Thursday, March 18, 2010

Gold Getting Ready for Another Assault

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Gold is and always has been a hot topic to write about. Goldbugs, investors who have a permanently positive opinion on gold, are some of the most passionate market people in the world. Ask them a simple investing question and you’ll like get an answer that includes gold. Gold is a hard asset. It’s tangible. It used to be enormously important to our financial and many around the globe when currencies were attached to its price.

Today, while gold is certainly used commercially, it’s also now widely available to be traded and invested in by individual investors. This can be done through the commodity (futures) market, coin dealers and popular exchange traded funds like GLD, which trade like stocks on the New York Stock Exchange.

I’ve written many pieces about gold over the years, including two blog contributions last year. My firm has two independent gold strategies for our clients that trade and invest in baskets of gold and other mining stocks. Always surprising to me, we have more assets in this area than any other of our now nine investment programs.

As gold was making its last nearly vertical run from $1000 to $1200 in December, I questioned whether or not we were seeing the makings of the latest bubble in our financial system.

If this pattern continues, which is the most likely path right now, gold should begin to move much higher and revisit the $1200 level during the second quarter with a chance at making a new, all time high as the weather becomes hot.

For this scenario to occur, given how correlated commodities and stocks have become, you would expect the stock market to also surge next quarter, which just happens to fit nicely with my long-term forecast of Dow 11,500 to 13,000 between Memorial Day and Labor Day.

Finally, to give you a long, long-term perspective of the metal, below is a chart going back to 1985. The secular bear market in gold lasted from 1981 to 2001 and saw gold collapse from roughly $1000 to $250. So if the current secular bull market mirrored the bear market, it’s possible that gold could continue higher the rest of this new decade, well into thousands of dollars an ounce.

My early December comments were “the best thing gold can do now to preserve its healthy bull market would be to digest its enormous gains over a period of months, sawtoothing its way to the $1000 area before resuming the upward climb in mid 2010. But if we don't see much weakness between now and January, the odds favor an even more powerful, parabolic acceleration to a final peak in 2010 that would likely see $100 move in one day towards the end.”

Thankfully for gold bulls and bugs, gold cooperated and began to consolidate those huge gains. From THE top in December, gold sawtoothed (think jagged edges of a handsaw) its way to the $1040 area, a roughly 15% correction that saw many investors jump ship to other vehicles and become very negative on the shiny, yellow metal.

To be fair, I did not believe at the $1040 level that gold was putting in the ultimate low, even though we were a big buyer of the gold stocks one day later. It just seemed like another opportunity.

When you look back at previous, similar behavior in gold, a few things are constant. First, the metal usually digests gains for a period of 3-15 months. Second, at some point during that period, gold goes from making lower highs and lower lows to higher highs and higher lows as you can see below.

Please feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

1 comment: