by: The Inflection Point
September 09, 2009
As gold flirts with crossing the psychologically important 1000 price level, not surprisingly, numerous predictions have popped up, all of them seemingly calling for a big breakout and move higher by year-end. Yet, nobody seems willing to offer what most investors really want to hear: specific predictions on how high Gold will go and how long will it take to get to these price levels. 
With this perspective in mind, we thought it would be helpful if we gave some projections on where we thought Gold may be headed by next year and then over the next 5-7 years. So, without further adieu, here are our thoughts:
1200 by Year End
In the very short-term, Gold has broken above key resistance in the $970-980 price range and is now in position to break above $1000 and its all-time highs of $1025. Of particular importance, Gold has held steady in the $1,000 price range after big gains last week, reflective of a strong market that has sellers satiated and buyers anxious to join the fray.
Most importantly, sentiment as measured by The Hulbert Gold Newsletter Sentiment Index, is very skeptical that Gold will have a successful breakout. Registering a 25% reading late last week, this Sentiment Index is at much lower levels than the readings seen in the past (high 50s/low 60s) as Gold was near all-time highs. From a contrarian point of view, with the crowd betting against a move higher, this bodes very well for Gold’s chances in here.
From a seasonal perspective, September has always been Gold’s best month of the year. Combine this with Gold’s seasonal tendency to continue moving higher into the year-end and you have the ingredients for a quick 20% move to the upside.
Why only 1200? Well, for one, stocks will continue giving Gold competition between now and year-end. Look for continued momentum to flow into equities as money managers chase equities higher in hopes of meeting their benchmark for the year. This in turn will slow Gold’s ascent, but only for so long.
As we move into 2010, additional catalysts will emerge to help usher in a climax run in Gold to levels previously thought reserved for the S&P 500 and the Nasdaq indices.
1500 in 2010
As the calendar turns to 2010, expect the economy to become susceptible to a possible “double-dip” recession. With the odds of a “double-dip” recession high, do not be surprised to see additional quantitative easing efforts unveiled by Fed Chairman Ben Bernanke, who will stop at nothing until the economy gets back on track. Ultimately, there may even be a need for a second stimulus plan next year (with much of the first stimulus money not being spent till 2011).
Add it all up and the odds are very high that you could see the dollar have a huge leg-down early next year, an event that would be sure to catalyze a climax run in the Gold ETF to $150 and a jump in the Spot Price of the commodity to $1500.
Not surprisingly, this would coincide with price action that has been seen throughout this secular bull market in Gold. A look at the 5 year chart of the ETF shows a number of “measurable upside moves” after it has emerged from long basing patterns:
With this perspective in mind, we thought it would be helpful if we gave some projections on where we thought Gold may be headed by next year and then over the next 5-7 years. So, without further adieu, here are our thoughts:
1200 by Year End
In the very short-term, Gold has broken above key resistance in the $970-980 price range and is now in position to break above $1000 and its all-time highs of $1025. Of particular importance, Gold has held steady in the $1,000 price range after big gains last week, reflective of a strong market that has sellers satiated and buyers anxious to join the fray.
Most importantly, sentiment as measured by The Hulbert Gold Newsletter Sentiment Index, is very skeptical that Gold will have a successful breakout. Registering a 25% reading late last week, this Sentiment Index is at much lower levels than the readings seen in the past (high 50s/low 60s) as Gold was near all-time highs. From a contrarian point of view, with the crowd betting against a move higher, this bodes very well for Gold’s chances in here.
From a seasonal perspective, September has always been Gold’s best month of the year. Combine this with Gold’s seasonal tendency to continue moving higher into the year-end and you have the ingredients for a quick 20% move to the upside.
Why only 1200? Well, for one, stocks will continue giving Gold competition between now and year-end. Look for continued momentum to flow into equities as money managers chase equities higher in hopes of meeting their benchmark for the year. This in turn will slow Gold’s ascent, but only for so long.
