Gold Forecast: A 30% Pop, Then Another Plunge

Turn Out The Lights?
So is the fun over for gold? Looking at the chart below, it looks as though, long term, GLD has put in the first half of a classic “head and shoulders” top — so there’s one more “shoulder” to go. Expect the price of GLD to give up 40% or more over the next few years.

But there is some money to be made as a trade in the near term. The level at which GLD is oversold indicates a decent bounce is on the way.

One of my primary reasons for avoiding gold as a long-term investment is its lack of income production. In fact, if you’re storing it in a safe deposit box, you actually have a negative cost of ownership. One way to combat this shortcoming is the use of covered call options on long GLD positions. (My colleague Amber Hestla has written extensively about this strategy.)

Another idea is to own shares of the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). This ETF, pays a dividend of about 2%, owns a basket of stocks in actual companies, which usually move in tandem with the price of the metal.

Risks to Consider: Remember, gold is a highly volatile asset whose price fluctuations are governed by many unpredictable external factors and events.

Action to Take –> GLD shares currently trade around $120. Look for near-term volatility to push the price up to around $160, close to the all-time high near $170. That would constitute a gain of 30%. After that, all bets are off. Remember to set price targets on both the upside and downside.