The stock mar­ket assess­ment below comes from highly regarded David Rosen­berg, chief econ­o­mist and strate­gist of Gluskin Sheff & Asso­ciates.

Gold just capped off its best month in a year — ±14% in Novem­ber and 34% year-to-date. It’s not just the middle-class in China that is start­ing to buy gold, but the cen­tral bank, which has very deep pock­ets, is going to do like­wise. We just came across a Bloomberg News arti­cle quot­ing an offi­cial from the state-owned Assets Super­vi­sion and Admin­is­tra­tion Com­mis­sion (Ji Xiao­nan, the Chief) as say­ing “we rec­om­mend China increase its gold reserves to 6,000 met­ric tons within three-to-five years and pos­si­bly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, cur­rently stand at 1,054 tons, so we are talk­ing here about the prospect of some pretty heav­ing buy­ing in com­ing years.

If China were to lift their gold reserves to 5,000 tonnes, which is equiv­a­lent to about two years of global pro­duc­tion, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our mod­els. If China moves towards 10,000 tonnes, well, that would end up tak­ing the gold price to $2,623/ounce if our cal­cu­la­tions are in the ball-park.

Make no mis­take, we are gold bulls. Cen­tral banks have deep pock­ets and pro­duc­tion of gold is stag­nant so the demand-supply back­drop for bul­lion is bull­ish. At the same time, we have to pay respect for mar­ket posi­tion­ing over the near-term. The mar­ket for pre­cious met­als is overex­tended right now after the par­a­bolic move of the past two months. The net spec­u­la­tive long posi­tion has swelled to a record 273,552 con­tracts (100 ounces each) on the COMEX. Open inter­est has never been higher, at 693,661 con­tracts. So this is one crowded trade — as is the short-trade on the USD against all the major cur­ren­cies, espe­cially the commodity-based units.

So, we could get a mean­ing­ful gold cor­rec­tion at any time, and we are talk­ing about a cor­rec­tion in what is still a sec­u­lar bull mar­ket — the 200-day mov­ing aver­age is $970/oz, which means we could get as much as a 20% pull­back and no fun­da­men­tal trend­line would be vio­lated. We remain long-term gold bulls, and our com­men­tary remains fun­da­men­tally bull­ish, but any­thing that could spark a coun­tertrend rally in the U.S. dol­lar, which is our prin­ci­pal near-term con­cern, would put gold at a much bet­ter price point for investors than the peak we are at today.

Source: David Rosen­berg, Gluskin Sheff & Asso­ciates — Break­fast with Dave, Decem­ber 1, 2009.

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Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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