Gold Prices Should Continue To Rise In 2008
2008 is off to quite a start. In the first 10 trading days the Dow has fallen more than 5%. The Nasdaq and S&P 500 haven’t fared much better.
Gold, however, is up more than 6%.
If gold were to continue increasing like this for the year it would be worth more than $2,200 per oz. Now I’m not suggesting that gold is going to more than double this year. That would be ridiculous. However, I do believe that gold is heading much higher, perhaps up to $1,100 before the year’s out.
As many of you know that we’ve been bullish on gold for some time. In early 2007, we recommended gold at $700 per oz. A few months later we said it again in “3 Reasons to Buy Gold – Now!” with gold at $800 per oz.
Today gold is over $900 per oz.
Now, let’s go over the reasons for our continued bullishness on gold.
Reason #1: Fed Rate Cuts
A few macro factors are driving gold higher; bear with me as I sum up the reasoning.
The Federal Reserve Board meets January 30. The markets are certain that another rate cut is in the cards. Every time interest rates are cut the US becomes a less attractive place for investors. Quite frankly, higher yields are available in other parts of the world.
As money flows out of the US it forces the dollar lower. As Harry Browne, the renowned financial author once said, “When paper money systems begin to crack at the seams, the run to gold could be explosive.”
Reason #2: Rising Inflation
The US economy is riddled with inflation. Everything costs more today including food, gas, insurance . . . everything except our homes. The purchasing power of our currency is falling, which is never good for the economy.
We haven’t heard much on inflation in the news until recently. Like a dog with a new chew toy you can bet that the news media will start scaring us with inflation stories. Remember, in an inflationary environment, gold is a natural hedge. As news of inflation becomes more widespread, knowledgeable investors will flock to gold driving up the price.
Reason #3: Reduced Supply
The Wall Street Journal recently highlighted the amount of gold held by ETFs. These funds have more gold stockpiled than some central banks. This news is not surprising as investor focus on the commodity has risen sharply.
What the Journal failed to recognize was the fact that these ETFs are physically removing gold from the markets. Every commodity is priced according to its supply and demand. If supply goes down the price goes up. Gold ETFs are helping drive prices higher as they decrease supply in the “real world”.
Reason #4: New Demand From China
“China Gold goes limit-up on debut”
This headline from The Standard says it all. In the US we take for granted our developed markets. Just a few days ago China opened their first market for gold. Contracts were sized so retail investors could participate in the market. The result was nothing short of spectacular.
Gold surged higher, and approached $1,000 per oz. Now, 1.3 billion new people have an easy way to buy gold. We’ve already seen how the Shanghai stock market moved when it was opened to the general population. To say it went up would be a gross understatement.
Might we see the same in gold?
So, with the influence of a declining dollar, the prospect of inflation, reduced supply from the growth of gold ETFs, and the anticipated demand from the new market in Shanghai – gold would seem poised for further gains. I would look to make selective investments on pullbacks, and always use proper position sizing and trailing stops.
My favorite way to play the gold market is through gold ETFs. These ETFs simply purchase the commodity in the open market, and hold it for investors, giving them direct exposure to gold. StreetTRACKS Gold Shares (GLD) is one of several.
Category: Currency Trading
