Boarding the Precious Metals Flight? Dollar Weakness, Rising Crude Oil Prices and Record Deficits Fueled Gold's Ascent to $448 in Early March. Many Analysts Predict That Precious Metals Will to Continue to Climb throughout the Year. but Others Caution: Rising Interest Rates Could Dull Metals Shine
Bauch, Carla M., Modern Trader
Gold often is referred to as the "yellow metal." But is Wall Street using the wrong color in the description? Would the "green metal" or "greenback metal" better depict the precious metal's character? Read any forecast for gold and most likely it will begin with ... "should the U.S. currency continue to retreat, gold will reach ..." or "with the dollar still due to decline, gold is set for ..." Today most analysts agree that unless the dollar can gain strength, gold prices, and for that matter the precious metals sector in general, will continue to climb.
"The dollar has nowhere to go but lower with the level of the debt and the interest we owe," says Greg McCoach, president of AmeriGold.com, which specializes in helping investors diversify a portion of their portfolio into hard assets such as gold, silver and platinum.
In March, reports showing higher than expected U.S. account deficit figures gave gold a boost. The report stated the U.S. current account deficit reached a record level of $187.9 billion for the fourth quarter of 2004 and that the full-year deficit reached a new high of $665.9 billion. However, later in March gold did retreat to $430 after the Federal Reserve hiked short-term interest rates for the seventh time this year, which caused a sharp dollar rise.
But some experts, like Jim Steel, director of research for Refco, who believes more dollar weakness is to be expected, downplay this dollar rally.
"Recent rallies in the dollar are more corrective than a signal of a turnaround," Steel says, explaining however that metals, not currencies, are his area of expertise. Overall, Steel is generally bullish on both gold and silver. "From a macro economic view, expansion is likely to continue, particularly in the United States. But this expansion also will continue with exporters of bullion, such as China and the Middle East, particularly India," Steel says. He explains the rising cost of crude is increasing the income of those living in the Middle East. On April 4, crude oil soared to a record high of $58 a barrel. Steel reminds us that Saudi Arabia is the biggest buyer of gold in the world.
"The geopolitical situation over the years supports precious metals," Steel says. "Gold has effectively been rallying since before [9/11] and has been supported by attributes abroad since then. Some people have underestimated [what] the geopolitical influence the last several years has had on the precious metals market." Steel adds that the inventory data for gold supports his bullish stance. "Mining data has shown that increases are modest at best," he says. "We are hardly deluged with supplies."
While many traders and analysts believe that gold is headed higher for the long term, some say the short term will bring sideways trading. "Essentially, I see gold and silver, and also the U.S. dollar index, in a sideways trading range for the next three to six months," says Clif Droke, chief analyst with ClifDroke.com, who expects in the next three to six months gold between $410 and $450. Droke, who finds 20-, 60- and 90-day moving averages important components to his short-term technical analysis forecasts, explains that while he is a long-term bull for gold and silver, he predicts a boring year for the precious metals. "I have seen people walk away in recent weeks," Droke said in late March. "Some investors are getting out because they don't see much upside potential. They are walking away until they get a new trading range."
McCoach, also a long-term bull, says he expects to see gold hitting $500 an oz. in the next six to 12 months. Regarding an even longer-term forecast, he says, "Gold will be comfortably priced in the four digit territory." He says we will see one share of the Dow Jones Industrial Average equal one ounce of gold. As for when, McCoach says this will depend on the rate at which Asian banks will sell dollars and move to other currencies. While numerous factors point to a gold bull market and rising base metal prices, McCoach says China's growth is the key reason. …