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How Gold's Run Could Be Derailed


A SocGen analyst says it's going to $6300. What could stop it?


The rhetoric surrounding gold now glitters as brightly as the metal itself.

Gold is slipping today, but its recent move has been dramatic and historic: in fact, gold reached a new all-time high price of $1153 per ounce on November 18. Given that kind of surge, it's unsurprising that fans continue to flock to the metal.

The latest forecast to hit the headlines: Dylan Grice, an analyst with Société Générale, thinks gold could go to $6300, given the decline in central bank credibility.

"The US owns nearly 263 million troy ounces of gold (the world's biggest holder) while the Fed's monetary base is $1.7 trillion. So the price of gold at which the US dollar would be fully gold-backed is currently around $6,300. Gold is very cheap -- at current prices, the USD is only 15 perrcent gold-backed," he wrote, according to Reuters.

The analyst has a platoon of well-regarded strategists and money-making investment pros agreeing with him about gold's shiny future.

The Wall Street Journal reports that hedge fund honcho John Paulson is launching a fund dedicated to buying up shares of gold miners and other bullion-related investments. Paulson & Co. already is a major holder of gold shares including Anglo Ashanti and Kinross (KGC).

Louise Yamada, the top-notch technician, told Barron's on November 9 that she thinks the metal could eventually test $4000 per ounce. This follows on the comments of David Rosenberg of Gluskin Sheff, who believes gold could in fact still triple from today's levels. See also Why Gold Could Triple From Here.

Indeed, if there's one trade everybody can now agree on, it seems, it's this: Stay bearish on the dollar and bullish on gold. Sometimes the herd is right, no doubt, but what could derail this group think?

This is a question Dr. Ed Yardeni of Yardeni Research recently asked: What would it take to rally the dollar and send the price of gold back down?

Of course, the most obvious is central bankers reversing this rock-bottom rate policy. This, though, isn't happening any time too soon, as we listen to the recent speeches by our PhD-carrying central bankers. See also The Other Side of the Dollar.

The November 4 FOMC statement highlighted that the Fed's zero-interest rate policy is going to be maintained for "an extended period."

Fine, Yardeni says, but what if fiscal accountability is restored in Washington?

Lawmakers now working inside the Beltway don't seem too interested. But their days in office could be numbered. Our fellow Americans recently gave the Democratic incumbents in Virginia and New Jersey the heave-ho.

Also, check out this recent survey taken by Gallup.

The poll, conducted earlier this month, found that more than two-thirds of Americans (68%) disapprove of the way Congress is handling its job. A majority of registered independents say they would likely vote Republican rather than Democratic, 52% to 30%, if elections for Congress were held today.

Mike Pento's response to our hypothetical: Fat chance, says the chief economist at Delta Global Advisors.

"As long as there is no entitlement reform, there is no way to get the budget under control," Pento told us in a chat this morning. "These are virtual guarantees due to demographic certainties."

Whether investors should be buying gold at these levels, Pento says, depends on their time horizons. Hedgies and day traders, he says, probably shouldn't be grabbing gold right now, but investors with longer time frames perhaps should.

"Let's get the fundamentals straight," the economist says. "We see other countries raising interest rates so there are huge interest rate differentials; we have negative real rates here; and the pedal-to-the-medal will continue for at least another four or five months."

Pento adds, "I am staying long gold. In March, if Bernanke says it's time to strengthen the balance sheet, it could be a sign to change investment direction. Until then, you have to stay the course."

We also checked in with William Fleckenstein, president of Seattle-based Fleckenstein Capital, for his thoughts.

"Even if the dollar does better, gold can still go up," Fleckenstein says. "It is just green paper. People see that the dollar is not managed well. It can't hold its value. We will print them up and they won't be worth too much."
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