[Editor's note: When this article was written on April 5 2007, gold was trading near $670 per ounce and the Dow near 12,500. As of October 8 2008, gold was trading above $920 and the Dow below 9,500.]

It’s about time to declare a testable, timely prediction for how I see the market unfolding. Here it is:

Before the year 2008 ends, we will see at least one of the following:

[1] Gold above $900 an ounce (that’s 35% higher than it’s current level).
[2] The Dow below 10,000 (that’s a 20% decrease from it’s current level).

I think either scenario is about equally likely, but probably both will not happen together (though I wouldn’t rule it out). These two movements represent two scenarios playing out in the economy:

Scenario 1. Housing and corporate earnings slow down and the Fed cuts rates to “save” the economy –> the value of the dollar plummets –> the stock market stays high nominally but inflation and gold are even higher.

Scenario 2. Housing and corporate earnings slow down and the Fed holds –> real estate prices decline substantially along with corporate earnings –> the stock market tanks and gold either rises or holds.

The probability of each Scenario depends on how severe the housing recession is and to what extent corporate profits are affected. The more severe the correction, the more likely I’d say we are to go for Scenario 1 (where the Fed is forced to lower rates despite the inflationary consequences).

The alternative scenario that could unfold that would make me change my prediction is if corporate earnings increase by 10% per year or greater in 2007 and 2008 while inflation stays below 3%. If this were to occur, I would retract my prediction above (but I think this is a low probability event).

Well, that’s about it. Calling it for the end of 2008 might be a bit aggressive, but that’s what blogs are for, right?  Besides, it’s only a matter of time before the market realizes how weak housing really is.