OUTLOOK FOR GOLD
1997
will be an interesting year for gold. Interesting, because everyone else
will have lost interest ...
Taipan has been bearish on gold since 1994. In July 1996, we warned
that gold could spike down another 6% below the US$380 per ounce level -
but forecast that the precious metal was close to setting a bottom.
The bottom fell out as rumors of central bank selling knocked gold
below support at US$380. For years, dealers made a fortune by selling US$400
calls when the metal tested the $US400 level, and selling US$380 puts when
the metal tested US$380. Since gold didn't break out of the range, dealers
would get to collect the option premiums from speculators.
Take it high, take it low
In January 1996, this strategy backfired. High lease rates for
gold made it expensive for gold producers to hedge their inventory by short
selling on the cash market. (This means borrowing gold they didn't own and
selling it in the open market, with the intention of "covering"
the short position with future production.)
Basically, producers stopped selling. Speculators stepped in and
took the metal as high as US$422. The dealers were trapped on their short
call positions and were forced to buy gold futures.
But while goldbugs were grinning like schoolchildren, producers
short sold nearly every ounce of gold they could produce in the conceivable
future - despite the high lease rates. Gold came crashing back down into
its old trading range.
The untiring bull market in paper assets gave speculators an excuse
to dump the metal. Just as dealers were forced to buy gold to cover short
call positions, they were forced to sell gold to cover short put positions.
Gold could get a US$10 or even US$20 bounce during a correction
in U.S. stocks to more realistic valuations. But that doesn't mean it's
time to buy. Trying to nickel-and-dime gold is a mistake. There's a flood
of gold that's about to hit the market ...
The gold market is trying to shake out the goldbugs. That's hard
to do, because goldbugs have been wrong for so long that they are probably
immune to pain. But eventually, even the strongest hands will capitulate.
Taipan's 1997 Forecast
Gold will collapse to the US$350 to US$360 range, possibly lower.
Until gold reaches a selling climax in the mid-US$300 range, all bounces
will be sucker rallies.
Accelerating world-wide economic growth triggered by loose global
monetary conditions will ultimately rekindle demand for the precious metal
(offsetting anemic growth in the United States). Gold will peak out around
the US$400 to US$410 range.
The 3%-5% solution
The strongest argument for gold is the supply and demand argument.
There's a limited amount of gold in the world. Demand keeps growing.
Logically, gold should move higher. But technical and psychological factors
will dominate the gold market for the next twelve months.
Once the cataclysmic shakeout is complete, however, gold will make
a comeback. We don't see gold breaking US$410 during 1997. But by 1998,
I expect gold to trade as high as US$480.
When the buying opportunity in gold is knocking on the door, Taipan
will give you the signal. If you want to be a contrarian, load up now ...
but the real contrarian play will come later on, when gold caves in ...
Taipan recommends that you keep 3% to 5% of your assets in gold.
Consider it an insurance policy. Like all insurance policies, hope that
you never have to use it. Mining stocks provide good leverage on the price
of gold, since production costs are fixed. But Taipan fundamentally dislikes
mining stocks. This tiny pond is filled with sharks (stock promoters).
The best long-term hedge is physical gold. I like gold coins because
they are portable and liquid. Our favorite source for gold coins is Jefferson
Coin and Bullion, 2400 Jefferson Highway, Suite 600, Jefferson, LA 70121
USA; tel. (800)593-2584.