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SAN FRANCISCO (MarketWatch) -- After reaching their highest level since 1980, gold prices may be due for a correction soon, but that could help feed what many expect to be a long-term boom -- to $800 and then inflation-adjusted highs past $2,000 in the years to come.
Gold for December delivery touched a high of $746.50 in electronic trading Thursday -- a level a lead-month contract on the New York Mercantile Exchange hasn't seen in at least 27 years.
You could say prices have a long way to go, given that the all-time high for front-month gold futures was $875, which hasn't been seen on Nymex since Jan. 21, 1980.
And that was only a nominal high.
"I do not believe today's prices are lofty," said Scott Wright, an analyst at financial-services company Zeal LLC. "Gold would have to exceed $2,200 an ounce in today's dollars to match the all-time real high achieved in 1980."
Still, gold futures have jumped around 16% after ending last year around $640. They climbed 11% in just the last month alone.
"Demand is continuing to rise and producers are continuing to struggle in bringing supply to market," said Wright. "With the dollar bordering historic lows, gold's monetary prowess is continuing to grow. [And] in the near term, we are entering into a seasonally strong time for gold."
Given all that, there's hardly one person who would argue against higher prices for gold in the longer term.
A few are brave enough to predict a short-term pull back in price.
Issue at hand
The most immediate influence on gold prices this week has been the Federal Reserve's decision Tuesday to cut its overnight interest rate target by a half percentage point to 4.75%.
With the cut, "the Fed revealed that it has no interest in defending the dollar or containing inflation," said Peter Schiff, president of Euro Pacific Capital. "This kind of irresponsibility is all gold needs to move higher from its current levels."
'The Fed revealed that it has no interest in defending the dollar or containing inflation. This kind of irresponsibility is all gold needs to move higher from its current levels.'
— Peter Schiff, Euro Pacific Capital
Gold's rally has been built on longer-term inflationary pressures that could be unleashed due to the prospect of, and now actually declining U.S. and then global interest rates, said Patrick Lafferty, a commodities broker at Capital Trading Group.
The impact of the latest rate cut is obvious, but will it continue to play out that way as the weeks wear on?
"The current consensus is that the weakening U.S economy, combined with the U.S. Federal Reserve cutting interest rates ... will cause the U.S. dollar to plunge and commodities prices to surge," said Steven Jon Kaplan, a senior editor at TrueContrarian.com.
The initial reaction following Tuesday's Fed decision "followed this script," he said. But on Wednesday, the U.S. Dollar Index recovered from its lowest point since September 1992, he said.
Analysts may have overlooked the chance that instead of causing the U.S. dollar to fall, the Fed rate cut could stimulate the fundamentals of the U.S. economy.
In that case, "if the U.S. dollar rallies strongly, this could exert significant downward pressure on the prices of gold and silver, while also depressing the prices of most other commodities," said Kaplan.
Indeed, James Mound, head analyst for Moundreport.com, a futures-trading newsletter, pointed out that if the Fed is willing to cut rates, then it sees housing issues as a greater problem than any concern over inflation. "If and when the market sees this, then the dollar will [find] support and the gold market will come down."
In the past, falling U.S. interest rates have been bearish for metals, said Michael Widmer, a metals analyst at Calyon, in recent research note.
"Historically, the Fed funds target rate and metals prices have been positively correlated, largely because rising interest rates wend hand-in-hand with a strong economic performance [and, hence, metals demand]," he said. So fundamentally, there is "little reason to buy the metals complex."
Instead, the rebound in prices as of Wednesday was "largely driven by investor sentiment and it brings most metals prices closer to the levels seen before the uncertainty emanating from the subprime and credit sectors hit the markets," Widmer said.
In the end, it would take a "change in attitude from the investment side of the market" to send gold prices significantly lower, said Darin Newsom, an analyst at DTN.
----------------------------------------------------------------------------------------------------------------
A big stretch
We're really talking about something short of a miracle for gold prices to drop from their current levels but the possibilities are nearly endless, most analysts said.
