Gold at $900 an ounce in 2007? That's what one well-known forecaster predicted at the Committee for Monetary Research and Education's annual fall dinner on Thursday in New York City, and he made a pretty persuasive case. Paul Van Eeden's argument was all the more compelling because it was crafted strictly by-the-numbers. My own forecast has been calling for a correction to as low as $513 before bullion prices are likely to move significantly higher. Although my scenario would turn bullish if December Gold were to close decisively above $603 for at least a few days, I've maintained a somewhat gloomy bias since May, partly out of caution. After all, why continue to sink with precious-metal assets when it's so easy to buy back in at the first sign of a turnaround? This we have done routinely in such stocks as Newmont and Goldcorp, losing only small change when several rally attempts in mining shares failed to develop thrust.

In his presentation, one of the best that I can recall on the subject of gold, Van Eeden compared gold inflation to dollar inflation, measuring the growth in the quantity of each to extrapolate a long-term trendline. The resulting graph left no room for doubt that a close long-term relationship exists and that, if it continues to hold, Gold would need to rise to just under $900 over the next year or so to keep things in line. Van Eeden's analysis becomes even more persuasive to the extent it correctly predicted the May top in gold. At $740 an ounce, he says, bullion quotes had been driven too high by yen carry-traders who got caught with their pants down when the Bank of Japan announced it would tighten. To unwind by selling dollars would have been disastrous, since the carry traders would have been pushing the spread against themselves. Instead, they bought gold and base metals to hedge their dollar exposure, pushing metals to unsustainable heights.

Could Van Eeden be wrong about a big rally in gold even though his analysis is sound? Possibly. It would require the dollar to strengthen or at least remain stable, a scenario that goes against a consensus that believes the balance of trade impacts the relative value of the dollar. My take is that the dollar is no longer affected by trade flows, but rather by financial speculative demand. To the extent this is so, the 35 percent drop in the dollar that Van Eeden expects might not happen any time soon, even if our burgeoning trade deficit would seem to demand it. Indeed, as long as the dollar remains (by far) the currency of choice for leveraged speculation in paper assets, there is little reason to expect its collapse.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in i ssues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless expre ss written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com  

-- Posted Sunday, 22 October 2006 | Digg This Article