Where could gold hit over the next few weeks to months? I see gold hitting the $2,000 easily - and probably a jump to $2,500-3,000 is quite likely over the next year.
Briefly, what is driving gold and what are a few equity market plays aside from ETFs tied to the physical price of gold?
A Few Driving Forces
Why do people have a love affair with gold? Gold is malleable and aesthetically pleasing metal to work with. These qualities work well in the jewelry market. India and China made up 63% of the demand in recent jewelry demand, and depending on the month, the overall jewelry market makes up half of the gold demand. Over the past few quarters, investment in gold has made up one-third of the gold demand.
Then you have other forces that can push gold up: risk of holding fiat currency or even bonds due to political problems ranging from squabbling leaders to unsustainable spending, inflationary pressures against the dollar such as quantitative easing (printing money to artificially stimulate the economy), and central banks buying gold to mitigate some of the risk of paper currency. There are other factors, but you get the point.
But the real fundamental driving force of gold? Fear. As various news releases add sensational flair to global problems, the fear drives people towards what has been called a 'safe haven'... gold.
Where can you put your money where it is safe? Bonds? The banks? Stocks? Property? All of these have shown weakness of late so people naturally turn to what they view as being a protection. But an emotionally-priced commodity can present dangers as well - which we will briefly touch on in the conclusion.
Gold Forecast Price Target
While I put a one year price target of $2,500-3,000, it is difficult to know with any surety. Analysts usually just play it safe and set their targets somewhat above current prices. But I think some added 'shock news' as we toy with another recession and the convoluted problems of the euro-zone, compounded by inflationary stimulus - will see the U.S. dollar-based price of gold go much higher over the next few months.
You can analyze a few of the fundamentals on which to value gold, but my target is largely based on the recent steep climb that is getting dangerously close to setting up a parabolic price move. Fear is the catalyst, and I think resistance will be met at $2,000 based on it being a round psychological number. After some churning when it breaks that - we could see another big run between $2,500 and $3,000. Some people actually forecast the price of gold as reaching $8,000 per ounce - a price that seems very excessive to me. Of course, these targets are simply opinions, and the viewpoints vary greatly.
Exchange Traded Gold Stocks
Some like to play the futures or ETFs linked to the price of gold, but at these high prices I like to play it differently. If gold were to go up $900 per ounce - this would boost prices by 50% of the metal. But depending on margins - the profitability of a company might double or triple, or more. The buy-out value of smaller companies also go up in no small way when gold prices make large jumps. I prefer to scour the equity markets when prices are getting high. Here are a couple ways to play:
If you like to play the bigger exchanges, then you may want to screen for gold stocks with diluted earnings growth over 15% for the last 12 months, with forward growth expectations more than 15% per year, and decent relative price strength. This would give you the stocks AngloGold Ashanti Limited (NYSE:AU) and Randgold Resources (NASDAQ:GOLD) - both of which are ADRs. Then you are also left with Minefinders Corp. (MFN) and IAMGOLD (NYSE:IAG).
Of these four stocks, I would say that GOLD is the strongest on a price chart having broken out past the $100 resistance. AU has resistance at $51 and IAG is in a neutral zone having just bounced off $18.50.
OTC Gold Stocks
But why limit yourself to the big exchanges? Some over-the-counter stocks have high potential also, although they are infrequently covered by analysts. These are often suitable for only extremely small amounts of highly speculative 'play' capital. Most people should not play these illiquid stocks.
- OTCPK:SMXMF - Samex Mining Corp. Prices have recently shot past the $1.40 peak of 2007. Keep in mind that although you are gaining some leverage tied into gold prices, there are few fundamentals to trade on in a stock like this. With a market cap of 188.5 million, prices can make gigantic swings with little warning.
- OTCPK:SGAE - Siga Resources has ridiculously thin volume. They are starting up a test plant as soon as next month. Again, the risk on these low liquidity stocks is extreme and even a moderate amount of investing could create huge problems in price slippage.
One scary thought associated to the quick-paced move of gold is that parabolic moves often have nasty downsides. If investors begin unloading when prices rocket up to $2,500, or wherever it settles, how will central banks react? With the U.S. having 74.2% of its reserve in gold, Germany at 71.4%, Italy at 71.2%, and France at 66.2%, how will they take a panic drop, if that should occur? If they begin to broadly sell in the attempt to preserve necessary sovereign value - it could get very nasty.
While I hope none of this happens - the recent increase in volatility around the world creates an unsettling feeling in the pit of my stomach that a handful of Tums won't take away.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.