Gold soon to re-test previous all time highs

A weaker dollar and a battle between bull and bear traders could see the yellow metal break its previous record and head toward $1100

Author: David Levenstein
Posted: Monday , 14 Sep 2009

JOHANNESBURG -

Finally, as the dollar fell to its lowest level in almost a year on Tuesday the gold price broke through the $1000 level. While the price of crude hovered around the $70 level, the euro rallied against the greenback for the sixth day to reach a fresh yearly high of 1.4630. The British pound advanced against the U.S. dollar for the fourth day to reach a fresh weekly high of 1.6744, and the improved outlook for inflation may drive the GBP/USD higher. The dollar also tumbled against the Japanese yen for the fourth consecutive day to trade below 91.00. The dollar index, which tracks its progress against a basket of six major currencies, fell to a low of 77.398, breaking through the lows it hit in early August to fall to its weakest level since September 30 2008.

With the Federal Reserve likely to continue to "print money" in an effort to boost the U.S. economy, and with the US debt now approaching an unprecedented $7 trillion it is likely to see further weakness in the greenback, and a higher gold price as a consequence.

In a recent report by Bloomberg, Marc Farber, the publisher of the Gloom, Boom & Doom report, who recommended buying U.S. stocks in October, before the biggest rally in more than 70 years, said investors should buy equities instead of bonds or holding cash.

"If the dollar is weak, there is a very good chance that equity prices could rise quite substantially," Faber said. A weaker dollar is "good for asset prices."

Faber also recommends that investors buy precious metals and other raw materials to hedge against declines in the U.S. currency. Before today, the greenback slid 4.9% against a basket of six major currencies this year and the 19-commodity Reuters/Jefferies CRB Index climbed 10%.

"The dollar will continue to implode against commodities," Faber said. "I don't see why someone would hold dollars and not own gold. More and more people will come to the realization that they have to own some resources, some commodities, some mining companies and some physical precious metals."

While the price of the yellow metal has been reacting to the weaker dollar, there seems to be a battle going on between the bulls and bears trading gold futures. Evidently, there is a determined effort from the commercials to drive the price of gold down as they continue to short the market, and the major bullion banks are now net short a massive position. This play between the bulls and bears will either prompt more short-selling or a liquidation of the current short positions. Liquidation of shorts means more buying and this could propel the price of gold higher in the short-term. No matter what, I believe we are soon going to see a re-test of $1035.

There are a number of different ways you can invest in gold. You can buy gold bullion, gold exchange-traded funds (ETF's), futures, options, funds, gold shares, managed futures, and gold coins. Each offers it's own advantages and risk profiles, and investors can tailor their investments to their own requirements. But whichever method you choose, one of the best ways to own gold is gold bullion. Physically owning the metal is the most direct and traditional method of investing in gold.

I would like to caution investors who want to buy gold bullion or gold coins. Beware of those dealers who try to persuade you to invest part of the money you want to use for investing in bullion in so called "rare coins." Most of these coins are actually limited edition medallions sold at ridiculous premiums which can be as high as 400% above the spot price of gold. Usually, the medallions are minted to celebrate some event, occasion or the birthday of some famous personality. But whatever it is, do not confuse these with authentic "rare coins." And, what you are never told by these dealers is that their buy-back price is generally around 35% less than their selling price.

Technicals

The weekly chart going showing the "bigger" picture of the gold price going back to July 2007 clearly shows how the $1000 level has become a major resistance level. However, if we look at the pattern that has developed since October 2008 we can see a large ascending triangle. Although we have now seen gold trade above $1000 level for the fifth time, we need to see it hold above here. If this happens over the next week the chances for gold moving to $1100 become very likely.

About the author

David Levenstein is an investment advisor who brings over 29 years experience of futures,equities, forex and bullion. He has traded equities, futures (commodities, equity indices and forex), precious metals (bullion and coins), for his personal interests as well as for clients. He has worked and lived in Los Angeles, Bangkok, Hong Kong, London and Johannesburg. He used to write his own column Commodity Corner, in MoneyWeek, and The Prudent Investor in ClassicFeel. He has also made appearances on CNBC, Summit TV, and Classic Business. commodity@wol.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.