by Jeff Clark: If
Deflation Wins, What Will Gold StocksDo?
The gold price
has been hitting ever-new records over the past couple weeks, now
closing in on the $1,300 mark. Some gold followers are saying this
is extremely bullish for the near-term price since it broke so decisively
through its June 28th high of $1,261. If they’re right, how high
might this particular surge go?
While the endgame
for gold is far off in my opinion, it’s worth looking at short-term
surges, especially if you’re trying to determine to buy at a particular
level. Plus, it’s just darn fun.
I looked at
all major surges in the gold price since 2001. What constituted
a "surge," in my opinion? Any large jump or uptrend that’s
clearly visible on an annual chart. So instead of looking at yearly
gains or seasonal tendencies, I simply measured the percent gain
of all big upswings that were the most obvious, regardless of when
I put the findings
to a chart.
You can see
there haven’t been that many large price advances, about one annually
until last year. You’ll also notice the biggest "surge"
this year is comparatively small. In fact, you have to go back to
mid-2001 to find one that didn’t advance at least 20%. Meaning,
we may very well be in for a bigger surge yet this year.
of all surges in the gold price since 2001 is 23.5%. If we hit the
average, gold would spike to $1,428 in the current run-up. Note
that I measured from the bottom of the surges, not the breakout
point; the bottom I used in our case was $1,157 on July 28.
If our current
surge were to match the 35.5% biggie, gold would hit $1,567. A 20.8%
advance (the smallest of those greater than 20%) would take it to
$1,397. With these numbers, Bud Conrad’s call for $1,350 gold by
year-end would be met and surpassed.
The only caveat
I’d point out is that we logged three surges last year, the only
time that occurred in the current bull market. On that basis, it’s
certainly possible we could be due for a breather this year and
have thus seen our biggest advance. But given the current global
economic and monetary circumstances, I wouldn’t place a bet on that.
A survey of 29 analysts by Bloomberg a couple weeks ago reported
they see gold averaging $1,500 in 2011 – and most analysts
tend to make conservative projections.
Note that there
were always small pullbacks in the time periods I looked at; it
was never a straight line. So the recent minor drawdown was typical
of what occurred during these surges. Also, there were always corrections
or at least periods of consolidation after the surge and before
the next big upswing.
of what gold does over the next few months, I think 20%+ surges
will continue throughout this bull market, with the occasional 30%
punch. And a doubling of the gold price in a matter of months is
also likely in our future, a sure sign of the Mania phase. Gold
surged 128.5% from October 8, 1979, to January 21, 1980. A similar
vault today would have the price jumping from, say, $2,400, to $5,484
in less than four months. Yes, I think that’s entirely possible
and perhaps probable.
How high will
gold ultimately go? I look at it this way. The sovereign debt crisis
in Europe isn’t over. The sovereign debt crisis in the U.S. hasn’t
started. We will almost certainly see more quantitative easing (i.e.,
money printing). We have artificially low interest rates. The U.S.
dollar is basically at the same level it was two years ago. We have
no official inflation and certainly no big inflation. Less than
5% of U.S. citizens own any form of gold. Central banks are widely
expected to be net buyers of gold again this year. Investment demand
for gold is still only 32% of all uses of gold, a far cry from the
54% level reached in 1979. I could go on, but you get the idea.
The only way
you can benefit from these surges is to be long gold. If you haven’t
been a part of one, I guarantee you it’s a lot of fun. Gold is more
important than that, of course; it’s your personal safe-haven asset.
Buy on pullbacks, slowly increasing your holdings so that what you
own makes a difference in your portfolio, both for asset protection
and profit potential.
And then, hang
The most profitable
way to take advantage of a surge in gold is to own gold stocks.
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Clark is editor of Casey's
Gold & Resource Report in Casey’s Daily Dispatch.