When will gold hit $1,400?

A number of people have asked me – how can I be so bullish about gold and be bullish on the dollar? Surely one is the inverse of the other. They can’t both rise together, can they?

Also, we’ve had quite a correction in the gold price since the highs of early December. Gold is off some 15%. So is my price target of $1,400 an ounce for gold this spring still a possibility?

I’ve had a lot of emails about these questions. So in today’s Money Morning, I’d like to take a look at the prospects for gold…

Largely speaking, gold will fall if the US dollar rises and vice versa. But that’s not a hard and fast rule. This chart below shows the fourth quarter of 2005. You can see that, broadly speaking, the two rose and fell together (the red line is the US dollar, the blue line gold).

There was a similar period in early 2009. So being bullish on one doesn’t necessarily make me bearish on the other. What I am bearish on, however, is sterling.

Gold and cash look the most attractive places for your money

It’s crazy to move all your wealth into one asset class. But when people ask me what to do with their money, it’s so hard to answer. Stock markets look like they’ve turned down. We had a rally yesterday, but I can’t help thinking it was no more than a temporary bounce. Commodities look risky at these levels. Real estate – that’s just a question of when, not if. Corporate bonds – we’ve had the rally. Now’s not the time to buy in. And who’d buy government bonds with so much sovereign debt risk?

So that leaves gold and cash, neither of which pay any interest (well, negligible interest in the case of cash). Right now, I think it’s wise to own a healthy mix of the two.

But we all know the problems of our debt levels in the UK. Sterling suffered big falls in 2008, but – like stock markets – I suspect 2008 may have just been the beginning. The UK doesn’t have Germany to bail us out.


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Looking at the chart below of sterling vs the US dollar, there is a trend channel in place (lightly falling) and sterling has slipped to the bottom of it. So it could rally here. But if it breaks below that channel – ouch. $1.57 was a key low and we have broken below that.

But while sterling looks very risky in the short-term, the euro clearly isn’t much better. As for the dollar, I’m medium-term bullish because I expect the next liquidity crisis to result in a rush to the reserve currency. But in the longer term that’ll just result in governments printing more money. The yen is also flawed, with the Japanese government hugely indebted. So is it any wonder I advise investors to hold gold?

Will gold still hit $1,400 an ounce by the spring?

So what about my target of $1,400 gold by this spring?

I arrived at this target based on a repeating pattern that gold has made over the past five years or more. Gold makes an up-move of some six to nine months, usually from a summer low, followed by a year to 18 months of consolidation. Then another up-move begins. Roughly halfway through each up-move, we get a correction of around 10%. Below is an illustration of what I’m describing:

We may just have had the mid-move correction. But its rather lengthy duration is of concern. I suggested in a previous Money Morning (How high can gold go?) that an ideal scenario would be for gold to go back, test its old high around $1,030, and bounce off it.

We briefly retested it on Friday and gold bounced off it like a kangaroo. But any subsequent re-test must hold. If my spring target of $1,400 is to be reached, it’s imperative that the $1,000 to $1,040 level is not breached.

As well as being the old high, this is the level at which India’s central bank bought its 200 metric tonnes. Both technically and fundamentally, there is a great deal of support there. I imagine many traders will cover shorts between $1,030 and $1,050, while many others will have buy orders at those levels. But they will also have stops – i.e. they could sell again – just below $1,000. So the price could fall pretty quickly if $1,000 doesn’t hold.

If it does hold, a second up-wave taking us beyond December’s highs to around $1,400 is a real possibility, even with a strengthening dollar – late 2005 proved that. But if it doesn’t, we can forget that spring target for now.

Gold is tied to stock markets for now

Most gold bugs are very pro-free market and anti any sort of government interference. As gold was once a form of money that was to a degree beyond government control, they see it as a contrary investment to suit their own contrary natures. Their ideal scenario is to see gold and gold shares rising, while everything else falls, and currencies lose their purchasing power as inflation strikes.

But that hasn’t happened.

Gold, for the time being, has largely been rising and falling with other assets, be they stocks, commodities or real estate. It is the US dollar that has been the contrary trade. Goldbugs are waiting for the time when gold de-couples and does its own thing. They may be waiting a long time.

The big moves in gold stocks in the 1930s came after 1932, when stock markets had finally bottomed and were rising. In 1979, towards the climax of gold’s last great run, gold actually fell with stock markets in October and November. Gold made its historic high of $850 when the Dow was rising.

