Has the bull market in gold peaked?

published 22 June 2006

I have been asked many times during the past two weeks what I thought the gold price would do in the short term. Will it go up? Will it go down? The answer is 'Yes'.

The gold price will go both up and down, but that is not what you wanted to know. However, I also have a question: What does it matter whether the gold price goes up or down in the short term?

Let's put this all in context. Four years ago the gold price was around $300 an ounce. One year ago the gold price was $425 an ounce. Today the gold price is $545 an ounce. Do you see a trend here? Who cares that the gold price was $570 an ounce two weeks ago? If you feel remorse that you did not sell at the top, sell now. You should still be up significantly, assuming you did not buy your positions two weeks ago.

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But perhaps you don't want to sell. Perhaps you just want reassurance that the upward trend will resume and that you'll make bags of money if you hold onto your gold investments. I cannot give you that reassurance, nor can anyone else. But, as I mentioned last week, my belief is that the gold price is going higher and so I am not concerned. If I think that we will see $1000 an ounce in the next few years it really does not matter to me what the gold price is next week, or next month.

Bull market in gold: what could drive the gold price higher?

Now that I have that off my chest, to answer the initial question more specifically, I think the gold price is going to trade in a range between $500 and $550 an ounce for a while, give or take $25. I know that is a wide range but it would not surprise me to see both limits breached.

We are in a psychological gold bull market and before the gold price can resume its upwards course the market needs to have a reason to take gold higher. The recent spike came fast enough, and it was high enough, to take money out of the market. Now new money has to come back in.

Some of the things that could drive the gold price higher are renewed central bank gold buying, central bank dollar selling or an indication that Ben Bernanke is not going to be able to hold the US economy together, which may not be Bernanke's fault since he inherited a can of worms.

The US housing market has already peaked and that could spell real trouble for the US (and the world's) economy. This month KB Homes reported a surge in cancellations and a decline in new orders during the past two months. Analysts expect KB Homes' orders to be down as much as 10% in its fiscal first quarter that ends on February 28. Toll Brothers (another home builder) reported that their orders fell 29% for the quarter ending on January 31, from a year ago. The US Census Bureau reported that single-family housing starts in December were down 12% from November and 8% from a year earlier. The bureau also reported that the median price for new homes fell 3% for the twelve months ending in December.

Bull market in gold: US economic growth

The basic thesis upon which I place my bets on gold is that the US economy cannot continue to grow at its current pace given the structural problems it faces, such as record personal bankruptcies, record corporate bankruptcies, record personal, corporate and official sector debt levels in an environment of rising interest rates, falling (or at best stagnant) real estate prices and rising energy costs. Consumer spending drives the US economy but consumers spent all they have long ago and now rely on foreign savings to support their lifestyles. If the Chinese and Japanese decide to lend them more money, they could probably keep going a while, but watch out when the Asians decide to reinvest their savings in their own economies instead of using it to subsidize US consumer habits.

This has all been discussed ad nauseam in the past. However, it relates to today's topic because the gold price has run so much, so fast, that I think we need to see reconfirmation of possible future weakness in the dollar in order for gold to go up, or we need to see confirmation that central banks are going to add substantially to their gold reserves.

Until we see something to give the market direction again, we are just going to see volatility in the current price range.

First published on Kitco.com (www.kitco.com)

By Paul van Eeden