As we move into 2010, additional catalysts will emerge to help usher in a climax run in Gold to levels previously thought reserved for the S&P 500 and the Nasdaq indices.
1500 in 2010
As the calendar turns to 2010, expect the economy to become susceptible to a possible “double-dip” recession. With the odds of a “double-dip” recession high, do not be surprised to see additional quantitative easing efforts unveiled by Fed Chairman Ben Bernanke, who will stop at nothing until the economy gets back on track. Ultimately, there may even be a need for a second stimulus plan next year (with much of the first stimulus money not being spent till 2011).
Add it all up and the odds are very high that you could see the dollar have a huge leg-down early next year, an event that would be sure to catalyze a climax run in the Gold ETF to $150 and a jump in the Spot Price of the commodity to $1500.
Not surprisingly, this would coincide with price action that has been seen throughout this secular bull market in Gold. A look at the 5 year chart of the ETF shows a number of “measurable upside moves” after it has emerged from long basing patterns:
5 Year Char GLD
Source: Stockcharts.com
(Click to enlarge )
As is clearly seen in the chart above, Gold has a history of consolidating and then advancing after breaking above the highs of these year-long consolidations. When we consider that the current basing pattern is nearly twice as big as the previous two bases, one could make the case that a 50% move higher from here is a conservative estimate.
In summary, the pre-conditions seem ripe for a big move in Gold and in the Gold ETF as we work into 2010. As for five years from now, we feel as though Gold could possibly go a lot higher than these levels, higher than maybe even the staunchest Gold bugs now think possible.
3000 by 2015-2017?
Since equities topped out in the Spring of 2000, they have been in a long, secular bear market that has yet to still see its final days. Typically, equities do not bottom out until mid-single digit valuations are seen in indices such as the S&P 500. Unfortunately, these cycles typically last about 15-17 years from peak to trough, implying another 5 years of sub-par performance from equities.
As we look ahead over the next 5 years, with all of the money being printed worldwide, expect inflation to rear its ugly-head once again, a catalyst that could very well lead to the parabolic stage for Gold’s bull market, where it goes to 3000 or even higher by 2015-2017. While inflation is the main reason for why we feel that we could see such high prices, there are a number of other factors to also consider. These include:
China: Over the next 5 years, look for China to slowly divert its foreign reserves out of Dollar denominated assets and into hard currencies, such as Gold and Silver. This is a huge potential catalyst for precious metals of all varieties. Recently, there have even been reports of China encouraging its citizens to buy into precious metals on their own. Imagine where prices could go if this becomes a trend, where precious metals are bought into by Chinese citizens, as opposed to them buying into equities.
The Public: As our economy fails to return to its glory-days and as the average Joe grows weary of stock and real-estate markets that fail to offer returns of any kind, look for the public to embrace precious metals in the coming years. With the advent of ETFs in the past few years making Gold and other commodities more readily accessible to the general public, look for “Gold-Fever” to sweep the nation down the road.
With 5-7 years to go in the Commodity Secular Bull Market, expect certain commodities to go parabolic in the coming years. Take a look at Sugar, a commodity that has soared this year without much fanfare from the press or public. If history is any guide, the most dynamic gains of any Secular bull are typically seen in the parabolic stage, when prices catapult higher than even the staunchest bulls would have thought possible. All one has to do is take a look at how Oil climaxed last year or the move that the Nasdaq had before topping in the Spring of 2000.
With these long-term considerations in mind, we feel as though it is quite possible that we could see Gold go to $3000 before its Secular Bull market is over. This will take years to play out, however, as it will take time to build the necessary buying power needed for this parabolic climax.
For the time being, we are buyers of the double Gold ETF, DGP,and the Gold Miners ETF, GDX, at current prices and on all, and any, pullbacks in the coming days. While our predictions may be too lofty for the long-term, we like our chances with these trades and predictions for the next 6-9 months.
Stop Loss Points: DGP: $19.65, GDX: $39.
Disclosure: Long DGP, GDX, Calls on GLD.
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