THE GOLD AND SILVER REVIEW
Market Summary - Silver Rocket
Chris G. Waltzek
January 30, 2006
Gold finished on Friday at
$558, up about $3 while Silver sky rocketed up to $9.57, up near
$.70! An incredible move for the metal. In my last, Weekly Market
Update, I suggested that silver had not confirmed golds new 25
year high and that until silver climbed above its trading range,
the precious metals bull would stall. Right on cue, the silver
market did in fact break out to the upside, this week, with phenomenal
momentum. Some analysts are suggesting that the move in silver
was due to the new silver Exchange traded fund. Regardless, the
gold to silver ratio was overextended and a rally in silver was
inevitable:
It was gold's turn to struggle
this week, as it attempted to break out of its trading range.
The daily gold chart shows the current consolidation. Although
we did close at a record high, the market was clearly lacking
in momentum. Gold was unable to confirm the silver break-out.
This is a potentially troubling fact considering that gold lead
precious metals higher during the entire several month rally:
The XAU gold stocks index climbed
to new highs once again this week, defying Sir Issac Newton's
laws of gravity. On Wednesday gold stocks gapped above the latestest
trading range and soared into the close on Friday. Technicians
like myself are very concerned about the large unfilled gaps
in the daily and particularly the weekly charts. When the market
begins its retracement it is certain that the large unfilled
gap below will be a primary target:
The major stock market indexes
were hit hard this week. The Dow regained almost all of what
it lost last week, it close up about 239 points, The Nasdaq gained
near 56 and the S&P was up 22. Last week in my market newsletter,
I noted that we were oversold and to expect a rally. The rally
appeared and it had legs.
The Gold and Silver Review Broadcast
This week, I had the pleasure
of chatting with, Jim Rogers, the Adventure Capitalist, on the
Gold and Silver
Review at Goldseek.com. Jim Rogers told our listeners that
he is long gold at this time and went into the details of the
new commodities bull market. Jim believes that the commodities
bull has many years to run. He talked about his latest book,
Hot
Commodities, a must read or visit his website
here. The Jim Rogers interview is now available at my web
site.
Here is a recap of the Jim
Rogers interview: Of all the investment alternatives, instruments
and vehicles available to investors today, Jim was adamant that
he is most bullish on commodities. In fact, he is pounding the
table on tangibles such as, coffee, orange juice, soy beans,
cotton, sugar, etc.. So he is convinced that the top jobs of
the future will be in commodities related fields such as mining,
farming, logging, etc..
Jim made it clear that contrarian
investing has been one of the hallmarks of his success as a top
investor. As many of our listeners know, contrarian investing
involves searching for markets that have been out of favor for
considerable periods of time and are thus unloved by Wall Street
as well as Main street. A simple analogy would be buying a winter
coat at Wal-mart in spring at a discount because it is out of
season. In the investing arena, a good example would be gold,
silver and commodities. After more than 20 years of a bear market,
they are significantly discounted compared to the historical
mean. This makes precious metals and other commodities a prime
target for sharp contrarian investors like Jim Rogers.
Jim also gave us a time frame
for the bull market in commodities and precious metals. He sees
this move continuing for another another 10-15 or at least the
year 2016. So even though we're in the a raging bull market according
to Jim the bull market is merely in its infancy at this stage.
Jim stated that he owns gold
and silver and is bullish on the markets, He did point out, however,
that precious metals and oil are at or very near record highs.
So, in the short-term, from his contrarian investor perspective,
gold, silver and oil are not cheap. But he does expect to make
considerable profits in precious metals in the years to come.
The adventure capitalist stressed
that he was not a fan of the bond market. Jim thinks that the
bond bull went into hibernation in 2003. He insisted that bonds
and stocks tend to fair poorly during commodities bull markets.
Even if bonds pull their weight, the meager 4-5% interest rate
will entice few savvy investors. He stated that the dollar is
in jeopardy of collapse which will only increase the demand for
real assets such as precious metals and tangible assets.
Anyone as bullish on commodities
and bearish on paper assets as Jim would shy away from debt bearing
paper or even dollars. I agree with Jim but think that he is
very conservative in his analysis. With considerable inflationary
pressures ahead for the economy. I'm expecting much higher interest
rates, in fact, double digit rates in the years ahead.
What would push rates up that
high? As inflation climbs much higher, the Federal Reserve and
Global central banks will be forced to combat inflation with
higher lending rates, just as we witnessed in the 70's as rates
climbed into double digit territory.
So what is the best indicator
or litmus test for inflation? Historically the most reliable
indicators are gold and silver. The Prior Fed. Chairman, Paul
Volker halted runaway inflation by restraining the money supply,
in other words he increased the cost of money by raising rates.
