How To Play $2,500 Gold

Yesterday, gold crossed the $1,600 level and it looks as if there is no stopping the precious metal, considering the debt concerns we have at home and abroad. Many are convinces that $1,600 is the next stop on the way to $2,000 an ounce, and perhaps even $2,500 if things really get out of hand. Yesterday we saw fears that Greece may be allowed to default, and the consistent and persistent worries that the U.S. could actually default. Over the weekend, Egan-Jones downgraded U.S. debt, but no one cared because it is not Fitch, Moody's or S&P. If and when one of the three major rating agencies does downgrade U.S. debt (which seems more likely by the day due to the ineptitude of Congress), there are two outcomes for precious metals: either soaring to heights unseen before, or plunging as investors try to raise cash from anything and everything. The more likely scenario is that gold and other precious metals will soar should a U.S. default become reality. Given the fact that S&P has asked for $4 trillion in cuts over the next decade, even if a deal were to get done, there is still a strong chance a downgrade could happen. Besides a potential downgrade of U.S. debt, there are other factors happening at home that could cause gold to blow past yesterday's intraday high was $1,607.90 an ounce, before settling at $1,602.40 per ounce. The economy is weakening, no doubt, due in large part to the devastation that happened in Japan. Automakers had a tough time getting parts, semiconductor companies had supply constraints and there were numerous other factors that have caused recent economic numbers to show a weakening in the U.S. As such, we could see further easing in the United States, as hinted at in the minutes from the Federal Reserve June policy meeting. The minutes were released on July 12, and ever since then, gold, as well as silver have been jumping. If the Fed and Chairmen Ben Bernanke do decide to do additional easing, the U.S. dollar would continue to depreciate, triggering a flight to precious metals. This could potentially pave the way for $2,000 gold. Talk about a "yellow brick road" paved with profits. "I think people are coming to realize that the economy is weakening again and the government might see a need to try to stimulate the economy further," said Joe Foster, portfolio manager for the Van Eck Global International Investors Gold Fund to CNN Money. There are still worries about Europe and Greece in particular, according to Foster. "Greece is sort of on the verge of default and they're still trying to figure out how to engineer a recovery for Greece without inflicting a default on the country [and] the markets are sensing that's almost impossible," he said to CNN Money. "Until the situation is resolved in these peripheral countries, it's going to drive gold." We may not see $2,500 gold tomorrow or next year, but if we see more easing and continued worries about defaults, the streets are not going to be paved with asphalt anymore. The streets will be paved with gold. Just don't have Ron Paul ask Ben Bernanke if gold is money again. ACTION ITEMS:

Bullish:
Traders who believe that gold is likely to continue to climb might want to consider the following trades:

• Buying gold miners such as Barrick Gold ABX, Hecla Mining HL or Yamana Gold AUY could prove to be profitable as gold soars to new highs.

• If traders do not want single equity exposure, they may want to consider ETFs, such as SPDR Gold Trust ETF GLD, which tracks the price of gold. Other ETFs to consider are Market Vectors Gold Etf Trust GDX or Market Vectors Junior Gold Miners ETF GDXJ.

Bearish:
Traders who believe that gold is likely to fall sharply from these levels as issues are resolved may consider alternate positions:

• Go long PowerShares DB US Dollar Index Bullish UUP, which should rise in face of problems being solved.

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