In 2008, it was the same. Gold fell with stock markets. Gold and emerging markets then led the subsequent bounce. The difference is that gold fell by less than stock markets and subsequently rallied by more. This post-credit bubble environment is favourable to gold.

This correlation is worth being aware of. What it means is that if stock markets capitulate here – as they could well do – then gold could well go down with them. If that’s the case, then my $1,400 spring target won’t happen. But on the rally out of the subsequent low, it will.

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34 Responses

  1. 10/02/2010, AC wrote

    You mention that we don’t have Germany to bail us out. It’s worse than that according to a hedge fund manager on Newsnight (who regrettably wasn’t given time to enlarge on any of his points); the UK will be expected to contribute towards any bail-outs elsewhere. The Eurozone won’t worry too much about whether we can afford it or not.

  2. 10/02/2010, alex wrote

    This whole UK = Greece thing, I think it’s worth noting in a broad economic/legal/political sense the UK is nothing like Greece.

    Ok we may have a similar % of GDP as public debt, but there the similarity ends. I think you’ll find that the UK economy is of a similar size to that of Germany and France, not Greece or for that matter Portugal.

    You might as well say that a family on £100,000 a year with £10,000 of debt is in the same situation as one on £12,000 a year income with £1200 debt.

    Yes the UK has macro-economic problems ( like all major Western economies ), but a direct comparison to Greece is rather stretching the Doom and Gloom.

  3. 10/02/2010, john bower wrote

    I know it’s hard to see it if one looks too closely ………..but in gold terms ……..the stock market has been falling for ten years and all that time …….since the Washingt0n Agreement of 99 , Gold has been moving in one direction because , like Elvis , SOBER PRACTICES and INTEGRITY as well as SOUND Fundamental Economic policy….. have left the building ………..and THE LUNATICS have now taken over the ASYLUM and are running it into the ground ………….bunch of preppie fraternity brothers on CRACK gone MAD ………….JUST SAY NO TO CRACK (S) (see plumber) MEET MADD COW DISEASE..

    The invisible hand of GREED in the glove of reckless abandon has been down to the barn and let out the FOUR HORSEMEN OF THE APOCALYPSE ……..

  4. 10/02/2010, john bower wrote

    The theater in which you are sitting is on FIRE ….and no one is warning the rest of the participants who are spellbound / hypnotized ( by the talking heads) as it is against the law to YELL FIRE INSIDE THIS THEATER…….WHEN ALL THE PAPER BURNS ……….the group of people trying to flee the one exit door into GOLD DENOMINATED SILVER FIRE PROOF EXIT TO SHELTER of SAFE HARBOR……will cause a bottleneck that you will not believe……

  5. 10/02/2010, JED wrote

    Thanks for great analysis Dominic. I was expensively caught out by the recent fall in gold so interested to see if it holds @ 1030.00 level and am still very bullish on gold. Do you hold any store by the assertions of the gold market being manipulated by central banks leasing bullion which has now been sold on aka John Embry of Sprott Asset Management on Kingworldnews.com interview?

  6. 10/02/2010, alex wrote

    The thin dividing line between insanity and genius is often bought to mind when talking about gold as an asset class. John has just run screaming from his mataphorical theatre as though his very trousers were on fire.

    Whether they’ll be a crowd following him, or just alot of people looking slightly bemused by his antics is something we’ll have to wait to find out. For the time being I’ll keep my seat and carry on eating ‘blue’ chips and watching the show as they’ve reduced the price recently.

  7. 10/02/2010, Adam wrote

    Below is a chart of the USD index since 1972:

    http://www.sharelynx.com/chartstemp/free/chartind1CRUvoi.php?ticker=FUTDX

    As you see the general trend is down but there have been cyclical highs (17 years between peaks) with a U-shape trough in between.

    1985 USD high at 160
    1992 USD low at 80
    2002 USD high at 120 (note that this high is lower than 1985 due to general down trend)
    2010 USD low at 72?
    2019 USD high at 100?

  8. 10/02/2010, Michael Lewis wrote

    If its a hedge against sterling collapse and wealth preservation – would Swiss short dated government bonds be a better bet? I don’t know if Switzerland will really see massive inflation and at least the Swiss bonds don’t have a negative real yield. (Credit Suisse do an ETF).

  9. 10/02/2010, alex wrote

    I would think a decent blue chip stock with a heafty dividend yield, shares denominated in £, but revenues primarily in $ with 90% of that revenue coming from overseas operations would be a better hedge against a run on the £ myself.

