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Gold Bugs Eye $600, $850 and Far Beyond

The metal continues to defy its critics, spurring chatter of a major 'short squeeze' near term.
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Nervous jitters about Iran's nuclear ambitions haven't only inflated crude oil prices. Gold, often seen as a safe haven in times of uncertainty, reached 25-year highs last week and remained on the upswing Monday.

In recent action, gold for April delivery was gaining $2 to $573.80 per ounce.

Among metal-mining stock indices, the Amex Gold Bugs Index was recently up 2.34%, led by big gains in


(AU) - Get Free Report


Harmony Gold

(HMY) - Get Free Report


Gold Fields

(GFI) - Get Free Report


The CBOE Gold Index was up 2% and the Philadelphia Gold and Silver Index was up 2.3%.

Barrick Gold


was up 1.7% after saying it would raise its stake in

Placer Dome


to 94%. Barrick offered to acquire Placer Dome in November 2005.

Broad indices, meanwhile, were mixed as oil prices rose and investors fret that the

Federal Reserve

may have to lift interest rates for longer than expected. The

Dow Jones Industrial Average

was recently up 1.76 point, or 0.02%, at 10,795. The

S&P 500 index

was up 0.07% at 1264 while the

Nasdaq Composite

was down 0.18% at 2258.

Gold Shines

Just like crude (which was recently gaining 38 cents to $65.75 per barrel) gold's latest surge came after Iran said over the weekend it would resume uranium enrichment activities even as its case is being referred to the United Nations Security Council.

But unlike crude, gold isn't likely to pull back if those tensions ease. "Gold is in a bull market," says Brien Lundin, gold analyst at Jefferson Financial, and editor of

Gold Newsletter

. "That means it responds positively to bullish news as investors are looking for excuses to buy."

For proof, there's no need to look further than the breakdown of a once-traditional inversion relationship between gold, which is priced in dollars, and the U.S. currency. A rising dollar used to depress gold prices, as it took less dollars to buy the same amount of gold. But, as it did all of last year, gold's latest push has occurred even as the dollar has been strengthening.

But as investors are looking for excuses to buy, a drop in the dollar might well give another leg up for gold. Should tensions with Iran ease, the greenback could get hit ahead of Friday's readings on the U.S. budget and trade deficits.

Still, after easily passing through the psychologically key $500 level in November and recovering from a mid-December slump, gold has been on a seemingly unstoppable upward trend. Most analysts currently view it as overbought. A correction, several say, should be expected soon.

This, however, is what gives Bernie Schaeffer, head of Schaeffer's Investment Research, confidence that gold still has room to run.

"This overwhelming sense of skepticism, this all-out assumption that the end of this rally is near, is exactly why the metal and its relevant stock indices still have upside potential, at least for the short term," Schaeffer wrote in a research note.

Schaeffer's contrarian investment strategy proposes that the investing masses may be right while a trend is unfolding, but they are likely wrong about when the trend begins and when it ends. "In this situation, I think the gold skeptics are calling an end to the trend a bit too early," Schaeffer says.

At the other extreme, James Turk, founder of, believes that gold might test $850 per ounce before the end of March. At a recent meeting in's

office, Turk said that after passing the key $500 level, gold has attracted investors who were previously under- or un-invested in the metal.

In addition, Middle Eastern investors tend to rush into gold when they are flush with cash, as they are currently, while the tensions with Iran, the ongoing war in Iraq and the recent victory of Hamas, are all fueling the short-term trend.

Several analysts, including Lundin and Peter Grandich, editor of

The Grandich Letter

, believe that gold will likely try to test the $600 before an expected correction occurs.

"I think

gold is obviously overbought, and I do expect a correction at some point," Lundin says. "But one thing about gold is that it has repeatedly made prognosticators look foolish."

In the short term, Lundin says that large short positions -- or bets that the price of gold would fall -- have been punished since the start of the year, which should guarantee further upside for the price of bullion. As gold prices refuse to drop significantly, the owners of those positions (most likely hedge funds) are increasingly forced to buy gold to cover their bets, creating a self-reinforcing mechanism called a "short squeeze."

But before or shortly after $600 is reached, the "smart money" may start anticipating a seasonal pullback in gold prices, which typically occurs between March and May, Lundin says.

That's all in the short term, of course. Lundin's conservative estimate for this year is that the $650 will easily be reached. But he doesn't bar the idea that speculative fever may push it to test its historic highs around $850, which were last touched in January 1980. Adjusted for inflation, this would equate to more than $2,000 in current dollar terms.

"Should the nominal high of $850 be touched, then the next target would be $2,200," Lundin says.

That's also the call of French bank Credit Agricole Cheuvreux, which sees the possibility of a spike to $2,000, without providing a time frame, because of an upcoming short squeeze.

In making the call, Cheuvreux analyst Paul Mylchreest revisits a conspiracy theory -- favored by hardcore gold bugs -- that central banks have roughly 10,000-15,000 fewer tons of gold than their officially reported reserves of 31,000 tons. Much of that disappeared gold was loaned secretly over the years to bring down the price of gold in times of crises, Mylchreest says. The banks' counterparties meanwhile have to replace the gold they had borrowed and this is causing a giant short squeeze, the theory goes.

Whether the theory is true or not, the $2,000-per-ounce call brings to mind Goldman Sachs' famous call that crude oil might experience a "super-spike" that would take it to $100 per barrel. It wasn't long after the call before crude oil prices experienced a correction.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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