Todd Stein & Steven McIntyre
It finally happened. Gold has closed above the $500 level for the first time since 1987. The yellow metal is clearly in phase II of its bull market as it is slowly being accepted by investors as a legitimate asset class. Other signs that gold has moved out of phase I is that those who invest in the metal are no longer labeled as "cranks" or "gloom & doomers." Two U.S. gold exchange traded funds (tickers: GLD and IAU) were launched about one year ago and have been quite successful as they have absorbed over eight million ounces of bullion demand from both individual and institutional investors.
So what are we to expect in the months and years to come? First of all, the experts seem almost certain that we will see some sort of pullback this winter. And while the majority of investment advisors do not advocate short term trading, those wanting to buy gold or mining stocks at this time are instructed to hold off or at least dollar-cost-average into the market. Not bad advice, as it seems to many that there is just too much short-term bullishness out there. But is there?
Let us turn our attention to a few quotes from highly respected analysts out there. Note that these guys are not CNBC bubbleheads but, rather, investors who have track records to back themselves up. Richard Bernstein, chief U.S. strategist at Merrill Lynch recently said the spike in gold prices is not based on fundamentals. "People have to remember that the number one player in all commodities right now is hedge funds," he said. "It's all speculation. In gold, it's an inflation trade. Hedge funds are long gold and short Treasury notes." Dennis Gartman, author of the Gartman Letter, has been a strong advocate of gold ownership and said that he "wouldn't be surprised to see gold back down to US$400 or US$450 by the end of the year. The very fact that this is making the front page of business sections should give people a lot of caution."
We will not argue with these assessments (except to note that very few of the large hedge funds touch gold) but instead use their very existence to counter the argument that gold is about to correct. You see, most of the gold news we have been reading and seeing on television this week has been NEGATIVE. Less than 24 hours ago, UBS (a major investment bank) raised their gold price targets for the coming months and years. Like most Wall Street research, UBS' comments aren't worth much except that they demonstrate a continuing hostility to gold. According to Bloomberg, "UBS raised its forecast for average gold prices to $441 an ounce from $434 for this year; to $520 from $455 for 2006; to $500 from $435 for 2007; and to $450 from $340 for 2008 to 2012. The bank's long-term forecast remains at $340 an ounce." That is a chicken upgrade if ever we saw one. Compare this to any tech stock where the lemmings on Wall Street will raise their long term target price to some absurd nosebleed level as the price rises. Gold is still unloved by Wall Street - which is good!
So while you should always be wary of buying any asset at a multi-year top, please realize that in gold's case, the multi-year bull market is likely not even close to being complete. The time to sell is when you see UBS coming out with price targets that double every year. Or maybe when Jim Cramer hosts a show on CNBC called Mad Mining. In all sincerity, we do not think that gold's long-term top is in when the Dollar Index is making two year highs and the U.S. trade deficit is pushing an unfathomable 7% of GDP.
Gold and its related stocks and futures could always have a nauseating pullback of 20-40% at any given moment (as can most asset classes we might point out), but relying on Wall Street or other soothsayers and their crystal ball to tell you how a chart looks or how a certain wave formation is coming is absurd. As with stocks and bonds one must focus on the fundamentals and invest for the long-term (3+ years at a minimum). The fact remains that the dollar's fundamentals continue to get worse by the day to the tune of about $2 billion dollars (read Buffett's latest annual report if you want a refresher on the topic) and that the allocation of assets into gold by institutions, Asian central banks, and individuals is still negligible. Only after both situations have changed (i.e. U.S. consumption declines bring in balance the trade deficit and gold investment is mainstream-popular like the early 80s) will the top be in for gold. We suspect that when the time comes to sell gold there will be sea of cheap equities to redeploy one's assets into.
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December 2, 2005