Gold: Room to Run, But Not Right Now

February 10, 2009 | By: FP Trading Desk

With a combination of flight-to-quality buying, market volatility and concerns about inflation and the health of the banking system, gold should be a strong performer for at least the next three years, Mr. Melek wrote in a note to clients.

However, he does not think that it will necessarily be a star in the short term.

"BMO full-heartedly agrees that most of these factors are very bullish for gold for the next three years, but analysis reveals that the gold market has jumped the gun somewhat," he wrote.

The problem, according to Mr. Melek, is that gold appears to be running ahead of its main drivers: the U.S. dollar and inflation. Right now, the greenback is strengthening and disinflation appears to be a much bigger problem than rising inflation. Those factors should be negative for gold, and Mr. Melek expects that the current gold rally may correct itself before it is reborn again in the second half of the year.

"Investors may have moved into gold as an asset class somewhat prematurely," he wrote.

Mr. Melek predicted an average price of around $850 an ounce in the first half of 2009. That is considerably below the current level of about $915 an ounce. However, the gold bugs will be much happier with his longer-term projections: $925 an ounce in the second half of 2009 and in 2010, with price spikes "easily topping" the $1,000 level next year.

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