Gold could go higher, but that doesn't mean it can't fall first

Gold has been on an eight-year advance since it hit $256 (U.S.) in 2001 and now that it has been trading through $1,000 since September the question becomes will gold continue to rise?

Jordan Kotic, chief technical strategist at Barclays, and an old pal, made a call in October for gold to reach $1,500. Aaron Smith from Superfund Financial Singapore called for gold at $2,000 within the next three years.

They are not alone in their forecast of higher prices for the precious metal. Some suggest that in today's dollar gold would have to trade at $2,287 to equal the inflation-adjusted value of the high hit in 1980 of $873. Others are saying that if inflation were calculated by the same methodology as was employed in 1980, the price of gold today would have to be $7,150 to provide the same purchasing power as $873 in 1980 dollars.

The three-year chart shows the first test of resistance at $1,000 in early 2008 with a retest of support at $700 in the autumn of that year as fear drove investors to the U.S. greenback as a safe haven after the collapse of financial services giant Lehman Brothers. With the announcement of the U.S. government's troubled asset relief program (TARP) - to buy up assets to strengthen financial institutions - and the massive amounts of liquidity pumped into the global economy by central banks to the tune of $9-trillion, gold enjoyed a sizable boost in 2009.

The three-month chart gives us a good view of the advance in the price from support at $940 in August to the high of $1,064.20 in mid-October. Gold has since surpassed that, reaching a high of $1,084.90 on Nov. 3.

The price of gold is invariably tied to the U.S. dollar and the chart tells the story of a falling currency driven lower by a tidal wave of spending and expansion of credit facilities.

The steady erosion of the U.S. dollar since September until the middle of October is the inverse of the advance in gold over the same period.

The three-year chart gives a great view of the resistance that the U.S. dollar has been struggling with against its 50-day moving average. Every attempt to break the downtrend has failed which again illustrates the inverse relationship with gold.

The real test for higher gold prices will be how the U.S. dollar fares with support at 76 and then lower at 74 and again at 72 on the index. For gold to reach $1,500 the U.S. dollar will have to melt through 72.

If gold is where you want to invest, there are many ways to participate. You can buy gold coins such as the Canadian Maple Leaf but then you have storage and insurance issues. You can buy bullion funds and ETF's, or you can buy the stocks of gold producers from large caps to microcaps.

However you decide to participate in the movement in gold keep in mind what my old friend Peter Jahn taught me many years ago. The price of an asset might eventually reach an all-time historic high but it might need to go through an all-time historic low to get there.

Happy Capitalism!