I’m very impressed at how the gold market has been holding up as many other commodities saw prices cut in half or more in the past six months. Investors have been flocking to gold as a safe-haven, and I see $1,000 an ounce or higher likely in the near-term.
Gold and Silver
We can’t talk about gold without mentioning the factors and outside markets that influence gold’s price. The U.S. dollar often dictates the direction of gold—when the dollar is up, gold is down, and vice versa. Gold is also viewed as an inflation hedge and tends to gain when there is inflationary fear. During the summer of 2008, we saw gold benefit from both a weaker dollar and inflationary fears. Last year crude oil peaked near $150 a barrel, corn hit a record $8 a bushel, and gold moved above $1,030. Today, we are seeing a little divergence in the factors that drove gold higher in the past. The dollar has been benefiting from safe-haven buying, and so has gold. Most commodity markets have corrected sharply as the global economy headed to recession. Crude oil is down, corn is down, and gold is still going strong above $900 an ounce. In times of uncertainty, investors tend to feel comfortable investing in gold, and its current price reflects the uncertainty we’ve seen in the economy. A loss of confidence in stocks and bonds has led to safe-haven buying in gold. Gold has been the strongest market since the financial crisis began.
Gold is a commodity people are very familiar with and can physically own. That is why we see so many “gold bugs” out there. The higher price gets, the more people seem to like it. I think there are many reasons to be bullish gold, and I believe this market will put in new all-time highs this year. And, gold should lead other commodities to more bullish trends as they work their way off recent lows.
The new administration looks to pass a stimulus bill somewhere around $900 billion. It has to be financed somehow, and as a result, I see inflation, perhaps even hyperinflation, just around the corner. As far as a trading strategy, I do feel gold will pull back a bit off its current levels and a correction would be a great buying opportunity. I recommend buying April gold futures at $875 and $860. More aggressive traders can buy at $890. This market has had a big move up in a short time, so wait, be patient, and see if you can establish a long position at a better price where it’s at right now (above $900). Have an exit strategy. I am impressed with how this market has held up and expect to see $1,000 an ounce this year, and $1,100 or even $1,200 is not a stretch.
I like silver also, but I don’t expect the same degree of bullish action as I do out of gold. It’s an industrial metal, and until we see clearer signs of economic rebound, silver won’t take off. I would look at $11.25 to $11.50 an ounce as good value areas to buy. Silver tends to be more volatile than gold, and is less predictable. If you are a more conservative trader, I recommend you might be better off with gold given that factor.
I’m also bullish crude oil, but given the state of the economy, I think there is more downside to go first. Crude oil has been very sensitive to economic problems and shrinking global demand has taken a toll on prices. However, I can’t see this market staying down forever. I recommend buying the March contract around $37 – $38 a barrel. I would wait to see if these levels are tested, although more aggressive traders could consider a move to just under $40. More conservative traders may consider more limited-risk options strategies.
Baring any geopolitical news that could cause supply disruptions, I think the upside is limited for the time being. Before the end of this year, I see $80 – $100 as likely. The driving season is just around the corner, and I think we’ll see demand pick up as the economy starts to recover. There is a lot of money being thrown at this problem economy, and that’s likely to trigger overall commodity inflation.
Keep in mind, these are highly volatile times and there is almost constant breaking news that can impact price action in all of these markets. The Obama administration is expected to unveil a plan to stabilize the banking system (so far the “bad bank” is a no-go), and the Senate gets a shot at the stimulus bill this week. We also have more corporate earnings reports this week, among them Toyota, which is expected to post it first-ever loss. Friday, February 6, brings the January employment report, which is expected to show another 500,000 in non-farm payroll jobs lost and an uptick in the unemployment rate to 7.5 percent. Be careful you aren’t overtrading given this type of environment. Feel free to contact me with any questions you have about these or other markets, and to develop a strategy for your particular needs and risk-tolerance.
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