Gold Starting to Look More Precious

"It's like all shiny and stuff."
-- anonymous 13-year-old Inca upon discovering a gold nugget.

I've always been skeptical about the soundness of gold as an investment. I dismissed its marvelous 25% gain in 2002 as simply the byproduct of investors' disgust with stocks, I questioned the sanity and sustainability of the prewar price run to $380 an ounce in February, and was asking "Where's your fundamentals now?" when the dissipation of the war premium sent prices tumbling some 16% to $320 by April.

But gold's recent rally back to $370 this past month has caused me to put aside my prejudice and concede that the yellow metal might actually be in the early stages of a structural bull market. Despite all the talk of deflation, a weak dollar has actually helped support gold prices. Because gold is dollar-denominated, other currencies, like the surging euro, are getting more bang for their investment when buying gold.

A Very Big Picture

From a technical analysis perspective, the turning point in gold occurred in May 2002 when gold crossed $320, breaking a 15-year downtrend. The chart below also shows that gold has emerged from four years of consolidation (1998-2001) by putting in a rounded bottom. This formation, as opposed to a sharp spike, usually supplies a solid foundation to build future gains.

The fact that gold held support at $320 and staged an impressive rally leads me to believe gold prices will hold recent gains and even trend higher over the next 12 to 18 months. Given the large time frame and the realization that gold won't be charging up in a straight line, a decline and retest of $320 -- or even $300 -- is entirely possible but doesn't change the thesis that gold is just midway into a multiyear advance.

10-Year Gold ($USD)

*Based on New York close, 19-day moving average. Source:www.kitco.com