India could slow its consumption, the U.S. could go into a recession, the U.S. stock market could rally further, taking the attention away from gold, and the credit crunch could continue and spur massive gold sales, according to Jon Nadler, an analyst at Kitco Bullion Dealers.
There are numerous other not-so-likely events that would have to take place.
"Peace would have to break out in the world and geopolitical tensions between the U.S. and Iran and the many tensions and problems through out the Middle East would have to be resolved," said Mark O'Byrne, a director at GoldandSilverInvestments.com.
"There would have be a huge gold discovery -- and nearly all geologists believe this is extremely unlikely and indeed, gold production is falling globally; The credit crisis would have to abate, western housing markets stabilize and the U.S. consumer continue on the merry spending spree," he said.
O'Byrne also suggests that investors "should not hold their breath in anticipation of these extremely remote possibilities taking place." Instead, it's more likely that these factors may deteriorate further.
Yet there are a few events that have a fair chance of pulling prices down. At the moment, however, the mere notion of a drop in oil prices or major central bank selling seems a bit farfetched.
Oil prices have surged to record levels above $84 a barrel. The inflation concerns related to that have supported gold's recent bull move, said Moundreport.com's Mound. If oil prices fall, "then the potential for inflation concerns to subside increases."
Capital Trading Group's Lafferty considers a retreat in energy prices as the mostly likely event. Key oil producers could significantly boost supplies, sending the energy markets into a correction, which would then signal gold traders to take profits, he said.
Then there's the possibility that central banks could sell some of their gold reserves, especially at these high prices, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor. But "they may have learned their lessons when their sales were not coordinated."
Retreat on tap?
Even with strong market disbelief for any bearish scenarios for gold, many analysts still agree that gold prices could see a temporary pull back.
Gold has "over shot on the upside and is over bought," said Ned Schmidt, editor of the Value View Gold Report. He expects to see a correction to the $690-$710 area.
After that, "we can start talking about $800 gold," he said.
The Fed's actions this week provides "confirmation of the weakness of the Federal Reserve, and makes $1,400+ gold like shooting fish in a barrel," Schmidt said.
Also, "the price of gold is on trends established by two decades of inept monetary policy in the U.S. -- such long-term trends are not easily reversed," he said.
Rewarding risks
For now, be warned of rough waters ahead for the gold market. But those who stick out may be finely rewarded.
"We expect gold to trade in very volatile sessions [over] the coming few days and weeks and don't exclude ample upside moves, followed by profit taking sessions resulting in price setbacks," said Frederic Panizzutti, senior vice president at MKS Finance S.A. "Yo-yo trading sessions are ahead of us."
'Years down the road $700 gold will seem cheap.'
— Scott Wright, Zeal LLC
Don't expect any major shake out in prices until you see gold test the $800 resistance level, said Ralph Preston III, an account executive at San Diego-based Heritage West Financial Inc.
But you won't have to wait long. "Shear momentum and the perception that the Fed will abandon the buck as it flirts with its all-time low ... will propel gold to $800 by the end of the year," he said.
O'Byrne said the most likely scenario for gold would be a retest of support at $700 in the short term before challenging $800 before the end of 2007, and the record non-inflation high of $875 reached on Jan. 21, 1980, early in 2008.
Peter Grandich, editor of the Grandich Letter, said gold would see a steady rise in stages, with the next stage trading anywhere between $735 and the old high around $875.
And analysts are already talking about what's beyond that.
Gold may reach $800 this year and Euro Pacific Capital's Schiff said he believes it'll surpass $1,000 next year.
And "unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-adjusted high of nearly $2,000 per ounce within this decade," he said.
Levels above $2,000 would account for 27 years of dollar devaluation, said Peter Spina, an analyst at GoldSeek.com, and while that gold price level is "becoming more likely as the current situation evolves," it's likely years away.
One thing to be sure of, "years down the road $700 gold will seem cheap," said Zeal's Wright.
