Source: The Gold Report 01/10/2005

http://www.theaureport.com/

Gold hit a 16-year high of $454 on December 2, 2004, only to finish the year at $436 and decline further to $416.50 during the first week of January. Editors of some of the industry’s newsletters pointed to the current rally in the U.S. dollar as the primary impetus for falling gold prices.

Yet most agreed that the rebound will be short-lived and that long-term, the dollar is headed for a steep decline. When that happens, gold prices will soar again in 2005, possibly even reaching the elusive $500 level, according to some predictions.

“The dollar is headed off the cliff, which is very positive for gold,” said Larry Edelson (Real Wealth Report).

Meanwhile, there are other forces at work that will continue to drive demand for gold, say Edelson and Adrian Day (Global Analyst). These include strong investment buying from Japan, India and Turkey, a recovery in global jewelry demand, the growing buying power of the Chinese, and the launch of the New York-traded Gold Trust.

In its first six weeks, the Trust attracted $1.3 billion, the most successful ETF launch ever, said Day. “Though some forecasts for its possible impact are exaggerated, nonetheless it is a significant long-term positive for the gold market, making it simple for U.S. investors to buy the metal, and making gold available to those who in the past had been prohibited from buying bullion . . . .”

Jay Taylor (J. Taylor’s Gold & Technology Stock Report) believes gold, like commodities, is an inflation hedge. “But unlike commodities, gold is also a hedge against deflation. It is always the ‘go to’ money when either currencies evaporate into the thin air of inflation or when debt implosions lead to massive bankruptcies and instability of financial systems.”

How long will the U.S. dollar continue to rally, before the anticipated slide begins? Day said he wouldn’t be at all surprised to see the dollar stabilize, or gain 10-15% over the next two or three months. And as the dollar rallies from its oversold condition over the next few months, gold will languish, said John Mauldin (Thoughts from the Frontline) in his January 7 E-Letter. “Maybe we even get a chance to buy some more at $400 or less, but at the end of the day, we will see new highs.”

The current rally could also create buying opportunities for gold stocks, which didn’t fare as well as bullion in 2004, and could experience even more weakness early this year. “Should gold retreat further due to a dollar rally, the gold stocks could pull back significantly,” said Day. Longer term, however, the stocks look promising.

“Regardless when the worm turns again, and people realize that the dollar is heading back down, down, down. . . . the quality resource stocks are going to light up like rockets,” said Doug Casey (International Speculator).

That may be especially true for the juniors, said Taylor. “Gold shares did not keep up with gold bullion in 2004, for a variety of reasons, so we think the snap back for the juniors could be very exciting in 2005.”

Expect gold prices and shares to remain volatile, at least for the early part of 2005. However, the long-term trend is up for both, according to our authors. “Gold’s uptrend remains firmly in place, which will continue because the dollar’s downtrend remains just as firmly in place,” said James Turk (Freemarket Gold & Money Report). “The dollar may occasionally bounce and gold may from time to time hit an “air pocket’. But what would you rather own, paper or gold?’ (January 10, 2005)

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