Hope's Still Springing

As reported in the Financial Post Trading Desk section, another bullish forecast for gold has been issued - this one, by J.P. Morgan. Analyst John Bridges has set a target of US$1400-1450/oz for gold to be reached in the second quarter of next year. After that point, gold should decline. Bridges has built his target on the assumption of further U.S. dollar weakness, which hasn't been that much in evidence lately. He also assumes that gold demand will remain strong, that the market will become increasingly discomfited by the Fed's ultralow interest rate policy, and that the greenback will reverse its recent uptrend and hit new record lows. I note that his target date is consistent with the Fed raising rates in the middle of 2010, which the overall market seems to expect also.


I'm not an investment professional, but I suggest that forecasts of this sort be treated with a little caution. As a trend-watcher, the extent of the greenback's rise surprised me. There have been so many reasons for the U.S. dollar to sink, and so few indicating a rise, that I was expecting little more than a blip. The same expectation may be going through the minds of the professionals.

Moreover, investment targets are not often met - particularly when they seem outrageous when they were first made. Gold at $1200 was one of those targets. There seems to be a suspension of disbelief as a result of that met target, which is encouraging more bullishness at a time when it may not be appropriate.

As far as the U.S. dollar is concerned, its hidden strength suggests that the bear case has something missing right now. My own guess in the matter is the greenback carry trade being unwound as it becomes apparent that the U.S. economy will not track Japan's of eighteen years ago.