Bulletin – October 27, 2007 – What Now on Gold?

Since that time, and especially quite recently, gold has rallied strongly, and has risen past its 2006 high to a present price of approximately $753.99. Oil has also risen in a spectacular fashion into the high $80’s per barrel. These support my conclusion in another article I penned for this website, published on February 26, 2007, Inflation and the Stock Market: Does Anyone Remember the Seventies?, that the gold price, oil and oil service companies stock price booms we have witnessed for the last few years are quite similar to the booms in like instruments last seen during the late 70’s. However, that boom in the late seventies and early eighties represented a long term peak in oil prices around $40 – per barrel and the gold price around $850.

Gold is now, over 25 years later, and after a brutal long-term bear market, approaching that peak area of $850 per ounce reached previously in 1980. This current powerful leg up in the gold market stimulated just lately by the subprime crisis, the ensuing credit and housing crunch, and what I believe is the underlying inflation in some sectors of the economy means one of three scenarios for gold.

The first scenario is that the current surge in gold and oil prices represent an area of peaking action, where after some time of forming a top (with gold possibly between $800-$850), they will correct for some time and the excitement in these investments will abate. I feel that this scenario is less likely to unfold.

In the second scenario for gold, the metal will find short-term temporary resistance at the old 1980’s highs and will correct temporarily, perhaps for many months or, while testing that upward resistance level perhaps several times, before breaking through the old top and surging to uncharted territory on the upside, embarking on a new and powerful leg in the gold bull market.

The third scenario rests on examining the history of the gold price bull market during the entire decade of the seventies, which started after the dollar was no longer redeemable into gold after the monetary crisis of 1971. The gold price rose powerfully into the mid-seventies, only to peak out and go lower, before taking off again into the second inflationary wave of that decade and multiplying many times in price to $850. This scenario, if it happened today, would mean that the gold price, would reach a temporary peak in the coming year or so, then decline into a lull that could last over a year, before beginning another powerful ascent that would dwarf anything we have seen to date.

I feel the odds favor the 2nd or 3rd scenario, so I am personally holding onto my gold coin and bullion positions. I feel, as I said in my February 26th, 2007 article, cited above, that “the jury has rendered a verdict of ‘bull market’.”

This article contains the opinions and ideas of its author and is designed to provide useful information to the reader on the subject matter covered. The author may or may not have current positions in the investments mentioned in this work, and the author may from time to time make investments in a manner that is not described here. Past performance is no guarantee or prediction of future results and any investments made, based on the opinions and ideas contained in this work, may or may not be successful. The strategies contained herein may not be suitable for every situation, and the author is not engaged in rendering legal, accounting, investment advisory or other professional services.

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