Buying the Gold Price Breakout

NEW YORK ( TheStreet) -- If gold prices are never going back to 3 digits as one leading commentator says, physical gold may not be the best play.

Peter Grandich, chief commentator on Agoracom.com, has been a bull on gold since 2003. Gold prices have soared over 40% year to date most recently hitting an all time high of $1,190 an ounce. Mining stocks like Barrick Gold ( ABX), Newmont Mining ( NEM) and Freeport McMoran Copper & Gold ( FCX) have all hit 52 week highs. The million dollar question is: will gold's bubble pop?

Grandich thinks there is still a lot of upside to the precious metal, even if prices are no longer considered cheap. But the one level that Grandich looks at, not as a bullish benchmark but as a cautionary number, is $5,000. I asked him why.

Peter Grandich: I think it's become evident that gold's rise is clearly stating that....the only party that doesn't know the U.S. dollar is dead is the U.S. dollar. The fact that the dollar is continuing to weaken and, in many people's eyes, is not deserving to be a world reserve currency anymore. If that continues to be the mood in the world, then you can expect that gold continue to rise. I'm not in the perma-bulls who talk of $5,000 gold. First of all the world we would be living in if we saw $5,000 gold in the next 1-5 years would be a world I really probably would not want to get up each morning to face. That would be sorely suggesting that we've had economic perils perhaps even far worse than we suffered a year ago. So one; I don't look for it and two; I wouldn't want to see it. But I still think there's enough upside left in gold of several hundred dollars over the next few years where people can still benefit from it and also those who hold dollars can recognize that holding gold...will give a better return than holding the same US dollars.

Will gold exhaust itself?

Peter Grandich: We compared the gold market now to what it was like in the early 1980s....through the 50s, 60s, 70s the Dow Jones Industrial Average was trapped between 700 and 1000. By the early 1980s, equities became so out of favor that there was an infamous Business Week Magazine front page story that said equities are dead. They were not owned largely by the public..... but then the Dow broke through 1000 and stayed through 1000 and ran much higher....along the way many people in the early stages kept saying it's got to pullback, it's got to exhaust itself because they became so accustomed to it being in a trading range.

Peter Grandich: Gold had a major breakout above $1,000. We had called it and said it would go from a ceiling to a floor. My personal opinion is....I don't believe in my lifetime...we we'll see a price of three digits or less in gold again. If there is a correction to come, if there is a serious consolidation I don't think it will be much... but gold has somewhat been self correcting itself. It's has many intra-day corrections where we go lower, where we see the paper market at the Comex hit stops and suddenly within an hour or two it was heading back or surpassed the point where those sells came in. It was kind of like a self correction.

Who's buying: momentum traders; retail investors; fund buying; short covering?

Peter Grandich: I think it's everybody that you mentioned. I think people are participating in it....The stamp of approvals came in two ways. The first big fundamental stamp was India's purchase of IMF gold. That really gave people a realization that that large a quantity available sale that someone would step up and pay retail prices really put a floor under gold. But I think the other thing that's happening as I compare it to the early 80s is we're now seeing established not crazy people always predicting the end of the earth, but significant money managers from around the world from Einhorn...to Paulson all aggressively are buying gold and looking for it to go higher. That happened in the early 80s too as some of the early equity mavericks who had been long term bears and had been against stocks for years turned bullish. I think you're seeing the same thing happen here. So I think it's a combination of all different types of people hitting the market at a time when the commercial traders and perma-bears have been aggressively short and they're getting squeezed

What other precious metals do you like?

Peter Grandich: I think platinum has been in a stealth bull market. It actually has outperformed gold performance-wise this year. But there aren't any words about it part of the reason is it's a much thinner market. Second, there are far fewer platinum stocks that one can play and most of them come from South Africa. But out of South Africa the rand has been extremely strong so profit margins have been hard pressed on platinum producers. So I would still like gold. I like platinum, silver. Base metals are fairly extended here. Copper at $3.20 doesn't wet my appetite but I also don't think its going to collapse either. I continue to recommend being over-weighted precious metals versus base metals.

How do you invest in gold?

Peter Grandich: I think the ETFs. There are a lot of people who are bulls that disagree with me...who say the ETFs will never really give you true ownership and all. I have to tell you if the day comes where we all need to have physical gold to survive, I wouldn't want to be around those days anyway. So I'm not one of those who say you have to keep gold under your pillow to survive Armageddon. That's why I believe ETFs are a very good way, particularly for smaller retail investors, to play the gold movement without the hassles and the mark ups and sales charges that physical bullion brings.

-- Written by Alix Steel in New York.

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