  10. 10/02/2010, Factman wrote

    The US deficit will be $1-3 Trillion this year, borrowing will increase by $8 Trillion by 2020 -READ THE US IS BORROWING THE INTEREST IT PAYS ON IT’S DEBT & ROLLING ONTO THE DEBT & IT WILL KEEP DOING IT FOR THE FORSEEABLE FUTURE.
    Watch the dollar collapse at http://www.usdebtclock.org/
    & that’s the world reserve currency for flight to safety !!!!!!!

    Check the fed balance sheet http://www.federalreserve.gov/releases/h41/Current/
    Assets are predominantly DEBT – & US debt at that – inc Fanny and Freddie Mortgages and Maiden lane are assets from the failed Beare Sterns etc – nice secure assets ?

    Check http://www.gata.org – gold and silver are being artificially depressed (stops people noticing how much paper Fiat currency is falling by virtue of detachment – intangible paper currency is backed by baskets of other intangible paper) – the naked shorts supressing silver and gold are reducing. When they clear Gold & Silver will …….

  11. 10/02/2010, FACTMAN 2 of 2 wrote

    China is now the worlds biggest producer of Gold (& it isn’t selling). Since China used the Silver Standard, the population like shiny metal & can now afford to look at Gold (Chinese government encouraging it too)

    All the big easy Gold reserves have been exploited – we are now looking at sparser, deeper and remote reserves (which is also more difficult & expensive to extract). Total gold mined has fallen 7% in last 10 years and demand increasing. A question – who is the worlds biggest gold producer & why would they buy 200 TONS in the market last year.

    The dollar is in terminal decline & the PIGS countries soverign debts will entwine through the Euro Banks like a spiders web.

    Chinas stockmarket ave p/e ratio is 50 – in 1929 the ave p/e peaked at 30 before the crash (ratios still apply & relevant).

    No advice – just a few facts to think over. Physical Silver/Gold versus fuzzy/wuzzt derivative backed paper ETF I leave to you.

  12. 11/02/2010, Stephen B wrote

    Perhaps we’re over-complicating the issue. Gold is a) a commodity and b) a currency. For b), as it cannot be printed, it is a hedge against inflation. The outlook for all major currencies remains highly uncertain – humans don’t tend to like uncertainty – so they will keep buying gold in order to preserve their wealth. The major movements are just beginning – once the general saver buys into this (we’ve had rising awareness amongst retail and private funds already), the price will rise substantially. My parents are retiring this year and buying some (not a lot) gold, multiply this across their generation means great demand.

  13. 11/02/2010, Alex wrote

    If gold is such a good hedge against inflation why between 1980 and 2000 …. a period which saw sustained inflation, did the price of gold fall from $850 to $250? Not the best hedge really. Generally when hedging against inflation you want an asset that goes up not down in price.

    The only real value I can see in Gold at present is that by virtue of being price in $ it is of some use to UK investors wishing to hedge against a continued decline in the £ vs the $. But there are other much better ways of achieving that anyway.

  14. 11/02/2010, Stephen B wrote

    In response to Alex, between 1980 and 2000 there was moderate inflation – but there was also good growth in other investment areas, like stocks and commodities. Currencies were also relatively stable. The situation now is very different – the major economies are in a race to reduce their debts by depreciating their currencies, which will lead to very high levels of inflation. At the same time there will be fewer areas to invest which will pay much in an era of sluggish growth. In such an investment world, gold will continue to shine.

  15. 11/02/2010, alex wrote

    Stocks grew, but commodities had an awful 20 years, oil sank so low that by the mid 1990’s BP almost went out of bust. As for currencies being stable, there were several major shocks springs to mind the ejection of the £ from the ERM. Not to mention several major wars.

    We will see sluggish growth, accompanied by moderate inflation and subdued interest rates, which will make high yielding dividend stocks a far more attractive place to be than gold.

    I was a buyer of gold 3-4 years ago and have since sat on it, to my mind it’s had it’s run. It’s been a while since last years predictions of gold hitting $2,000, $3000, $6000 were being bandied about on MW, $1400 is a more modest target, but even that looks like a stretch at the moment.

