DENVER, CO — The brutal correction we experienced the second half of 2006 has now come to a close and the next phase of our bull market appears like it will open 2007 with a bang, taking metals prices much higher.
The chart below clearly shows the bull market in gold that has been intact since 2001.
I believe the red line on this chart for the year 2007 will show a sharper upward trend, with moderate corrections along the way. The upward volatility will become greater as more and more investors and institutional funds wake up to the fact that they need to diversify away from the depreciating dollar.
Overall, I expect the gold price to be closing in on the $1,000-an-ounce mark before the end of the year as the dollar continues to wane in value. If a mass exodus by major players away from the dollar were to occur in 2007, then gold could march much higher than $1,000 an ounce. While this is possible, I think the powers that be will pull out all the stops to avoid such an exodus for now.
Beyond 2007, however, I believe they will no longer have any power to manage that fate as market forces take over and gold goes to levels most people wouldn’t think possible.
Speculative versus Investment Demand
The main driver of these higher gold prices will not be the short-term speculative demand that comes from mining shares or commodity futures, but from longer-term buying interests seeking risk protection for their savings due to depreciating worldwide currencies. Gold is moving up against all currencies worldwide. And while some may flee the dollar to go into the euro or some other fiat currency for a time, eventually most will come to gold as the only true safe haven for their savings.
These buyers are strong hands with long-term interests who will be seeking to protect wealth. This trend is already underway, but will accelerate greatly in 2007. Mining shares will benefit as the metals prices move to higher levels.
What I try to stress to people who are new to gold investing is the tiny size of the precious metals markets. Remember, all the gold that exists in the world above ground in the form of bullion, coins, jewelry, etc., if melted into a giant cube, would only measure 20 cubic yards. That’s it!
The reason I point this out is to help investors understand that even if only 5% of the investment world begins to move into gold, prices would be pushed to much higher levels. John Hathaway of Tocqueville Asset Fund made this observation recently regarding this kind of move into gold:
"It is worth noting that a mere 1% allocation to physical gold by a significant percentage of long-term institutional portfolios could only be accomplished with a gold price well over $1,000 an ounce."
The reason for these kinds of statements is that the unsustainable US debt structure looks like it’s getting ready to implode. This instability translates into a worldwide diversification away from the dollar.
The "turning of the guard," so to speak, appears to be underway. What I mean by this is that the days of the dollar being the international reserve currency appear to be numbered.
Keeping this in mind as you make your investment decisions for 2007, gold and silver should do very well this year and for many years to come.
Until next time,