This is a typical Monetarist tactic. And it worked well. However,
it only works well in a country with a robust manufacturing sector
and a precious metals backed currency. The US had only just left
its gold standard backing in the 70's and manufacturing was still
the backbone of the nation. Will hiking rates work now as it
did three decades earlier? That's for you to decide. I'm preparing
for much higher prices.
Guru Predictions
Our guru for the week, the
investment bank J.P. Morgan, is expecting much higher gold prices
ahead:
"J.P. Morgan sees gold
near $600/oz by year-end
LONDON (Reuters) -Gold
prices may reach almost $600 an ounce by the end
of the year on supply worries, firming jewellery demand, geo-political
concerns and favourable currency environment, J.P. Morgan Securities
said in a report on Monday.
Prices might even jump to $800
from $556 now, if Iran's nuclear issue heated up and oil hit
$100 a barrel, it said. Oil prices are currently ruling at around
$68.
"For gold, event risks
are surfacing at a time when mining supply was already inadequate
and jewellery demand firming. Fundamentals alone justify prices
near $600 by year-end, while a meltdown in Iran/spike in crude
could see $800 gold," it said."
Our next batch of gold pundit
forecasts is brought to us by, Nicola Mawson:
"Predictions for gold's
high price this year range from $760/oz to $580/oz,
while its low is seen at between $520,75/oz and $425/oz.
Analysts put its average at
anywhere between $618/oz and $479/oz.
Top of the log is TheBullion
Desk.com analyst, Ross Norman, who made it to the shortlist for
last year's winning prediction. He expects the gold price to
peak at $760/oz and average at over $600/oz, but
comments that 2006 was the toughest year to predict for in a
generation.
Norman adds that the market
seems to have "migrated from something that one could readily
measure and weigh according to a reliable set of supply/demand
statistics". However, he says that external factors are
likely to remain positive for gold.
Here, he is referring to US
dollar weakness, inflation, geopolitical tension in Iran and
US trade deficits, as well as the avian flu. He also points out
that price rises have been in double digits, aided by internal
price issues, such as production falling and demand for actual
bullion. But, by 2007, he expects the phrase 'gold bubble' to
be in regular use.
Providing the lowest price
is CPM Group's Jeffrey Christian, forecasting a high of $580,
a low of $425 and an average of $479 for the year. Gold, he says,
will be pulled slightly higher in the first quarter through investor
spend, but that this type of spend will taper off. Christian
adds that economic conditions are not as bad as people make them
out to be, and central banks will sell more than expected.
The number 12 out of 25 analysts
is GFMS chairperson Philip Klapwijk, who, coincidentally, presented
the firm's Gold Survey 2005 - Update 2 in Toronto on the same
day.
He sees gold ranging between
$495/oz and $609/oz, with a yearly average of $532/oz.
Klapwijk believes that investment
growth will require "some external stimulation", such
as a slide in the US dollar and higher oil prices, increased
political tensions and Iran's alleged nuclear programme.
These are likely to be seen
in the second half of the year, he says.
"In the first, prices
may be more subdued, owing to fabrication demand struggling with
$500-plus/oz gold prices and, in the short-term, some liquidation
of speculative long positions built up at the end of 2005 and
the beginning of this year." Last year's winner was Royal
Bank of Canada's London gold analyst, David Holmes.
He puts gold in a range of
$462/oz to $582/oz, with an average of $522/oz,
saying that he remains "long-term bullish".
South Africa's contribution
came from Dr David Davis, of Andisa Securities, who pegged gold
at a range of between $628/oz and $500/oz, averaging
$554/oz"
Bottom Line
Our Big Shot of The Week
Award, goes to J.P. Morgan for their intrepid gold price
forecast of: $800. When we take the average of
all of our pundit estimates this week we find a single price
target of, $651 or about $100 higher than the current
gold quote.
$580 + $582 + $600 + $609 + $628 + $760
+ $800 =
= $651
Although the charts are beginning
to show signs of extreme froth at this point and we are clearly
overbought, precious metals are in an upward trend. The bias
in the gold and silver markets will remain intact as long as
higher highs are followed by higher lows. Don't be surprised
to see extreme volatility, powerful swings up and down at this
stage of the bull market. Gold was unable to confirm the record
closes in the previously lagging XAU and silver markets. This
indicates that precious metals will likely begin to consolidate
next week.
Thanks for reading.
Jan 27, 2006
Chris G. Waltzek
email: cwaltzek@comcast.net
website: http://silverinvestor.blogspot.com
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my blog and web site for free daily market articles, audio broadcasts
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