A Golden Opportunity

12/20/2002 12:00 am EST


Mark Leibovit

Chief Market Strategist, VRTrader.com

Gold has broken out to new 5 1/2 highs, recently rising above $340 an ounce. What's next? Here are comments from two leading technicians, John Murphy, from StockCharts.com, who looks at the inter-relationship between gold and other markets, and Mark Leibovit, of VRTrader.com, who had forecast this breakout in precious metals.

John Murphy, chief technical analyst of StockCharts.com, says, "Gold traded above the 330 level for the first time in five years. Gold may be completing a major double bottom that has been forming since 1998. Not surprisingly the big breakout in gold is giving a big boost to the Gold Index (XAU), which recently broke through its November high and shattered a 6-month downtrend line. The breakout in the price of gold helped propel gold stocks into the latest week's top performing position. That's the good part. The bad part is the dollar may also be breaking down. Generally, there is an inverse relationship between gold and the dollar. When one goes up, the other usually goes down. The big upmove in gold over the past year has been accompanied by a sharp drop in the dollar and one of the factors driving the gold market higher is continued weakness in the US Dollar. Gold is now approaching a down trendline that is based on the previous highs of 1987 and 1996. That area will represent a major test of the long-term bullish potential of gold. If gold can clear resistance, that could set the stage for an eventual run up to the early 1996 peak near $400."

Says Mark Leibovit, editor of VRTrader.com, "There has been much speculation regarding the reason for gold's advance with the most popular notion surrounding inflation risks. With the Fed's accommodative monetary policy and a predisposition to inflate the economy that notion is probably not far from the truth. But there are greater reasons for gold's rally. Japanese investors are buying gold as a safe haven from their country's devastating economic problems. Buyers are coming from the Mideast, as concern regarding a war with Iraq grows. Saudis have been rumored to be moving into gold and selling US assets. And a new gold exchange in China is opening up the door for Chinese investors.

"I have often said that you have to sit and hold your positions in gold and gold stocks, unless you are a very nimble trader. My feeling is that we could walk in some morning and suddenly find that gold has gone through the roof. You have to be psychologically and financially prepared for the swings. What do you do now? If you don't own gold stocks, for pete's sake buy some. We are loaded up to the gills in gold stocks and we're holding, despite our short-term forecast for a pullback.  Long-term, I remain steadfastly bullish and believe the party is only beginning."

Among the gold positions Leibovit has been holding are Newmont Mining (NEM NYSE), with an upside target of 36-37, Placer Dome (PDG NYSE), with a target of 14-15, Glamis Gold (GLG NYSE), with a target of 12, Gold Fields Ltd. (GFI NYSE), with a target of 17, and ASA (ASA NYSE), with a target of 45. His most recent portfolio addition is Goldcorp (GG NYSE), recommended for an upside target price of 15.25.

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