Myra P. Saefong is MarketWatch's assistant markets editor, based in San Francisco.
Gold for December delivery touched a high of $746.50 in electronic trading Thursday -- a level a lead-month contract on the New York Mercantile Exchange hasn't seen in at least 27 years.
You could say prices have a long way to go, given that the all-time high for front-month gold futures was $875, which hasn't been seen on Nymex since Jan. 21, 1980.
And that was only a nominal high.
"I do not believe today's prices are lofty," said Scott Wright, an analyst at financial-services company Zeal LLC. "Gold would have to exceed $2,200 an ounce in today's dollars to match the all-time real high achieved in 1980."
Still, gold futures have jumped around 16% after ending last year around $640. They climbed 11% in just the last month alone.
"Demand is continuing to rise and producers are continuing to struggle in bringing supply to market," said Wright. "With the dollar bordering historic lows, gold's monetary prowess is continuing to grow. [And] in the near term, we are entering into a seasonally strong time for gold."
Given all that, there's hardly one person who would argue against higher prices for gold in the longer term.
A few are brave enough to predict a short-term pull back in price.
Issue at hand
The most immediate influence on gold prices this week has been the Federal Reserve's decision Tuesday to cut its overnight interest rate target by a half percentage point to 4.75%.
With the cut, "the Fed revealed that it has no interest in defending the dollar or containing inflation," said Peter Schiff, president of Euro Pacific Capital. "This kind of irresponsibility is all gold needs to move higher from its current levels."
'The Fed revealed that it has no interest in defending the dollar or containing inflation. This kind of irresponsibility is all gold needs to move higher from its current levels.'
— Peter Schiff, Euro Pacific Capital
Gold's rally has been built on longer-term inflationary pressures that could be unleashed due to the prospect of, and now actually declining U.S. and then global interest rates, said Patrick Lafferty, a commodities broker at Capital Trading Group.
The impact of the latest rate cut is obvious, but will it continue to play out that way as the weeks wear on?
"The current consensus is that the weakening U.S economy, combined with the U.S. Federal Reserve cutting interest rates ... will cause the U.S. dollar to plunge and commodities prices to surge," said Steven Jon Kaplan, a senior editor at TrueContrarian.com.
The initial reaction following Tuesday's Fed decision "followed this script," he said. But on Wednesday, the U.S. Dollar Index recovered from its lowest point since September 1992, he said.
Analysts may have overlooked the chance that instead of causing the U.S. dollar to fall, the Fed rate cut could stimulate the fundamentals of the U.S. economy.
In that case, "if the U.S. dollar rallies strongly, this could exert significant downward pressure on the prices of gold and silver, while also depressing the prices of most other commodities," said Kaplan.
Indeed, James Mound, head analyst for Moundreport.com, a futures-trading newsletter, pointed out that if the Fed is willing to cut rates, then it sees housing issues as a greater problem than any concern over inflation. "If and when the market sees this, then the dollar will [find] support and the gold market will come down."
In the past, falling U.S. interest rates have been bearish for metals, said Michael Widmer, a metals analyst at Calyon, in recent research note.
"Historically, the Fed funds target rate and metals prices have been positively correlated, largely because rising interest rates wend hand-in-hand with a strong economic performance [and, hence, metals demand]," he said. So fundamentally, there is "little reason to buy the metals complex."
Instead, the rebound in prices as of Wednesday was "largely driven by investor sentiment and it brings most metals prices closer to the levels seen before the uncertainty emanating from the subprime and credit sectors hit the markets," Widmer said.
In the end, it would take a "change in attitude from the investment side of the market" to send gold prices significantly lower, said Darin Newsom, an analyst at DTN.
----------------------------------------------------------------------------------------------------------------
A big stretch
We're really talking about something short of a miracle for gold prices to drop from their current levels but the possibilities are nearly endless, most analysts said.
