Gold Stocks to Push Higher in 2010

Sandy Franks, Executive Publisher, Taipan Publishing Group
Wednesday, December 30, 2009

Spot gold prices are sitting at $1,103. Gold prices had been on a record-setting climb over the past several months as the U.S. Federal Reserve’s low interest rate policy has sent the dollar tumbling.

However, the dollar has steadied since early December, causing gold prices to drop about 10% from a record high of $1,227.50 on Dec. 3.

Although gold stocks have dropped slightly, investors are still buying the precious metal. After falling to 1,116.25 metric tons in mid-December, holdings in the biggest gold exchange-traded fund, the SPDR Gold Trust (NYSE:GLD), have since climbed back to 1,132.71 metric tons, the highest level since early June.

The economic forces that determine the price of gold are different from the economic forces that determine the price of many other asset classes such as equities, bonds or real estate. Gold, which is considered a hedge against a weak greenback, tends to rise when the dollar falls.

If you look back to a year ago, gold prices were held down during the second half of 2008 as the U.S. dollar enjoyed a +20% rally. At the time, foreign governments, institutions and banks began buying the U.S. dollar, which contributed to a significant drop in the price of gold. It reached a low of $683 an ounce.

But gold rallied back… especially as the global economy fell into turmoil. Now as we head into 2010, the outlook for gold is good.

In a recent interview, noted gold analysts John Hill and Graham Wark said, “We believe the drivers of the gold bull market remain intact. Longer term, we would not be surprised to see gold prices double from current levels as the global policy prescriptions for the credit crunch remain powerfully and uniformly reflationary.”

DailyMarkets believes gold will continue to rally into 2010. However, they do warn gold could suffer a correction based on debt default. The pullback from the 2007 high at $1,033 occurred right at the beginning of the Lehman default announcement. The most recent gold pullback began within a week from Dubai’s debt announcement last month.

Overall, gold stocks have enjoyed a long and enviable climb, rising some 380% from a low near $255 an ounce way back in April 2001 to an all-time high just over $1,225 early this month. Some gold experts predict we could see gold prices climb as high as $1,500 to $2,000 an ounce.

In fact, Ted Scott, director, UK Strategy, F&C, says, “The only way that gold can underperform is if the U.S. and other developed economies recover in a conventional way by cutting spending and raising taxes while at the same time embarking on a period of stable economic growth.”

An official at the World Gold Council says, “Gold, which has been one of the bigger investment vehicles this year, would remain so as the demand for the metal is underpinned by inflation, economic uncertainty and investors’ search for alternative assets.”

So, look for the price of gold to climb higher and up your holdings.