Analyst's Corner: Gold To Go Sideways

Jan 13 2006 | 9:13pm ET

Gold prices, which rose dramatically last year and reached a 25-year record high on Monday at $550 an ounce, will likely continue to climb in 2006, partly due to pressure from hedge funds looking for alternatives to stocks, bonds and currencies, according to industry experts.

Carter Braxton Worth, a market commentator in Oppenheimer & Co.'s equity research department, says hedge funds are holding onto gold, but he doesn't see much new demand for the precious metal coming from hedge funds, at least for now.

"Hedge funds who have aggressively accumulated positions in gold appear to be resting. On a day-to-day basis, there is not much in the way of new buying," Worth said. "In the context of gold having reached a 25-year high, a lot of buyers who entered the market appear to be digesting, waiting and watching. Having established large positions over the last several months, the presumption is that gold bullion and gold mining stocks are likely to trade sideways in the days/weeks ahead."

Worth believes that gold will reach $650 an ounce in the year ahead, as rested buyers return to the market and new buyers enter the market, drawn in by ever higher prices. "It's worth noting that gold, at current levels, is nowhere near its historical high of $850 an ounce reached on January 21, 1980," he said. "The judgment is that you can buy it cheaper one-week to one-month from now, so if you sell now, you get to re-enter either because it has pulled back and you get to buy it cheaper, or you get to enter right here, at the same price, because it has gone sideways and rested."

Another area Worth believes will be popular among hedge funds this year is in certain interest-rate sensitive stocks, specifically diversified financials and some insurers. "We would look for alpha in financials, in basic and money center banks —Citibank, Wells Fargo, Bank of America —with many banks actually coming to life and outperforming much as they did in October/November of last year."


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