The "Two Outlooks" for Gold Prices

One of the best parts of my job is when I hear back from you.

And two recent columns in particular on gold generated a larger-than-normal response.

The comments were related to the two-parter on gold prices that we published on Nov. 5 ("The Secret Gold Standard") and Nov. 13 ("Why Obama's Victory Means Higher Gold Prices").

Let's take a look at what you had to say.

The comments related to the "Secret Gold Standard" column were especially intriguing because a number of you thought I was advocating a literal return to the "gold standard."

I wasn't, of course. I employed the term as a convenient metaphor to try and help folks understand how the world's central banks were adding gold reserves for the first time in nearly a quarter century.

In fact, a global return to the gold standard isn't possible - there literally isn't enough gold to allow that to happen. It would crimp money-supply growth in such a way that global economic growth would be stymied.

A number of you wrote in to make that same point - including one reader who actually performed all the necessary calculations to make his case.

Al K. wrote in to ask: "Some analysts believe gold will drop further & others believe gold has bottomed out now. What do the experts of Money Morning believe?"

Since Al requested an "expert" opinion - a fair request - I put in a call to Chief Investment Strategist Keith Fitz-Gerald.

The Outlook For Gold Prices

Right now, Keith explained, there are two separate outlooks for gold - one for the near-term and another for the longer-term.

"If you're looking at the long haul, I believe that gold is tremendously undervalued," Keith told me. "I expect a combination of factors - including demand, the trillions of dollars that have been printed/injected into the economy and the development of new partially asset-backed international drawing rights - to create higher prices ahead."

But the outlook for gold is very different in the short-run, Keith explained.

"In that near-term time horizon, however, I still believe the risk is to the downside," he said. "The Eurozone situation remains problematic on a number of levels. And gold prices could also correct (fall), if traders have to contend with redemption requests, or if there are other factors that force them to raise cash."

In his mention of "traders," Keith was referring to the fact that these market insiders may have trading positions that are collateralized with gold. If they are forced to raise cash, they might have to sell that gold to do so, which could put downward pressure on "yellow metal" prices.

There are also some "market mechanics" to keep in mind, Keith told me.

Historically speaking, the months that follow presidential elections tend be to weak for gold prices, he explained. But the year that follows tends to be strong. If we follow that pattern this time around, it would mean the rest of 2012 won't be so hot, but that the odds for a rally in 2013 are high.

In fact, Keith said he won't be at all surprised to see a sharp drop (sell-off) in gold prices before the year ends.

"I can't say when, or how big, that drop will be - chiefly because the U.S. Fed and the other world central bankers are doing all that they can to keep the financial markets from flat-lining ... which is distorting the normal and healthy market-adjustment mechanisms that exist," Keith said. "But I expect that we will see [a correction]. When that occurs, consider it a buying opportunity. President [Barack] Obama's first-term policies created a lot of damage and his second term is likely to reinforce the need to preserve value even more."

This puts gold in a special category, making it an asset that all investors should include in their investment plan.

Here's the thing about Money Map Press: We're fortunate here to have the sharpest group of experts that you'll find. But we need them. Because I believe we also have the sharpest group of readers in the business, too.

And that's what makes this job fun.

By the way, in our first 15 months of publication, four of our recommendations have doubled or better, two of our recommendations have ended up as takeover targets and we've had more than four dozen winners.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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