gold 1000 here we come

KEVIN KERR
Inflation talk spooks the market
Commentary: Gold $1,000 is on the way
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By Kevin Kerr, MarketWatch
Last Update: 10:59 AM ET Feb 22, 2007

NEW YORK (MarketWatch) -- Even the most die hard gold bear has to admit that the recent price action in gold has been indicative of a very healthy bull market. It's alive and well, even after the best efforts by naysayers to smack it down.
Gold rallied over $20 Wednesday on news that the government is still concerned about inflation. That combined with a rise in oil prices and growing fear over a confrontation with Iran and suddenly April gold is right back up to near $700. The lack of fanfare from the business media and the seemingly unnoticed strength in gold are a good sign. A true bull market often flies under the radar.
Golden opportunities still exist
Gold bulls don't see this move as a surprise but still welcome it anyway. The metals markets have been a tough place for the commodities trade and mining shares have not been much gentler with investors either. Wicked swings in pricing and heavy volatility have made the metals a tricky place to trade indeed. Traders may be left scratching their heads at this point after the rally, wondering what if any ways are there to still play any coming rally. There are many, and some are better than others.
One way is to look for mining equities that still offer good value even with gold at this level. Yamana Gold (AUY :
yamana gold inc com
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Last: 14.94+0.27+1.84%
3:39pm 02/22/2007
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Sponsored by:
AUY14.94, +0.27, +1.8% ) , of which I own shares, is a good choice and there are many others, like Newmont (NEM :
Newmont Mining Corporation
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Last: 47.93+0.95+2.02%
3:39pm 02/22/2007
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Sponsored by:
NEM47.93, +0.95, +2.0% ) for instance. And companies like Frontier Development Group (FRG :
fronteer dev group inc com
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Last: 12.76-0.39-2.97%
3:39pm 02/22/2007
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Sponsored by:
FRG12.76, -0.39, -3.0% ) that have both gold and uranium, the next hot metal.
As a commodities trader my favorite way to trade gold is to use options on the futures and specifically options spreads. An option spread simply allows us to fund the buying of one option with the selling of the other. By doing this we reduce our costs -- but also somewhat limit our profit potential. The good part about using options is we know what our risk is right up front.
Hurdles to climb
Gold is a fast paced market and can be very skittish. The market has had a tough time around the $700 to $710 area and it needs to break through, which it seems like it might shortly. The gold market has very good momentum right now but that rally could fizzle a little should tensions in the Middle East calm down or the Federal Reserve start talking less about inflation. Anything can happen and often does but with all that's taking place in the world right now, gold is one of the few safe havens for investors.
Flight to quality
Gold is often called a flight to quality instrument. Often in times of war or fear investors turn to the yellow metal to avoid any major fluctuation in their respective currencies, even the U.S. dollar. Gold is a good hedge against inflation too and combine these two elements and you have a very strong bullish argument for gold going to $1,000.
As more U.S. warships move into the Strait of Hormuz and the disaster quotient escalates with Iran, the market will become more and more nervous and may begin to look for that flight to quality -- really soon.
Kevin Kerr edits the MarketWatch Global Resources Trader investment letter. He owns shares of Yamana Gold, which is mentioned in this report. End of Story

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