    If you bought at $300, even $400, you’ve made a very nice 250-350% return, to get the same again you’d need gold to spike to $6000 from here. Not going to happen (anymore than house prices are going to double again ). Time to look elsewhere

  16. 11/02/2010, IJ wrote

    I agree with Alex. I accept many of the arguments regarding uncertainty on currencies and so on… but what’s so certain about gold? If we’re really heading towards Armageddon, as so many commentators seem to be saying, what use will be gold be then? I can’t buy the “store of value” argument, but just see gold as another speculative asset, heavily correlated with, but lower beta than, other commodities and several emerging market equities. Hence, like Alex I think there are better alternatives as investments (even some bank equities!). Stephen B, you seem like so many others to have lost faith in equities as an asset class. But there are other parts of the world – ones that are becoming increasingly important – that are much less in debt and have the potential to grow a lot, aided by credit growth (which needn’t always be an evil force as we all seem to view it now). I wonder whether the authors and posters on this site might be overly locked into this bearish paradigm.

  17. 11/02/2010, Factman wrote

    Fiat paper currencies are worth ? – pick one and value it !

    In a semi/total economic collapse – ideal things to be physically invested in food/water/fuel/booze/fags – all either essential or tradeable.

    Asside from direct barter you need something as a medium of exchange which is recogniseable and seen as of value, to trade/exchange on. Gold/Silver/other precious metals/diamonds etc.

    In the above scenario or social dissorder/disaster & you personally had food spare to barter/trade would you :-
    a) swap for $1100 in notes
    b)Swap for £700 in notes
    c)Swap for a share cert
    d)Swap for a print out of a nominee held share portfolio
    e) A 1 oz Gold bar
    f) 100 oz of Silver
    g) X of uncut diaonds

    Governments are buying it, Billionaires always hold it & even Warren Buffet has a good stash of it.

    Doesn’t make rational sense, but in a crisis, disaster, martial law – what does !

  18. 11/02/2010, Factman cont wrote

    Ask your Granny – during the war and rationing – what could you get with Gold & Silver.

    On Haiti – day 2 – List what you would like to have in your total possessions contained in your 2 carrier bags.

  19. 11/02/2010, Royce wrote

    I began buying gold at the spot price of $464 in September 2005. Many people told me it wasn’t a good hedge against inflation. They kept telling me that in the 500’s. They kept telling me that in the 600’s. They kept telling me in the 700’s. They kept telling me in the 800’s. A few were still saying that in the 900’s. At 1000+ most had been silenced. At 1100 some were asking me where to buy. At 1200+ I was being asked to accompany them to coin shops. Enough said! Those are the facts. Ignore gold now at your own peril, but quit this silly nonsense about it not being a reliable store of value. The facts speak for themselves.

  20. 11/02/2010, alex wrote

    Royce. I was/am in the same position as you, however whereas you appear to expect gold to continue to perform for the next 5 as it’s done for the last 5, to me it is like UK houses now fully valued and set to fall.

    Yes there are now or have been ads on TV trying to persuade the gulible to part with their old gold jewelry for a fraction of the spot price, in just the same way as at the peak of the property boom Inside track were all over the place persuading the gulible to buy naff city centre box flats as a ‘discount’.

    Both to my mind marked the top of the market. Not the next stage up.

    As for armaggedon, social breakdowns etc, firstly it’s not going to happen, secondly if it did a cross bow and some tins of beans would be more use then a lump of metal with no actual uses.

  21. 11/02/2010, IJ wrote

    Royce – congratulations. A good call. But the way I see it, the price has gone up because there have been more buyers than sellers, not because it’s a hedge against inflation. If it were a hedge against inflation, wouldn’t it have gone up by less? Also, as Alex says, we’re not talking about past performance but about the outlook for gold now. With the benefit of hindsight, the point of absolute pessimism on gold, hence the time to buy, was back around when Gordon decided to sell. We call him an idiot for doing so. No doubt he was. But I don’t remember that many people saying so at the time. Now they do, and now I get emails from friends asking how to buy it. I guess my point is that gold is a) potentially overbought already and b) hard to value. I can’t make an educated guess on what the price should be. The price of gold will probably go much higher, and then collapse. But I just don’t know.

  22. 11/02/2010, Factman wrote

    Please visit http://www.gata.org
    a) you will know why the price has gone up
    b)you will know where it is going next & why.
    c)if you have a read around the site, you will now a lot more.

    Or stay in the dark and keep guessing.
    Warning – ignorance can be bliss.

  23. 11/02/2010, Gazkaz wrote

    Just a note for Alex – on your latter point. When a US senator was recently asked, the best thing to invest in at the moment. Response a cellar full of food and water – Oh & a gun.

