February Gold: $905.5

Back in November, the hoopla about the dollar slumping and rising oil prices climaxed for a short period, allowing gold prices to consolidate around the $800 per ounce price level.  That is the nature of bull markets: advance, consolidate, advance, consolidate, etc. As stated back then in November, gold prices will reach $1000 (and it easily could be in 2008).  Now, being only $95 away, that may no longer seem like such an absurd notion to those who believed the commodity bubble burst.

$1,000 per oz. certainly may not seem like such a silly idea now, when expectations are for the FOMC to slash rates deeper in the year ahead, with a 50 basis point cut in the works for the Jan. 29^th meeting.  Such an outlook is decidedly bearish the dollar, and so conversely, bullish of gold.  Corrective forces in the currencies have played out and trends are resuming.  So, even though the European Central Bank has put rate hikes on hold, US rates are sliding.  While China is battling rampant inflation and a post-Olympic bubble concerns grow, the US housing bubble is currently in a sticky mess. 

The lesson to be learned is that trends are trends, they take time to develop and time to play out.  The US dollar has been trending lower since 2001. Its just become more apparent in the last two years that this decline is more than a correction.   The FOMC is starting to admit there is a problem with the economy and inflation, but is throwing more cheap money after cheap money, hoping to stimulate the economy (and fight inflation how?).  Seems like that's how we got into this mess, but hey, I'm not Helicopter Ben.

What's one to do?  Understand the reason for the trend, or not, just don’t get stuck on the wrong side of the trend.  The global commodity sector is in a strong inflationary trend that likely will continue for some time longer.  The US will not recover quickly for its economic woes.  So, if the correlation between gold and the value of the dollar holds, gold prices will continue to rise.  Not all at once, not in a straight line, but in a series of advances and setbacks, advances and consolidations.  So buy on weakness, buy on setbacks, and simply, don’t short this market.

At the money puts on February Gold are now more expensive than calls.  Traders are eyeing a break in prices soon.  After a $100 rally in prices in under a month, that seems fairly reasonable.  However, the last extended rally in gold, from Aug’07 to early Nov’07, was a $190 move.  That would mean an objective of near $980 for this overall advance we’re currently in.  Expect buying support to come in from $880-$860.

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