventually erode the value of the dollar and other currencies.

There is an opposing fear that all of the stimulus spending won’t be enough to get the global economy out of its sickbed. What happens then? The Fed and others have made it clear that their medicine will be more stimulus spending, which will further devalue paper currencies.

Either way, gold has appeal.

As long as the global economy is transmitting mixed signals, gold stands to benefit as an uncertainty hedge and a store of value. How long the price surpasses $1,000 remains to be seen, but this unusual convergence of factors creates favorable conditions for gold investors.

Disclosure: The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 6/30/09: Barrick Gold Corp.

Comments

[twitee:]

Never fight the FED, but buy GOLD for insurance.

Sep 15 12:26 PM

[Mad Hedge F...:]

ttm Those transfixed by gold blasting through the $1,000 level have been missing the real action in silver. The white metal has soared 57% to $17 since the beginning of the year, compared to only a 22% move for the barbaric relic, an outperformance of almost three to one. I have been a raging bull on silver all year, and on May 7, grabbed you by the lapels and shook you senseless if you didn’t buy at $12.70 (click here for earlier report ). It is nothing less than owning gold with a turbocharger. Silver gives you a nice double play. Its qualities as a precious metal are giving it a major boost from the flight from the dollar, one of this year’s certainties. It is also an industrial commodity, which unlike gold, is consumed, and therefore gives you a call on the recovering economy. If you don’t think this move is real, check out the shares of the silver producers. Coeur D Alene Mines (CDE) has rocketed by 57% this month and is up 144% YTD, while Silver Wheaton (SLW), and Hecla Mining (HL) have also done well. If you want to get set up on buying silver futures, e-mail me at madhedgefundtrader@yah... and I’ll tell you how to do it. To accumulate .999 fine silver dollars for only a buck over spot, or bullion at the lowest spreads in the market, visit mileniummetals.net by clicking here. How long will it take to get to the old high of $50? The Hunt brothers must be grinding their teeth.

Sep 15 02:17 PM