Money continues to pour into gold bullion and ETFs and gold stocks have made huge recoveries from their nadir in October and the consensus appears to be that there is plenty of upside to come as we continue to be hit by adverse economic news.  Gold seems to many to be the means of protecting one’s wealth with the lowest downside likelihood.  Everything else appears very vulnerable.

But there are potential pitfalls ahead for the gold and gold stock investor.  While the gold price may well soar to unprecedented highs over the next year it may not be a smooth run.  Indeed as investment builds in the ETFs in particular – a particularly neat and easy way to invest in the precious metal – the potential for profit taking (just as easy) is high as well and sometimes a bout of profit taking can bring prices down very sharply indeed.

High prices are also bringing in big increases in scrap sales of investment grade jewellery (high caratage and low mark-up material) in the Middle East and India in particular so the path ahead for the gold price is uncertain as profit taking becomes an increasing factor should the price continue its upwards path.

Speaking on Mineweb/Moneyweb Radio yesterday, US gold guru Jeff Nichols of American Precious Metals Advisors particularly emphasised this point but is confident overall that the price will continue to increase – and to rise sharply in the year or so ahead.  “Most people would say I’m nuts, but I think we are going to see gold over $2,500/oz before we’re done” said Nichols in an interview with Mineweb‘s Editor in Chief, Alec Hogg.  While we have heard claims like this before, it should be pointed out that Nichols isn’t an out and out gold bug but one of the more sober gold specialist commentators out there, so his opinions do carry some weight.

But Nichols also warned again that any big price rise is likely to be interspersed with sharp corrections because of the above mentioned factors.  Jewellery demand has fallen back very sharply indeed which could put a big dent in the demand side of the equation, but at the moment investment gold is balancing the jewellery fall-off.  World gold production is still falling too and if some other Central Banks follow Russia’s example and aim to increase the gold proportion of their reserves there could be additional offtake here too helping keep the market in balance.

Gold does seem to be entering a different world with traditional supply/demand fundamentals being replaced by new factors which may continue in play until the global crisis is over and people’s confidence in more traditional investments returns.  But when the global markets do stabilise (and this could still be some years off) then gold could then come down with a nasty bump.

The advice would thus seem to be buy on weakness, but watch out for an end to the global crisis when an exit strategy may be required.  If predictions are correct of an increasingly volatile upwards price pattern, traders in gold could do well also, selling on strength and buying on price falls, but this can be a risky policy too.

Meanwhile gold has been continuing its upward path with the mid $980s being reached in New York yesterday before profit taking brought it back sharply overnight and this morning.  As lack of general market confidence continues and gold stays looking positive, new highs in the gold price in US dollars look set to be reached – it’s already there in most other currencies.

As for the $2,500 gold price though – only time will tell!