    PLEASE CHECK OUT what Pres Bush did in his latter days too.
    1) Overturned 100yrs+ of US constitution by giving the US PRESIDENT SOLE POWER TO INTRODUCE MARTIAL LAW.
    2)For some unknow reason – he also made a minor ammendment in that “US troops can now be used against US citizens to quell public dissorder”. Check it out.

    Probably nothing really, just tidying up before he went, to fill in the time.

  24. 11/02/2010, alex wrote

    As I said, if armaggedon really is coming I’d rather have 30 acres of woodland, with a big fence, some large dogs, a crossbow and a few pigs for protein… than a few kilos of a not very useful metal buried in my back garden.

    I do actually have a woodland in my SIPP, it’s not because I think the world will end though, and I don’t have a crossbow. It’s just a nice place to go camping. Although top marks are due to MW for running in a feature on buying woodlands about 3 years ago sicne when it’s doubled in value. Thank you MW.

  25. 11/02/2010, GAZKAZ wrote

    Factman – dynamite stuff, wow
    Just read gata.org, they are the real deal. I thought some of the other articles I read were just conspiracy stuff. When I look at the other link you give for the US Debt and that the worlds 8th biggest economy is bankrupt with the banks about to foreclose, I was gobsmacked to find that was California and that even the FED won’t help. $ for safety ?
    Upsetting Arnie the Terminator might be why Mr Bush did what he did (just checked that out too – wow).Think I will join Alex with his beans etc.

  26. 11/02/2010, Factman wrote

    Alex, Woodland – if i supply the Cabin & dog, can you manage the fence.
    Gazkaz – can you manage the pigs, beans & crossbow.
    All we need then is Mr Swartz……….er and a tin opener.

  27. 11/02/2010, Stephen B wrote

    Been away from the net (reading Schumpeter) so missed some of the posts here. I think Alex is spot on highlighting that to replicate gold returns over the last few years, it would have to go near 6000 – this is pretty unlikely, and even I would get a nosebleed then and probably have bailed out. To clarify some of my points as to why I think a) this bull market has a good five years to run and b) why gold will continue to grow because of the specific inflation before us.
    (continued in next post)

  28. 11/02/2010, Stephen B wrote

    the western consumer is deleveraging, so stocks overall will perform badly; like alex says there will be other investment opportunities, probably abroad and in things like nuclear, but these are somewhat exotic to the mind of the saver – they will prefer gold, for at least 5% of their savings
    - these savers are beginning to realize that western governments are in a process of competitive devaluation to cut their debts; the B of E has today said there will probably be more QE; we have so far had no inflation, then a perception of some inflation; next will be some inflation, then the perception of more inflation. This is a government-induced form of inflation, based upon political failure; it is not the economic-based inflation of the last twenty years. As it is to do with cutting debts, competitively against other currencies, it effectively knows no bounds.

  29. 11/02/2010, royce wrote

    To Alex and IJ,
    I agree that farmland, canned food, and guns are important for a end-of-the-world type scenario. I never said I didn’t acquire those too. The point however is that as long as there are two people left standing there will be a need for a medium of exchange. Gold and silver simply provide a undiluted store of wealth that can’t plunge in value because some banker defaults on OTC derivatives or something else I can’t control. Regarding the comment that they (gold/silver) are at the point the peak I’d say, “Heck, you may be right”. The feeling I get in my gut, however, is that Bernanke &Co. will quantative ease into eternity simply because they have no other choice. One last point: If it was just gold and silver surging in value I’d be more skeptical. I’d perceive it to be a bubble. But look at cotton, tin, lead, grains, etc. Where is this deflation we keep hearing about?

  30. 11/02/2010, Factman wrote

    US 30yr T Bond just flopped-looks like the East are easing back.
    The mystery “Direct Buyer” in evidence gain, taking up around a whopping 25%. Probably US Fed related; trying to prop up (sorry Regan authorised them to “intervene” to provide stability), no we will stick with prop up, as midway between “intervene” & “manipulate”, the US bond market, sagging under the sheer weight of issuance.
    And ! – the Fed says it wants to move towards increasing rates at some point – like the markets will give them a choice !

    It’s like Iran – once you have tried to be paid In EUROs for your oil instead of Dollars, the DI IS CAST.

  31. 12/02/2010, Factman wrote

    Saves a lot of typing – excellent piece (long but to the point)

    http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/

    The only part I take issue with “the people who made all the money not being aware of the consequences and risk”

    Same families using same system for 100yrs+

    Consequence – they increase their wealth & wipe out everyone else.

    Risk – it’s getting a bit too obvious.

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