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Getting Ready For Gold's Run To $500

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John Dobosz, 07.01.05, 9:21 AM ET


Related Quotes
RYPMX 34.91 + 0.07

ABX 25.28 + 0.25

AU 36.09 + 0.36

AUY 3.84 + 0.15

GG 15.73 - 0.05

GLD 42.70 - 0.74

MDG 18.03 + 0.03

NEM 38.93 - 0.10


NEW YORK - The price of gold has come a long way in the past four years. In February and April 2001, you could have picked up an ounce of the shiny yellow metal for just over $255. By early last December, it had kissed $454 in London, for a gain of nearly 80%.

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Stocks of the mining companies performed even more spectacularly. The Philadelphia Gold and Silver Mining Index (XAU) bottomed out in November 2000, at 41.85, and by last November topped at 111.50 for a four-year gain of 166%--more than double the gain of the metal itself.

But that volatility in the miners cuts both ways. Gold (the metal) corrected almost 10% from its high to form two parts of a double bottom early in February and again in late May. Meanwhile, the miners in the XAU got hammered to the tune of a 30% drop from last December to mid-May. True to form, however, the miners have vaulted 20% higher from the May 16 low, while gold gained about 5% on its recent run, from $415 back near $440.

So, given the four-year bull market in gold and gold stocks, what's a savvy investor to do? In short, some of the best gold advisers say hang on to any gold exposure, and to continue to accumulate as prices of the metal and the miners are likely to consolidate before vaulting to new highs.

"I'm fully expecting to see $500 gold by the end of the year, as long as it can take out its high earlier this year of $445," says Sy Harding, editor of Street Smart Report, the number one ranked gold timer by Timer Digest for the past 12 months. Harding's technical indicators, which rely primarily on price and volume reversals, flashed sell signals for both the metal and the miners at the top of the market last December, and got him back into both on May 24.

Currently, Harding says the XAU is "overextended" above its 21-day moving average, which has been a reliable indicator of support. He looks for the XAU to pull back to the moving average before resuming its uptrend. However, he cautions "a break below the rising moving average, if it occurs before Comex gold breaks out above $445, would be a negative." Harding currently has 30% of his model portfolio in gold-related investments: 10% in the exchange traded streetTRACKS Gold Shares (nyse: GLD - news - people ) and 20% in the Rydex Precious Metals Fund ( RYPMX) .

Another believer in soon to be $500 gold is Curtis Hesler, editor of Professional Timing Service. Like Harding, Hesler anticipates profit taking after the sprint higher in the XAU, perhaps a drop back to the 85 level.

"If you don't own any gold, buy a little here. But then load up on Yamana (amex: AUY - news - people ), if it falls back to $3.10; and on Barrick Gold (nyse: ABX - news - people ), if it pulls down to $22.50," he says. Another core mining stock, says Hesler, is Goldcorp (nyse: GG - news - people ), of which he is waiting to buy more on a pullback to $13.75.

Jack Adamo, of Jack Adamo's Insiders Plus, made a profitable call in his May 14 newsletter, urging investors to buy gold stocks that have since run up between 13% and 24%. He's hanging on to those positions, but his models are telling him to hold back on new purchases just now.

"The indicators I track and trust give me excellent results on bottoms, but only tell me when the risk-to-reward to the upside is getting unfavorable," says Adamo. "Right now they're saying hold, but don't buy."

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Adamo is a long-term gold bull and never completely sells out of the sector, although he will prune his positions, which he says he will probably do with AngloGold Ashanti (nyse: AU - news - people ) and Newmont Mining (nyse: NEM - news - people )--once this short-term cycle has peaked. One strategy he does employ on some of his profitable positions is to write out-of-the-money covered call options. "That way you put some more money in your pocket and probably get to keep the stock."

Currently, Adamo's favorite gold stocks are Meridian Gold (nyse: MDG - news - people ) and Goldcorp.


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