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Gold Prices at $10,000? In Your Dreams!

$2000 gold is plausible, but the fundamentals don't justify some of the forecasts being made today...

FEW WERE taken by surprise when Gold Prices surged following the Federal Reserve's third round of quantitative easing announced last month, says The Commodity Investor's Amine Bouchentouf, writing for Hard Assets Investor

The positive impact QE3 has on gold is a basic fundamental; just look at gold's reaction to previous stimulus measures initiated by the Federal Reserve.

After QE1 was announced in the wake of the financial crisis, Gold Prices increased 36 percent; during QE2 announced in November 2010, Gold Prices shot up 21 percent. There are many macroeconomic and econometric models that indicate a direct relationship between Gold Prices and the monetary base, which is usually measured as money supply M0 and M1.

The models indicate that an increase in money supply tends to increase the price of gold. At its most basic level, quantitative easing programs tend to increase the money supply; in addition, more Dollars injected into the system tends to decrease the value of the Dollar.

All else being equal, as the value of the Dollar decreases, the value of gold and other Dollar-denominated assets tends to increase. This is one of the many important reasons why Gold Prices increase during and after bouts of quantitative easing. And we don't expect gold to react any differently this time around.

Many commentators and analysts are now predicting that gold will be reaching $2000/oz.; some are even arguing that gold may reach these levels before the end of the year. The upward trend for Gold Prices has been established after a period of consolidation that lasted for most of the summer. Let us take a look at what gold has done so far in 2012 in order to determine what gold will most likely do as the year comes to a close.

Gold began the year on a very positive note, rising more than 8 percent between the beginning of January and the end of February. While the first two months of the year proved to be good for those who were long gold, the subsequent months weren't as generous.

Between the months of March and July, Gold Prices were down almost 11 percent. It was also not a good time to be long gold during the summer; it certainly was not a good time to exit any positions since that period marked a yearly low. Indeed, prices almost hit $1500/ounce in May and June. For a period of time, it looked as if the stock market mantra of "Sell in May and Go Away" also applied to gold.

However, as the summer doldrums subsided, Gold Prices began to show signs of life once again. While the months of March, April, May, June and July experienced decidedly mild downward swings, the month of August marked the beginning of the consolidation period. Up until the middle of August, we did not get any strong indications of price action in either direction.

This of course changed toward the end of August, as prices began an upward-biased trend. And the trend was confirmed as prices exploded in September, up almost double digits since the August lows—indeed, prices are currently up 10 percent since Aug. 1.

With prices sitting above $1770 and with upward momentum clearly established, many commentators are claiming that gold will hit $2000 before the year is over; some have even claimed gold will hit $3500/oz., while still others have come out of the woodworks and gone so far as predicting $10,000/oz. Now, it's very easy to get carried away when prices are going up (dot-com bubble anyone?), so the astute investor needs to study the signs and indicators to determine the best entry and exit points.

At this stage, The Commodity Investor is cautiously bullish on Gold Prices and is waiting for further indication of a long-term upward trend confirmation. The fact of the matter is that prices are going up, and I expect them to keep going up in the medium term; however, there are always unforeseeable events, so tread carefully.

If you began accumulating during the summer, then I would definitely not sell your holdings; in fact, I would add to them at these levels and keep buying on dips. If you're considering going long now, I believe there is still further upside, but be cautious.

My position is that prices will likely go higher than lower, but I certainly don't believe the fundamentals justify $10,000 or even $5000 in the near future. However, $2000 is certainly plausible and within reach.

While QE3 is certainly providing a lot of momentum for gold bulls at the moment, its effects will not last forever. Therefore, we need other key drivers to keep pushing prices higher. Fortunately for gold bulls, there are plenty of factors that are bullish at the moment. First, central banks around the world are pursuing "easy money" policies, which are usually bullish for Gold Prices.

Second, Europe is nowhere near where it should be to solve its sovereign-debt situation, another positive factor for gold. Third, demand from consumers in Asia and other emerging markets is solid and will remain so. Finally, there are always sudden shocks that could cause Gold Prices to go parabolic, such as a replay of a Lehman collapse (this time on a sovereign level) or an armed conflict (such as an Israeli showdown with Iran).

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Hardassetsinvestor.com is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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