Jeff Clark's Thoughts on How to Predict the Price of Gold

Casey's Jeff Clark shares his observations about where the price of gold may be heading in years to come.

Regular readers know that my opinion differs from Clark's in the short term, as I think gold is in for a massive correction. However I do agree that the most likely medium to long term scenario is a moonshot for gold prices. The real question is when.

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How to Predict the Price of Gold

Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

Jeff Clark is editor of Casey’s Gold and Resource Report, where each month he brings readers some of the best research and investment recommendations in the business.

How to Time Gold Stocks Using the BPI

Some interesting trading research and musings by Jeff Clark today, as he describes a method to time the buying and selling of gold stocks.

Clark's found that when the eight-day moving average crosses above the bullish percent index, it's time to buy - and when the converse happens, it's time to sell, or go short. It's a twist on the popular method of timing stocks using the BPI. Clark says a little adjustment is needed for gold stocks, due to their huge volatility.

I personally have become fascinated with these sentiment indexes recently. Over the weekend, I perused the Wall Street Journal, and concluded that at least anecdotally, gold seemed to be a little too popular right now.

Is the dollar a doomed currency? Of course it is. The problem is that everyone knows that right now. And when everyone is on one side of a trade, you know the other is due for a mega rally. Since it's tough to picture a scenario where both the dollar and gold rally, it may be wise to be cautious on gold for now, especially if you believe the buck is due.

Gold's latest assault on $1,000 ran out of steam soon after crossing the goal line -

at least for now.

(Source: Barchart.com)

What's the Best Month to Buy Gold

Well, we sold our gold stocks after May this year, on cue with the old addage "sell in May and go away." We were alarmed that the gold market appeared to be looking a bit toppy, at least in the short term, so we took profits and went to the sidelines.

And now we're "safely" back in cash. BUT - when do we buy back into the market? That's the conundrum involved with selling an asset that's in a bull market...you sell and wait for the pullback, often to find that you lost your position, and are resigned to watch helplessly as the market takes off without you!

Fortunately for us, guest author Jeff Clark is going to dive into this topic today, as he looks at the best months for buying into gold and gold stocks.

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When is the Best Time to Buy Gold?
By Jeff Clark, Editor, BIG GOLD

I bet you don’t own enough gold.

Before you tell me I’m wrong, let me ask it this way...

• If inflation returns, or even hyperinflation...
• If the economic crisis persists and gets worse...
• If uncertainty and fear continue, and chaos and rioting begin...
• If stock markets languish or suffer another meltdown...
• If the recovery spending of the world’s governments proves futile...
• If government interference in the economy continues to increase...
• If the value of the U.S. dollar takes a major fall...
• If world recovery from the current recession/depression takes years...
• If you’re still wondering whether you have enough “safe” money...

...would you feel you own enough gold?

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away.

So let’s assume you answered “No” to my question and need to add some ounces to your collection... is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?

In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy.

How does this compare to the bull market of the 1970s?

In the last great bull market, summer also was a good time to buy gold (although April was even better.)

What about gold stocks?

Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy.

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power.

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.

Having physical gold in your possession is always a good idea in times of economic turmoil – there is no “uncertainty hedge” like it. But to actually make money, you should also look at premium gold stocks. Our current favorite has been so consistently successful that we call it “48 Karat Gold.” Click here to learn more.

Ed. note - I'm a Casey Research subscriber and can vouch for the quality of their research and analysis.