Gold Prices Should Continue To Rise In 2008
The Dynamic Wealth Report
January 16, 2008
How High Can Gold Fly?
2008 is off to quite a start. In the first 10 trading days the Dow has
fallen more than 5%. The Nasdaq and S&P 500 haven’t fared much better.
Gold, however, is up more than 6%.
If gold were to continue increasing like this for the year it would be
worth more than $2,200 per oz. Now I’m not suggesting that gold is going
to more than double this year. That would be ridiculous. However, I do believe
that gold is heading much higher, perhaps up to $1,100 before the year's
out.
As many of you know that we’ve been bullish on gold for some time. In early
2007, we recommended gold at $700 per oz. A
few months later we said it again in “3 Reasons to Buy Gold - Now!” with
gold at $800 per oz.
Today gold is over $900 per oz.
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Now, let's go over the reasons for our continued bullishness on gold.
Reason #1: Fed Rate Cuts
A few macro factors are driving gold higher; bear with me as I sum up
the reasoning.
The Federal Reserve Board meets January 30. The markets are certain that
another rate cut is in the cards. Every time interest rates are cut the
US becomes a less attractive place for investors. Quite frankly, higher yields are
available in other parts of the world.
As money flows out of the US it forces the dollar lower. As Harry Browne,
the renowned financial author once said, "When paper money systems begin to
crack at the seams, the run to gold could be explosive."
Reason #2: Rising Inflation
The US economy is riddled with inflation. Everything costs more today
including
food, gas, insurance . . . everything except our homes. The purchasing
power of our currency is falling, which is never good for the economy.
We haven’t heard much on inflation in the news until recently. Like a
dog with a new chew toy you can bet that the news media will start
scaring us with inflation stories. Remember, in an inflationary environment, gold
is a natural hedge. As news of inflation becomes more widespread,
knowledgeable investors will flock to gold driving up the price.
Reason #3: Reduced Supply
The Wall Street Journal recently highlighted the amount of gold held by
ETFs. These funds have more gold stockpiled than some central banks.
This news is not surprising as investor focus on the commodity has
risen sharply.
What the Journal failed to recognize was the fact that these ETFs are
physically removing
gold from the markets. Every commodity is priced according to its supply
and demand. If supply goes down the price goes up. Gold ETFs are helping
drive prices higher as they decrease supply in the "real world".
Reason #4: New Demand From China
“China Gold goes limit-up on debut”
This headline from The Standard says it all. In the US we take for
granted our developed markets. Just a few days ago China opened their
first market for gold. Contracts were sized so retail investors could
participate in the market. The result was nothing short of spectacular.
Gold surged higher, and approached $1,000 per oz. Now, 1.3 billion new
people have an easy way to buy gold. We've already seen how the
Shanghai stock market moved when it was opened to the general
population. To say it went up would be a gross understatement.
Might we see the same in gold?
So, with the influence of a declining dollar, the prospect of inflation,
reduced supply from the growth of gold ETFs, and the anticipated demand
from the new market in Shanghai - gold would seem poised for further
gains. I would look to
make selective investments on pullbacks, and always use proper position
sizing and trailing stops.
My favorite way to play the gold market is through gold ETFs. These ETFs
simply purchase the commodity in the open market, and hold it for
investors, giving them direct exposure to gold. StreetTRACKS Gold Shares (GLD) is one of several.
•
Gold ($916 per oz)
Gold hit an intraday high of over $916 per ounce. News that the new
Shanghai gold market had bid prices up to $1,000 drove increases around the
world.
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