What's next for gold after it hits 1500.00 per ounce ?

Traders and analysts have been raising their price targets on gold as the precious metal continues its steady climb. Comex June gold futures, the most actively traded gold contract, settled just shy of $1,500 an ounce on Wednesday, though prices stayed above that mark for most of the day.


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Analysts at Capital Economics continue to maintain that gold prices will reach $1,600 an ounce by the end of the year and will climb to $2,000 an ounce by the end of 2012. (The firm first made that call in December of last year when prices were under $1400 an ounce.)

Traders point to three main factors underpinning gold prices: inflation fears, low interest rates, and gold's safe haven status being reinforced by "destabilizing events," such as the euro zone's fiscal crisis, Japan's earthquake, and political unrest in North Africa.

Capital Economics says gold prices will continue to be supported as "slower global growth and lower inflation mean that monetary policy is likely to remain extremely accommodative in the US and in the other major developed economies. What's more, there are plenty of candidates that could cause a fresh bout of risk aversion, including an escalation of the fiscal crisis in the euro-zone."

Don't forget about China. HSBC precious metals analyst Jim Steel says comments from the governor of the People's Bank of China earlier this week about the country's foreign exchange reserves have also been supportive of gold prices.

"Any increase in non-US dollar assets would likely be indirectly supportive of gold, especially if it weakened the U.S. dollar's status as a reserve currency," Steel says. He currently sees gold prices rising to a near-term high of $1,550 an ounce.

But the future may be even brighter than that for the precious metals in the coming months. Traders in the New York gold pits says call options — bets that prices will go higher — have been extremely hot this week.

"There's been significant call buying between the $1800 and $1900 region in August and October contracts," says Mihir Dange, an options trader and co-founder of Arbitrage LLC. "So obviously there's a bullish bet that prices are going to go there within the next six months."

4 most dangerous words in investing

This time it's different...


To many investors with a sense of history, the four most dangerous words are "this time it's different". The phrase is usually evoked in an attempt to justify why a huge price gain in a particular asset class can continue to defy common sense and historical valuation norms. A surfeit of explanations on why "this time is different" is usually enough to send seasoned investors to the exits.

Silver, having defied the low expectations of many investors, has now seen a monster rally of 392% from $8.88 in October 2008 to the recent market price of $43.67. The pace of the advance has gone almost vertical with silver gaining 60% from the lows of late January.
Long term silver investors no doubt remember the aftermath of the last rapid run up in silver prices to $48.70 in January 1980. Silver prices collapsed shortly thereafter and ultimately slid to the $5 range where it remained throughout the 1990's. Silver dropped off the radar for most investors and remained dead money for 25 years before decisively breaking out of a very long base in early 2006.

Will history repeat with another meltdown in silver prices at some near point in the future, or is the rise in silver prices indicative of a major trend change in our economic future? I have never believed that the mechanical application of past price trends was a useful tool for predicting the future. Each point is history is unique with new players and new sets of circumstances. Understanding today's fundamentals are far more important than ascribing importance to past events that are largely irrelevant.

To understand why silver prices are in the initial stages of a long term super cycle advance rather than a replay of the 1980's, it is necessary to review the differences of the late 1970's compared to our current situation. Gold and silver both advanced in the 1970's as a booming, demand driven economy fueled inflation. The huge cost of financing the Vietnam War, low employment and surging wages all contributed to a steadily rising rate of inflation which peaked at 13.5% in 1981. Federal Reserve Chairman Paul Volcker finally stopped inflation dead in its tracks through a series of massive interest rate increases which brought the prime rate to a high of 21.5% in mid 1981. High interest rates caused a severe recession but by 1983, the rate of inflation had collapsed to 3.2%.
Both gold and silver moved dramatically higher during the inflation surge of the late 1970's and early 1980's but the meteoric rise in silver prices was driven by specific events. Wealthy brothers Nelson and William Hunt acquired a massive position in silver in an attempt to corner the market. Prices skyrocketed on the news and silver went from $11 per ounce in late 1979 to $48.70 in early 1980. Regulators did not take kindly to market manipulation and margin requirements on commodities were dramatically raised. The Hunt brothers' ill conceived attempt to drive silver prices higher collapsed along with their net worth. Silver prices plunged to less than $11 per ounce within two months. The last great silver "bull market" lasted less than six months, driven not by fundamental demand but rather by heavily leveraged speculators.
Fast forward 30 years - the finances of governments worldwide have reached the tipping point under ballooning debt levels and massive deficits. Additional borrowing by insolvent nations to rollover debt simply delays the day of reckoning - more debt is not the solution for too much debt.