Prices Can Only Go Higher From Here

That first gold purchase is the hardest one. What's even harder is the test of nerves during your first big correction with "skin in the game". It can leave you feeling foolish, stupid, and all alone - it's not as if you can walk down the hall at work and commiserate with one of your co-workers.

"Gold got hammered today!" said Fred, slouching, as he entered Jim's cubicle.

"Tell me about it" Jim glibly replied, shaking his head. "Silver too."

Maybe someday you'll hear people like Fred and Jim over in the next aisle, providing needed sympathy to each other on down days and high fives when the sky appears to be the limit - but that day is far off.

The public is still largely unaware of precious metals as an investment class, but by the looks of a recent Bloomberg article, that may change soon.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~Advertisement~~~~~~~~~~~~~~~~~~~~~~~~~~~

Due to holiday scheduling, the popular two week trials at Iacono Research have temporarily increased by a full 100 percent (a healthy increase, but still short of the gains posted by four positions in the model portfolio).

Free Two Week Trials Now Last a Month!

Request a free trial today and you'll get free access to the subscribers' section of the website through January 13th - that'll leave plenty of time over the holidays to have a good long look as you evaluate your investment decisions for the new year. Click here to find out how to start your free trial.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

It's pretty unusual to find an article from the mainstream financial press that is as bullish on gold as this one from Pham-Duy Nguyen of Bloomberg, but after watching the dollar over the last couple months and hearing the talk coming from foreign central banks, this is probably a sign of things to come.

Just because gold is down 14 percent from its high of $732 an ounce on May 12, doesn't mean the rally that began six years ago is coming to an end anytime soon.

The swooning U.S. dollar, which has become a proxy for the slowing American economy and the nation's humiliating lack of success arranging regime change in Iraq, banning weapons of mass destruction in North Korea and Iran and reducing its trade and budget deficits, is making gold Wall Street's darling again for 2007.

"Gold is the purest play against the dollar,'' said Louise Yamada, managing director of Yamada Technical Research Advisors LLC in New York, who sees gold surpassing $730 next year on its way to $3,000 within a decade. Yamada, the former head of technical research at Citigroup Inc., proclaimed gold cheap in 2001 when it fetched $279.

She now has lots of company among the world's biggest financial institutions. Deutsche Bank AG's chief metals economist, Peter Richardson, made gold his favorite pick for 2007. JPMorgan Chase & Co. analysts John Normand and Jon Bergtheil on Dec. 7 said only corn could rival gold as the best bet while Merrill Lynch & Co. analyst Michael Jalonen elevated gold's value through 2010.

"If you can only make one commodity investment,'' gold is the "choice for 2007,'' said Richardson from his office in Melbourne.

That's partly because five of the past six bear markets for the dollar led to an increase in gold.

More than ever before, gold seems to be a U.S. dollar story. With officials from foreign central banks increasingly talking about diversifying away from the greenback, further weakness in the dollar could cause the exits to become crowded.

No one wants a currency crisis, but no one wants to hang on to something that is losing value - a very tough decision if you're an Asian central banker with lots of dollars.

Of course there continue to be skeptics - but the ranks of the dollar bulls are dwindling.

The U.S. dollar will rebound in 2007, said Joe Prendergast, global head of currency strategy at Credit Suisse in London, during a recent radio interview with "Bloomberg on the Economy with Tom Keene.'' He predicts a 3 percent appreciation for the dollar by December 2007.

Some analysts say the current consensus that predicts no end to the dollar's weakness is wrong. "The dollar is completely undervalued,'' said Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures Ltd. in Tokyo. "Metal prices are hitting the tops. This month and next January, base and precious metals prices will go down.''

The strength of the dollar will surely be a topic of discussion for Treasury Secretary Hank Paulson and Fed Chief Ben Bernanke during their talks in Beijing this week. Chinese officials have been among the most vocal in the anti-dollar chorus.

With the yuan now pegged to a "basket" of currencies rather than directly to the dollar, it has strengthened against the buck, but not by much - not nearly enough to make a difference in the trade deficit that sees the Chinese central bank accumulating roughly 20 billion new dollars each month.

You'd think it only logical for them to want to exchange some of those dollars for something more tangible, but European central banks now seem reluctant to part with their stash of gold bars and who knows what's really left in Fort Knox - the place hasn't been audited for three decades.

Sales of gold by central banks fell 31 percent in the third quarter to 59 metric tons from a year ago, according to the World Gold Council. European Central Bank members this year failed to meet the 500-ton quota for gold sales under the second so-called Central Bank Gold Agreement.

Federal Reserve Chairman Ben S. Bernanke in April told Congress that he looks at gold prices on his computer screen "every day'' in assessing inflation expectations. Inflation, using the Fed's preferred index that subtracts food and energy from consumer spending, was 2.4 percent for the year ending in October.

"There's information in gold prices as there is in other commodity prices,'' he said. Rising gold prices reflect inflation concern, "but clearly, a factor in the gold price has got to be global geopolitical uncertainty and the view of some investors that, given what's going on in the world today, that gold is a safe haven investment.''

What goes through the Fed Chairman's mind when he looks back a year and sees gold prices up 22 percent and core inflation up 2.4 percent? Does he wonder why people continue to purchase the largely useless shiny metal when inflation-protected Treasuries offer a far more sophisticated hedge against inflation?

Probably.

Does he wonder if the public is finally starting to figure out that their experience in the world no longer matches up with the story their government tells them about the purchasing power of their money?

Probably.

More and more, the public is realizing that maybe gold in the $600 range is still inexpensive - especially when compared to the inflation-adjusted highs of 1980 and the current price of oil.

Gold remains cheap relative to other assets. The record high of $850 an ounce, reached 26 years ago, is equal to $2,100 in today's dollars after adjusting for inflation. The cost of an ounce today is equal to about 10.3 barrels of oil, compared with 23 barrels in 1980.

"Prices can only go higher from here,''reaching $800 next year and $1,000 by the time U.S. President George W. Bush leaves office in January 2009, said Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio. His $875 million World Precious Minerals Fund has gained 58 percent this year. "Gold is one of my favorite picks for next year, along with platinum and uranium.''

Twelve of 30 traders, investors and analysts surveyed by Bloomberg from Sydney to Chicago on Dec. 7 and Dec. 8 advised buying gold, which fell 3 percent last week in New York to $631 an ounce, the first decline in three weeks. Ten respondents said to sell the metal, and eight were neutral.
...
"A dollar is definitely going to be worth less in one hundred years than it is today,'' said Graham Birch, who helps manage $27 billion at BlackRock Investment Management in London. "An ounce of gold will still be an ounce of gold.''

Acceptance is a long and gradual process - these things take time.