Recently by Jeff Clark: If Deflation Wins, What Will Gold StocksDo?

The gold price has been hitting ever-new records over the past couple weeks, now closing in on the $1,300 mark. Some gold followers are saying this is extremely bullish for the near-term price since it broke so decisively through its June 28th high of $1,261. If they’re right, how high might this particular surge go?

While the endgame for gold is far off in my opinion, it’s worth looking at short-term surges, especially if you’re trying to determine to buy at a particular level. Plus, it’s just darn fun.

I looked at all major surges in the gold price since 2001. What constituted a "surge," in my opinion? Any large jump or uptrend that’s clearly visible on an annual chart. So instead of looking at yearly gains or seasonal tendencies, I simply measured the percent gain of all big upswings that were the most obvious, regardless of when they occurred.

I put the findings to a chart.

You can see there haven’t been that many large price advances, about one annually until last year. You’ll also notice the biggest "surge" this year is comparatively small. In fact, you have to go back to mid-2001 to find one that didn’t advance at least 20%. Meaning, we may very well be in for a bigger surge yet this year.

The Goldwatcher: Demys... Holmes, Frank Best Price: $2.52 Buy New $6.99 (as of 12:00 EST - Details)

The average of all surges in the gold price since 2001 is 23.5%. If we hit the average, gold would spike to $1,428 in the current run-up. Note that I measured from the bottom of the surges, not the breakout point; the bottom I used in our case was $1,157 on July 28.

If our current surge were to match the 35.5% biggie, gold would hit $1,567. A 20.8% advance (the smallest of those greater than 20%) would take it to $1,397. With these numbers, Bud Conrad’s call for $1,350 gold by year-end would be met and surpassed.

The only caveat I’d point out is that we logged three surges last year, the only time that occurred in the current bull market. On that basis, it’s certainly possible we could be due for a breather this year and have thus seen our biggest advance. But given the current global economic and monetary circumstances, I wouldn’t place a bet on that. A survey of 29 analysts by Bloomberg a couple weeks ago reported they see gold averaging $1,500 in 2011  and most analysts tend to make conservative projections.

Precious Metals Invest... Paul Mladjenovic Best Price: $6.24 Buy New $3.86 (as of 04:35 EST - Details)

Note that there were always small pullbacks in the time periods I looked at; it was never a straight line. So the recent minor drawdown was typical of what occurred during these surges. Also, there were always corrections or at least periods of consolidation after the surge and before the next big upswing.

Regardless of what gold does over the next few months, I think 20%+ surges will continue throughout this bull market, with the occasional 30% punch. And a doubling of the gold price in a matter of months is also likely in our future, a sure sign of the Mania phase. Gold surged 128.5% from October 8, 1979, to January 21, 1980. A similar vault today would have the price jumping from, say, $2,400, to $5,484 in less than four months. Yes, I think that’s entirely possible and perhaps probable.

How high will gold ultimately go? I look at it this way. The sovereign debt crisis in Europe isn’t over. The sovereign debt crisis in the U.S. hasn’t started. We will almost certainly see more quantitative easing (i.e., money printing). We have artificially low interest rates. The U.S. dollar is basically at the same level it was two years ago. We have no official inflation and certainly no big inflation. Less than 5% of U.S. citizens own any form of gold. Central banks are widely expected to be net buyers of gold again this year. Investment demand for gold is still only 32% of all uses of gold, a far cry from the 54% level reached in 1979. I could go on, but you get the idea.

The only way you can benefit from these surges is to be long gold. If you haven’t been a part of one, I guarantee you it’s a lot of fun. Gold is more important than that, of course; it’s your personal safe-haven asset. Buy on pullbacks, slowly increasing your holdings so that what you own makes a difference in your portfolio, both for asset protection and profit potential.

And then, hang on.

The most profitable way to take advantage of a surge in gold is to own gold stocks. But not all precious metal equities equally benefit from gold’s advances. To own the best producers in the gold industry, try a risk-free trial of Casey’s Gold & Resource Report its only $39 a year. Click here for more.

September 23, 2010

Jeff Clark is editor of Casey's Gold & Resource Report in Casey’s Daily Dispatch.

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