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Posted on June 23, 2009 -
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By John Reizner |


I bought gold bars and coins in 2003 at $354, $377 and $383.50 per troy ounce, and in 2004 at $431 per troy ounce. I purchased gold coins in 2009 at $1000 per ounce. I also purchased silver bullion this year.

I am continually reevaluating my gold and silver positions to account for changes in the market. The gold market, as I stated in my previous blog entry (see related posts below), emerged from a large flag formation on the weekly chart when the gold price on the August 2009 contract rose from $900 in January of 2009 to a high of $1006 the following month and then retreated. It has since made another run at the February high which is unsuccessful as of this writing (that may change).

In my article posted in October 2007, when the gold price was trading at $753 per ounce, I concluded that there were three possible scenarios for the future of the gold price:
 
 
 

  1. The first scenario was that following the surge in the gold price in 2007, the gold market had potentially reached its peak, or the eventual high might be around the 1980 peak area of $850 per ounce. After that peak, excitement in the metal could stall and the gold price might then retrace its steps. I assigned a lesser probability to this outcome, and so I maintained my gold positions.
  2. The second scenario posited that the gold price would challenge the 1980 high of $850 and then would temporarily retreat while testing the $850 area multiple times before pushing through it on the upside to new high territory. I assigned a greater probability at the time of the article to this scenario. This in fact has occurred, and the gold market rose to new all time highs.
  3. The third scenario rested on looking at the performance of the gold price during the 1970's when there was a ten year bull market in gold (gold went from $35 in 1971 to $850 in 1980 during a period of high inflation). This rise was punctuated in 1973-1974 by a deep recession when both gold and the stock market lost half their value. Gold later recovered spectacularly in the late 1970's as gold, gold stocks, oil, and oil service stocks performed very well. If this were to happen now, gold could potentially rise significantly higher than the $753 per ounce at the time of the 2007 article. At the time of my 2007 article, I assigned a greater probability of the second or third scenario occurring.

The 1970's bull market in commodities lasted ten years. The current bull market in commodities which began in 1999 is now of similar length. Thus, I would expect a potential blow-off peak in gold sooner rather than later. The gold price may break out of its $1006 high and move boldly into new high ground, taking silver along for the ride. If this is true, the question is how high will the price go? I answer that no one really knows for certain.
 
But is there a possibility that the gold rally could stall out around the current level of $924 or even at $1100 or $1200 per ounce should it break out of its current range? I refer to the very wise words of the late Sir John Templeton from a January 2005 interview when he foresaw the end of the housing bubble. During the interview, he stated there were almost no equities bargains worldwide, and that the gold bull market was more than half over (the gold price was around $400 at the time of the interview). He had been quoted to have said, "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

Could a potential blow-off top in the gold and silver markets represent the euphoria into which savvy metals holders could sell? Sir John Templeton was by some accounts the greatest investor of the 20th century, and so I take his insights to heart. 

Yet, the fundamentals of the gold market still appear to be extremely healthy. The ever growing budget deficit of $1.8 trillion and escalating public debt threaten to further unravel our financial system. There has been near systemic economic collapse in our financial system, at which the authorities are throwing money. As most observers can see, the Obama administration is spending with only symbolic fiscal restraint (betting the farm!) and may not be able to take back that money without sizeable tax increases.
 
As I see it, the problem with gold now is that it is too well known and popular as an investment. It appears that we are in the optimistic stage. That does not mean that gold does not have further to move upward. But it is not the bargain that it was when I bought it six years ago.
 
The hard money advocates (including this writer) have been pounding the table on the metal for years. And fundamentally, the economic situation may be extremely constructive for gold. If the gold price breaks into new high ground, there may be nothing stopping it from repeating what happened in 1978-1980 (the gold price jumped fourfold).
 
But there is no guarantee. I attempt to practice diversification in my portfolio. As I already hold many inflation hedge investments, I have reduced my gold position to rebalance my portfolio. I am placing the funds received from the sale of part of my gold position into a money market fund until I decide where to invest it. I continue to hold silver bullion and the remainder of my gold.

 

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