Gold - Where From Here?

Gold broke to all time highs this week and along with silver look firmly entrenched in a secular bull market.  The gold bugs see gold at $2,000 or more an ounce and the gold haters see it as another bubble and one that will burst soon.  So who will win?  It is my humble opinion that both are going to be right, however to remain short gold right now is suicide.

A look at what drives gold prices is in order.  Over the years gold has been known as a hedge against inflation and dollar weakness (as you have seen in previous blogs these two go hand in hand) and as an indication of fear.  Fear both for markets around the world collapsing and fear of change.  Certainly all of these factors are at play in the current market environment and so the gold bugs expect gold to continue to press to new highs for the foreseeable future.

The bear argument is that you cannot eat gold, you cannot use gold for anything other than as an ornament or as a piece of jewelry and so gold in essence is a useless store of wealth.  People dig it out of the ground, collect it and let the dust settle on it but in effect there is no value to it other than that perceived by the market.  As the market is fickle it is just a matter of time until the metal falls precipitously taking with it another set of gold bug dreams.

Certainly ever since man discovered the precious metal centuries ago, there has been a fascination with the metal that surpasses any true logic.  However that fascination has not ebbed in hundreds of years and I do not foresee any change to this attitude any time soon.  Gold is held widely and the central banks of the world continue to stockpile the metal.  The simple laws of supply and demand mean that the price should continue to appreciate for the near term.  Added to this is the fact that while gold has moved to all time highs there has been little fanfare regarding this price.  Previous bubbles have typically been met with much press while this gold rise garners little attention.

I still do not see the crazy hysteria associated with a bubble.  Typically there is the end game where everyone talks about gold, buys gold and the price rockets into orbit climbing to new highs on increasing volume daily.  This is not happening so for now I believe that the price of gold and silver will continue higher.  Furthermore as the dollar continues to weaken there will be continued demand from central banks to hedge against the move and increasingly they are turning to gold.  As such the fundamentals that drive gold higher are in place and I expect those to remain intact for at least the next six to twelve months.

That said, once gold mania is rife it will then be time to exit any gold positions and look for a way to short the commodity.  One thing I will warn is that bubbles can take prices to levels that no-one would ever have believed.  This is a dangerous place to be short as many a trader has lost his shirt trying to pick a top.  Rather wait patiently on the sidelines until the market is clearly in a downturn before initiating any short positions.  Believe me there will be plenty of time to make money betting against gold once the bubble bursts.  You do not have to try to time this at all.

So for now I believe that gold will march higher.  I see that the price is being based on as solid a foundation for gold as I have ever witnessed and I would expect that to remain intact.  Outside of the commodity trade I am skeptical of the market and see no reward to risking your investment dollars so as always if you need a place to park some cash let me know and I will provide you more detail on my fixed rate deposits.