Don't Stop Believing in Gold

11/11/2010 12:00 pm EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says gold has come a long way and may be due for a correction, but it will continue to move higher after that.

China, India, and Russia have been overt in their desire to accumulate significant quantities of gold as an alternative currency reserve. I do believe we are seeing this process in effect, and it is acting to put a floor on the downside price of bullion.

Gold finally broke over the former $1,000 ceiling in October 2009. It then backed off to test that breakout in February 2010. All in all, since October 2008, the gold market has worked higher, albeit with an occasional correction along the way.

I have warned lately against chasing strength as bullion prices have advanced to new highs above [$1,400, and] prices have exceeded the upper Bollinger Band (a technical indicator that shows a range between high and low prices as part of a trend—Editor). These occasions are typically followed by some degree of selling.

The 21-week moving average sits at $1,260. From a purely technical point of view, we should see gold come back to at least the June highs of $1,260. The lower [Bollinger Band] is right at $1,150.

I would rate that as a very outside expectation, since the big question is whether our foreign friends, along with recently burned euro holders, will take up the slack, thus holding prices from correcting back to traditional technical targets.

If I were to buy a gold stock without regard to price, it would be Goldcorp (NYSE: GG). Recently, it jumped sharply higher due to an excellent record cash flow, a fourfold increase in earnings, and a 100% dividend increase. I like companies that are willing to share the wealth. The annual dividend is not a big deal as overall yield goes, of course, but it does compete with Treasury bills.

Goldcorp should be at the core of your precious metals’ portfolio.  Weakness back to the $42.50 level will provide an excellent opportunity to accumulate.  (It closed Wednesday above $47, and yielded 0.8%—Editor.)

The premium over net asset value for Central Gold Trust (NYSE: GTU) is only about 2% now, and that likely reflects some cooling off on the part of the gold buyers. GTU did manage to dip as low as $49.62 last month, but that was shy of our $48.00 buy price for additional shares. Since then, it has rallied back into the trading gap left when gold broke on October 19th. Nevertheless, it is a good gamble that we will see another retracement in accordance with my overall outlook for gold over the next month or two. I am raising the buy price to $49.90. (It closed Wednesday above $53—Editor.)

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