Gold futures' next stop: $800, then $2,000 or bust?
by Myra P. Saefong
Date: September 20, 2007
Prices up 11% in a month; analysts see correction ahead, then more gains
After reaching their highest level since 1980, gold prices may be due for a correction soon, but that could help feed what many expect to be a long-term boom -- to $800 and then inflation-adjusted highs past $2,000 in the years to come...
"I do not believe today's prices are lofty," said Scott Wright, an analyst at financial-services company Zeal LLC. "Gold would have to exceed $2,200 an ounce in today's dollars to match the all-time real high achieved in 1980."
Still, gold futures have jumped around 16% after ending last year around $640. They climbed 11% in just the last month alone.
"Demand is continuing to rise and producers are continuing to struggle in bringing supply to market," said Wright. "With the dollar bordering historic lows, gold's monetary prowess is continuing to grow. [And] in the near term, we are entering into a seasonally strong time for gold."
Given all that, there's hardly one person who would argue against higher prices for gold in the longer term.
A few are brave enough to predict a short-term pull back in price.
Issue at hand
The most immediate influence on gold prices this week has been the Federal Reserve's decision Tuesday to cut its overnight interest rate target by a half percentage point to 4.75%.
With the cut, "the Fed revealed that it has no interest in defending the dollar or containing inflation," said Peter Schiff, president of Euro Pacific Capital. "This kind of irresponsibility is all gold needs to move higher from its current levels." ...
In the past, falling U.S. interest rates have been bearish for metals, said Michael Widmer, a metals analyst at Calyon, in recent research note... In the end, it would take a "change in attitude from the investment side of the market" to send gold prices significantly lower, said Darin Newsom, an analyst at DTN.
A big stretch
We're really talking about something short of a miracle for gold prices to drop from their current levels but the possibilities are nearly endless, most analysts said... [I]nvestors "should not hold their breath in anticipation of these extremely remote possibilities taking place." Instead, it's more likely that these factors may deteriorate further...
Retreat on tap?
Even with strong market disbelief for any bearish scenarios for gold, many analysts still agree that gold prices could see a temporary pull back.
Gold has "over shot on the upside and is over bought," said Ned Schmidt, editor of the Value View Gold Report. He expects to see a correction to the $690-$710 area.
After that, "we can start talking about $800 gold," he said.
The Fed's actions this week provides "confirmation of the weakness of the Federal Reserve, and makes $1,400+ gold like shooting fish in a barrel," Schmidt said.
Also, "the price of gold is on trends established by two decades of inept monetary policy in the U.S. -- such long-term trends are not easily reversed," he said.
Rewarding risks
For now, be warned of rough waters ahead for the gold market. But those who stick out may be finely rewarded...
Don't expect any major shake out in prices until you see gold test the $800 resistance level, said Ralph Preston III, an account executive at San Diego-based Heritage West Financial Inc.
But you won't have to wait long. "Shear momentum and the perception that the Fed will abandon the buck as it flirts with its all-time low ... will propel gold to $800 by the end of the year," he said.
O'Byrne said the most likely scenario for gold would be a retest of support at $700 in the short term before challenging $800 before the end of 2007, and the record non-inflation high of $875 reached on Jan. 21, 1980, early in 2008.
Peter Grandich, editor of the Grandich Letter, said gold would see a steady rise in stages, with the next stage trading anywhere between $735 and the old high around $875.
And analysts are already talking about what's beyond that.
Gold may reach $800 this year and Euro Pacific Capital's Schiff said he believes it'll surpass $1,000 next year.
And "unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-djusted high of nearly $2,000 per ounce within this decade," he said.
Levels above $2,000 would account for 27 years of dollar devaluation, said Peter Spina, an analyst at GoldSeek.com, and while that gold price level is "becoming more likely as the current situation evolves," it's likely years away.
One thing to be sure of, "years down the road $700 gold will seem cheap," said Zeal's Wright.
The above information has been redacted from the article as it originally appeared on MarketWatch.com on September 20, 2007.
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