Cash From Chaos as Gold Shines

While geopolitical turmoil has sent the broader market lower recently, gold stocks have been on a tear, and analysts say the gains could well continue this year.

Like most commodity prices, gold has risen over the past 12 months amid a weakening dollar, low interest rates and strong investor demand.

Although gold has been in a correction for most of 2004 following a big surge at the end of last year, geopolitical events recently sent bullion higher, and gold stocks have jumped 4% since March 15. Meanwhile, the S&P 500 has fallen more than 1%.

The perception that world violence is escalating bodes well for gold because in times of political or economic uncertainty, investors often flock to assets that they consider safe havens. But even if the geopolitical landscape improves or falls off investors' radar screens, pundits say there are many reasons to be bullish on the group.

Merrill Lynch analyst Michael Jalonen believes gold prices will rise in April though mid-May because he expects consumer demand will be strong in India as the wedding season approaches.

He said gold jumped from $345 an ounce in early April to $375 in mid-May. Following the same pattern, he says gold could rise to $425 by mid-May.

Gold futures were recently sitting at $417 an ounce. Other analysts are more cautious on the very near term, however.

David Skarica, editor of the newsletter Addicted to Profits and vice president of research at Freemarketnews.com, said while the dynamics of supply and demand are important, gold prices tend to trade on emotion. He noted that whenever bullion moved in a range of $420/oz to $430/oz over the past 10 years, rallies have often failed.

"Over the next six to nine months I'm pretty bullish, but over the very short term it's going to be tough to take out those levels," he said, adding that he expects gold to reach $460 an ounce by year-end.

Geoff Stanley, an analyst at BMO Nesbitt Burns, agrees there's no urgency for investors to step in right now, although "there's a strong case" for higher gold prices over the long term.

"You've still got a low interest rate environment," he said. "You have major producing companies reducing their hedges quite aggressively. You have a trend towards instability and weakness in the dollar. You've got the problem of the twin deficits in the U.S., so there's a lot pointing towards firmness in gold prices in the medium to long term."