Some time ago I suggested that gold was destined to rise to $1400/oz price level. In fact based on current movements in the Dow, I would suggest we are likely to see the gold price rise as high as $US2,000/oz. The basis for this forecast is an important measure of relative price value - the Dow gold ratio. Just as you have price-earnings ratios for stocks and housing affordability indices for property, there are ratios for commodities as well; and they are very bullish for gold.There are several ways you can trade gold. You can buy gold stocks - blue chips or the juniors, or you can buy the metal from the Perth Mint, or a derivatives such as options, futures or contracts for difference. If you have less confidence in the financial viability of financial institutions, then you would avoid derivatives because you will bear the counter-party risk if the counter-party fails. No one talks about these risks. Its just assumed that counter-parties are of good standing. Don't think that rising asset prices will protect you from that risk.
I have extrapolated the charts above. You can see that to get to a Dow-gold ratio of 4 (the historical low) we need to see gold reach $2,000/oz. That is based on a Dow Jones index of 8,000, and we are just above that now. We have this week been given the signal to buy gold exposure because gold appears to be holding above $900/oz. Another solid rise should see it continue higher.
Andrew Sheldon www.sheldonthinks.com
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