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Why Gold Keeps Climbing, and Why it Could Stop

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What could confound the consensus?

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The yellow metal continues to shine, with everyone bearish on the dollar and bullish on gold.

Australia yesterday jacked up its official rate by 25 bps to 3.25%, which investment pros think could be the beginning of additional rate hikes around the world.

"This is important because in this day of instantaneous information and data transfer, money will not gravitate: It will flash to where it is treated best," notes Curt Hesler, longtime editor of the Professional Timing Service newsletter.

The result is another drop in the US dollar and gold breaking out to new highs over $1,000 an ounce. Investors assume that the greenback will continue moving lower while gold could keep rocking and rolling higher.

In the past five days, the SPDR Gold Trust (GLD) is up 3.4%. The Market Vectors Gold Miners (GDX), an exchange-traded fund with holdings including Agnico Eagle Mines (AEM), Barrick Gold (ABX), Kinross Gold (KGC), and Yamana Gold (AUY), has climbed 9.5%.

"Contrarians had a couple days in the sun last week when the dollar firmed," notes Ed Yardeni of Yardeni Research. "This may be one of those rare times when an overwhelming consensus turns out to be overwhelmingly right."

But, for the sake of a fun little intellectual exercise, we asked this question: What could derail consensus opinion and cause the dollar to strengthen and gold to tumble?

We called up a few smart fans of gold for their quick two cents. Truth be told, we couldn't track down many hard and good reasons why the consensus is misguided.

First off, though, should investors be putting new money to work in gold at these levels?

"Short term, gold is over-extended," says Michael Pento, chief economist at Delta Global Advisors. "Gold skyrocketed very quickly. I would not be buying gold today. I think we could get a consolidation back somewhere around $1,000 an ounce."

He adds, "I would want to see gold consolidate around $1,000 for a few days before I bought more."

Hesler isn't buying here, either.

"I am impressed with the breakout," he tells Minyanville. "But I like to buy when I have some risk/reward in my favor." He says he would be comfortable buying gold at $970.

Dr. Scott Nystrom, who spent 25 years crunching numbers and writing economic policy briefs at the White House Office of Management and Budget and now edits the Gold Stock Strategist newsletter, reminds us that, short term, anything can happen to the price of gold.

"There are currently large and long speculative positions on the COT," he tells us. "If speculators move away from these positions it could drive the price of gold down."

Nystrom adds, "Gold could go down to $1,000, no sweat. There could be a small correction at this point. But if gold did go under $1,000, and you're a long-term investor, I would buy as many gold stocks as I could."

Nystrom likes the miners right now. His latest junior gold mining pick is Metanor Resources.

Longtime market pro Dennis Gartman is also sounding a bit cautious here in the short term, and he has his own unique contrarian indicator.
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No positions in stocks mentioned.
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