Gold traders are in for a bumpy ride

Section:

By Myra P. Saefong
CBS.MarketWatch.com
Tuesday, November 9, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7B177AE6AD%2DBDC5%
2D4C77%2DB6BA%2D9DDBB565D0D3%7D&siteid=mktw&dist=

SAN FRANCISCO -- Gold futures have climbed to their
highest levels in 16 years and are unlikely to stop there.
But traders face a very bumpy ride ahead.

Tensions in the Middle East, a downtrend in the U.S.
dollar, and high oil prices have helped drive gold futures
near $438 an ounce in New York -- their highest level
since December of 1988.

"In this since-long-unexplored trading area, gold could
move in a very volatile and erratic way and play yo-yo,"
said Frederic Panizzutti, an analyst at MKS Finance in
Geneva.

Developments in the Middle East, with the U.S. offensive
against insurgents in the Iraqi city of Fallujah and
Palestinian leader Yasser Arafat reportedly near death,
have provided hefty support for gold.

"You've got a lot of fear out there that things are going
to get worse in Iraq," said Charlie Nedoss, an analyst
at Peak Trading Group. "Once you start talking about
urban warfare, I think that gets people on edge," he
said.

Overall, the biggest factor in the gold market has been
the perception that the dollar will weaken further, analysts
said.

"With the [U.S.] policy of benign neglect as to the value
of the dollar, the market is now convinced in a continuing
devaluation of the currency," Leonard Kaplan, president of
Prospector Asset Management said in a note to clients
Tuesday.

He said the rally in gold is due "strictly and solely" to the
decline in the dollar and as long as U.S. interest rates stay
below the rate of inflation, the dollar will suffer and gold will
shine.

The dollar also needs to fall to keep the economic recovery
on track, and it seems the Bush administration is content
to let the greenback "softly fall," said Brien Lundin, editor
of Gold Newsletter.

Still, Kaplan urges caution among traders. "Watch the
dollar as this will determine all," he said.

Kaplan is in the "bull camp" for now, but recommends
placement of some carefully crafted stop-losses, given
the "massive" long positions held by large traders, which
makes the gold vulnerable to sharp declines.

The risks for a price decline don't stop there.

"There is a risk now that falling oil prices will help reduce
the trade deficit, as well as undermine any inflation
component to gold's strength," said Tim Evans, a senior
analyst at IFR Markets.

The recent strength in the stock market also represents
a "competing investment, with potential that smaller
investors might choose the stock market over owning gold,"
he said.

For now, general economic growth and the decline in the
value of the dollar could add another $10 to gold's price
over the next two to three weeks, he said.

But the market may also just as easily see a repeat of a
move seen earlier this year, Evans said, when prices
dropped from the $432 level in April to a low of $375 in
May.

"In other words, there may be a $10 of further upside
potential, against perhaps a $57 downside risk," he said.

Given the odds of a continued downtrend in the dollar
and Middle East uncertainty, however, traders aren't very
hesitant in wagering on higher prices for gold.

In the very short term, prices could climb toward $440 an
ounce, said Panizzutti. Nedoss expects to see prices
climb to $475 by July of next year, and also says "it looks
like I might hit my target sooner rather than later."

In the very least, this is a gold rally that is likely to
continue through at least the first quarter of next year,
said Gold Newsletter's Lundin, adding that the market has
probably seen "intermediate-term bottom" for prices at
around $430.

Still, gold is prone to some pretty serious corrections
along the way as the big funds move in and out of the
market, said Lundin. He warns that gold's moves over
the next several months will volatile.

Instead, he recommends keeping a close watch on the
"long-term prospects for the dollar and inflation in general."

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