India could slow its consumption, the U.S. could go into a recession, the U.S. stock market could rally further, taking the attention away from gold, and the credit crunch could continue and spur massive gold sales, according to Jon Nadler, an analyst at Kitco Bullion Dealers.
There are numerous other not-so-likely events that would have to take place.
"Peace would have to break out in the world and geopolitical tensions between the U.S. and Iran and the many tensions and problems through out the Middle East would have to be resolved," said Mark O'Byrne, a director at GoldandSilverInvestments.com.
"There would have be a huge gold discovery -- and nearly all geologists believe this is extremely unlikely and indeed, gold production is falling globally; The credit crisis would have to abate, western housing markets stabilize and the U.S. consumer continue on the merry spending spree," he said.
O'Byrne also suggests that investors "should not hold their breath in anticipation of these extremely remote possibilities taking place." Instead, it's more likely that these factors may deteriorate further.
Yet there are a few events that have a fair chance of pulling prices down. At the moment, however, the mere notion of a drop in oil prices or major central bank selling seems a bit farfetched.
Oil prices have surged to record levels above $84 a barrel. The inflation concerns related to that have supported gold's recent bull move, said Moundreport.com's Mound. If oil prices fall, "then the potential for inflation concerns to subside increases."
Capital Trading Group's Lafferty considers a retreat in energy prices as the mostly likely event. Key oil producers could significantly boost supplies, sending the energy markets into a correction, which would then signal gold traders to take profits, he said.
Then there's the possibility that central banks could sell some of their gold reserves, especially at these high prices, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor. But "they may have learned their lessons when their sales were not coordinated."
Retreat on tap?
Even with strong market disbelief for any bearish scenarios for gold, many analysts still agree that gold prices could see a temporary pull back.
Gold has "over shot on the upside and is over bought," said Ned Schmidt, editor of the Value View Gold Report. He expects to see a correction to the $690-$710 area.
After that, "we can start talking about $800 gold," he said.
The Fed's actions this week provides "confirmation of the weakness of the Federal Reserve, and makes $1,400+ gold like shooting fish in a barrel," Schmidt said.
Also, "the price of gold is on trends established by two decades of inept monetary policy in the U.S. -- such long-term trends are not easily reversed," he said.
Rewarding risks
For now, be warned of rough waters ahead for the gold market. But those who stick out may be finely rewarded.
"We expect gold to trade in very volatile sessions [over] the coming few days and weeks and don't exclude ample upside moves, followed by profit taking sessions resulting in price setbacks," said Frederic Panizzutti, senior vice president at MKS Finance S.A. "Yo-yo trading sessions are ahead of us."
'Years down the road $700 gold will seem cheap.'
— Scott Wright, Zeal LLC
Don't expect any major shake out in prices until you see gold test the $800 resistance level, said Ralph Preston III, an account executive at San Diego-based Heritage West Financial Inc.
But you won't have to wait long. "Shear momentum and the perception that the Fed will abandon the buck as it flirts with its all-time low ... will propel gold to $800 by the end of the year," he said.
O'Byrne said the most likely scenario for gold would be a retest of support at $700 in the short term before challenging $800 before the end of 2007, and the record non-inflation high of $875 reached on Jan. 21, 1980, early in 2008.
Peter Grandich, editor of the Grandich Letter, said gold would see a steady rise in stages, with the next stage trading anywhere between $735 and the old high around $875.
And analysts are already talking about what's beyond that.
Gold may reach $800 this year and Euro Pacific Capital's Schiff said he believes it'll surpass $1,000 next year.
And "unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-adjusted high of nearly $2,000 per ounce within this decade," he said.
Levels above $2,000 would account for 27 years of dollar devaluation, said Peter Spina, an analyst at GoldSeek.com, and while that gold price level is "becoming more likely as the current situation evolves," it's likely years away.
One thing to be sure of, "years down the road $700 gold will seem cheap," said Zeal's Wright.
Myra P. Saefong is MarketWatch's assistant markets editor, based in San Francisco.