GOLD ABOVE $ 1,000 : INDICATIVE OF AN IMMINENT MARKET FALL ? / SEEKING ALPHA ( RECOMMENDED READING )

Gold Above $1,000: Indicative of an Imminent Market Fall?

by: Peter Cooper

September 08, 2009

Gold prices sprinted past the $1,000 an ounce mark this morning, and silver climbed even faster to approach $17. But this might also be taken as a warning that investors are about to shift out of stocks which are looking very overbought.

Shares have enjoyed a huge rally in most markets since the lows of March and have been riding for a fall for more than a month. Last week investors also ominously moved money heavily into bonds, depressing yields, and the gold and silver price surge may represent another shift to risk aversion.

$1,000 barrier

Will the gold and silver price rises hold this time? Gold has challenged the $1,000 barrier several times over the past year only to fall back.

If global stock markets now do suddenly take a tumble, correct or crash then precious metals are going to be sold down heavily to meet margin calls, although that will depend on how the players have positioned themselves after the experience of last year.

If that happens it is a great buying opportunity for the precious metals, and even more so for their shares which are leveraged against the ups and the downs of the underlying metals. For the really brave this could be the last big chance to buy junior exploration stocks at bargain levels.

Real gold bugs will be saying that gold has passed $1,000 and that the only way is up. True, it could be that gold surges higher to $1,200 or more over the next couple of weeks and then has a correction and still stays above $1,000.Parabolic stage?

It certainly will not be a straight line upwards unless gold has entered its parabolic phase and speculation in the yellow metal is not nearly universal enough just yet for that to happen. But it could be starting. The encouragement being given to 1.3 billion Chinese to invest in precious metals does look like the start of this ball rolling.

So if you are not in the precious metals market it is perhaps high time to buy some gold and silver, although for gold and silver equities there might be a better opportunity to come in the market correction that looks inevitable after the 50 per cent plus rallies. Indeed, the very strength of the gold price today is a portent of near term stock market weakness.