Gold and Silver in 2009

By: James Turk, Founder & Chairman of GoldMoney.com

This letter is the last one for this year, so it’s time to look ahead to 2009. It’s shaping up to be an ugly year for financial institutions and the economy, but a good one I expect for the precious metals. Here are my 2009 targets:

1) Gold will climb into 4-digits in the first quarter and this time will remain in 4-digits for the rest of the year. The potential high is $1800 per ounce ($57.87 per goldgram). I expect the low to be $850, which will be reached early in the first quarter. In short, 2009 is shaping up to be the key "break-out year" for gold. It will become a "break-out year" because the average investor will start becoming aware of gold and begin buying. Despite its remarkable performance throughout this decade, few people own physical gold. That will begin to change in 2009 as the financial disruptions will worsen and people seek a safe haven for their money.

2) Will silver finally outperform gold in 2009? Having been burned two years in a row, I am asking this forecast as a question rather than offering it as a statement. The underlying fundamentals for silver continue to improve, and we saw a spark of silver’s potential early this past year when it climbed above $20. I expect silver will again break above $20 this year, and I repeat my $30 forecast from last year.

Silver is dirt cheap. It’s only a matter of time before it climbs above $30, but if you choose to buy silver, be prepared for the volatility, which is reflected in the gold/silver ratio. I think the ratio will not break above over-head resistance in the low 80s. The downside potential for the ratio is 45 or so, which is the bottom of its multi-year trading range. If I am right that gold reaches $1800 sometime during the course of 2009, and if the low in the gold/silver ratio is 45 at that same moment in time, then mathematically, silver would be $40. If the ratio only moves to 60, then silver will be $30. In any case, I expect the gold/silver ratio to fall in 2009. Thus, regardless of the prices they eventually achieve, I expect that silver will outperform gold in 2009.

3) The XAU Index [which bottomed at 65 in October] will bounce back strongly in 2009, beginning in the year’s first quarter. Widening profit margins due to lower energy and other input costs will bring investors back into the gold mining sector. The mining stocks are unbelievably cheap. It is reasonable to expect them to return to more normal levels of valuation, which would imply that the price of the XAU Index in terms of gold would be 6 goldgrams and perhaps as much as 8 goldgrams. Therefore, if gold does indeed reach $57.87/gg (which is $1800/oz), then 6gg to buy the XAU would mean this mining index would be 347. The XAU Index would be 463 if it cost 8 goldgrams and if the price of gold actually rises to $57.87/gg. These numbers seem outrageous, but they are not unreasonable when viewed within their historic context. The big question of course is whether gold will reach my upside target.

In an environment in which people are increasingly fearful about the downturn in the economy, the safety of banks, and the outlook for the dollar, anything is possible for gold. And if 2009 turns out to be the year when the biggest bubble of them all pops (i.e., the dollar becomes suspect), the sky is the limit for gold.