Insights & Advice

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Gold hits my price target

I forecasted gold would rise to a price of between $1,200 and $1,300/ounce back in October, 2009 (“All that Glitters”). This week gold hit $1,250/ounce before falling back. I think the precious metal needs a break, call it a period of consolidation, before resuming its move higher.

On the June futures contract, gold could fall to as low as $1,150-$1,160 in the next few months. Silver, another precious metal I like, will also drop along with gold. In the case of silver, my long term price target is between $29-$30/ounce from its present price of $18.25. Whatever you do, don’t chase gold or silver here, wait until they fall back in price.

As I’ve written before, both metals act as a hedge against uncertainty, but like uncertainty, they can be extremely volatile. In the case of gold, investors also view it as an alternative form of currency. The concept that gold represents a store of value has been around since the biblical age. I believe investors are once again focusing on that attribute of the precious metal.

As the Euro (the European currency) plummets to four year lows against the U.S. dollar and other currencies, both gold and silver have risen to record highs.

“But that doesn’t make sense,” argued a client over a sushi lunch at Shira’s, “Gold usually goes up when the dollar goes down and vice versa.”

I agree that correlation held last year and even into part of this year but correlations are not forever. They change depending on how the world changes.

For instance, in times past, gold and silver have provided an inflation hedge against the eroding value of real assets and the dollar. Inflation rose, the dollar declined and the value of precious metals climbed. When inflation declined so did gold and silver. Yet inflation has been tame for several years now. It has moved to the back burner. Sovereign risk, both here and abroad, has replaced inflation as a reason for buying gold and is crowding out all other concerns.

My recent columns on Greece and the other Club Med nations outlined the risks the European Community faces in the sovereign debt arena. The global financial crisis effectively moved trillions in bad debt from the books of the private sector worldwide to those of the public sector as the buyer of last resort. As a result, the risk that governments might fail under the huge debt they have incurred in bailing out the private sector (and with them their currencies) have spooked investors big time.

Although the U.S. dollar has been a traditional safe haven in times of uncertainty, investors know that the U.S. is not without its own risks. Like Europe, we also have a deficit which is now estimated to be 67% of GDP this year and above 70% next year. Investors fear that if left unchecked, our deficit, like Greece, Spain or Portugal, will be larger than our GDP in a couple of years. So investors are hedging their bets right now by buying both the dollar and gold.

Unfortunately, gold can excite passions both for and against the precious metals among investors. Last year, I received a number of angry responses to my purchase recommendation, calling my article “irresponsible” and my forecasted price target “impossible and pie in the sky.”

Despite that, I still like gold and silver and believe there are times when it should be part of every investor’s portfolio; although now is not the time to chase it. Wait for the pullback and then add or initiate new positions, but be prepared to wait. These commodities can back and fill for several months before resuming their move higher.

Posted in A Few Dollars More, Portfolio Advice