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When This Indicator Says to 'Buy Gold', It's Never Wrong - Outside View
 
 
When This Indicator Says to 'Buy Gold', It's Never Wrong

When I recently predicted that the long-term trends were in place to send gold to $5,000 an ounce, I was stunned by all the attention that my forecast received.

Granted, a move of that magnitude represents a dizzying long-term profit opportunity. But that's just it - it's a long-term profit opportunity.

I've uncovered some profit plays that offer equally hefty gains - but in the short term.

One in particular stands out - a profit opportunity that relates to a signal that I refer to as the "Gold Spike Indicator," or GSI. Because of the nature of the indicator itself, this profit opportunity is available only four times a year.

And the next "window" of opportunity is just weeks away.

Near-Term Profits Hidden Within Long-Term Gains

Gold has posted some solid gains over the past decade, zooming from about $250 an ounce in June of 2000 to an all-time record of $1,260 an ounce earlier this summer, before trading down to the current level of about $1,160. That zooming long-term surge in the yellow metal has some pundits shouting "bubble."

My advice: Don't listen.

In fact, I've got two good reasons investors should ignore these doomsayers.

First of all, from a long-term standpoint, one of the first signs of a bubble is a parabolic rise in price - a short-term spike that's clearly visible on a long-term chart. The more-recent bubbles are fairly easy to spot: Just think about the Nasdaq Composite Index in 1999-2000 and U.S. housing prices from 1997 to 2003.

The accompanying chart of gold prices over the past decade illustrates this very well: One look underscores that there's been no such short-term price spike.



The second reason may surprise you: The near-term profit story may be even more dramatic than the long-term opportunity - thanks, believe it or not, to the global financial crisis.

As an aftermath of that worldwide financial mess - currently manifesting itself as an inflation-fueling debt overhang - several of the leading investment banks reconstituted themselves as "bank holding companies."

This is where the near-term profit story for gold gets quite interesting.

The "Gold Spike Indicator"

You see, while firms such as Morgan Stanley and Goldman Sachs Group Inc. may now be officially characterized as bank holding companies, they can't ignore their investment-banking DNA. And that means that Goldman and Morgan remain major traders of - and holders of - such commodities as oil and gold.

As bank holding companies, Goldman Sachs, Morgan Stanley and other firms in similar circumstances are required by law to make quarterly disclosures on their holdings - including commodities. And my research shows that there's a certain "window" during this disclosure period during which some of those commodities can make some pretty hefty price moves.

Gold is one of the commodities that's worth watching.

In each of the last six quarters, in fact, this indicator has signaled - to the day - the optimal time to buy gold.

How do I use that information? There's an old investing adage that says: "The best place to look for gold is in a gold mine."

While some traders use futures or options to play the commodity markets, I prefer to keep my strategies simple: I like to go directly to the source - I believe the shares of the companies that get the gold out of the ground offer the biggest payoffs at the lowest levels of risk.

If you really think about it, this strategy makes the most sense: Investors stand to maximize their profits when they buy into a well-run company that controls sizeable amounts of a rare mineral that happens to be one of the world's most-sought-after natural resources.

That means it's time to buy gold-mining stocks. But only certain ones.

Right now, for instance, I'm looking at a junior-metals player with a resource estimate in the millions of ounces. At current prices, its gold holdings are worth roughly $2.5 billion. If gold were to hit $1,425 an ounce next year, as Goldman Sachs predicts, these holdings would be worth more than $3 billion.

And I've publicly predicted that gold could hit $1,500 an ounce by late this year or early next year.

What makes this company especially intriguing is the fact that there are two neat wildcards at play here.

First, the company's resource estimate may be low. There's a lot of interest in its latest drilling results. A "new" estimate could be announced at any time.

Second, there's a relationship between the indicator and the company's stock price. The last time the GSI was available - remember, it's only available four times a year - this stock zoomed 21% in just a few days.

Vigilance Pays

In that afore-mentioned Money Morning report back in January, I said that I expected gold to eventually reach the $5,000 level. My "gold superspike" prediction got quite a bit of attention. So let me say this: I haven't changed my mind - I've grown even more confident in my forecast. It will take some time for this price point to be achieved, but the long-term catalysts I outlined remain in place

If there's a takeway message here, it's this: When it comes to gold, by all means invest for the long-term.

But don't ignore the short term.

The huge level of debt the United States has taken on as a result of this financial crisis is a long-term positive for gold. All that debt is highly inflationary.

And I continue to believe that gold prices could reach $1,500 by the end of the year. On a straight gold play alone, that would make for a tidy 29% gain from recent price levels.

My short-term target is actually becoming more realistic by the day, given the growing lack of confidence that exists in the U.S. government's ability to arrest the nation's financial slide.

This particular "wall of worry" will be very good for near-term gold prices.

That's a short-term catalyst that no shrewd investor can afford to ignore.

This article is authored by Peter Krauth. Peter is a a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy resources and other natural-resource-related commodities. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 
 
 
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