Monday, September 25, 2006

THE GOLD AND SILVER REVIEW, SEP. 24th 189th Edition.

September 24th, 2006
189th Edition
Chris G. Waltzek
*$588 Gold - $11.22 Silver*

Bargain hunters hastened to increase gold and silver positions at sharply discounted prices as the Federal Open Market Committee held its benchmark Fed. Funds rate constant for the second consecutive meeting. Although precious metals consolidated for most of the week, the bulls wrestled away control from gold bears as the US dollar collapsed beneath trading range support on Thursday and Friday, leading the yellow metal within striking distance of the $600 level. Investors were further encouraged by the upcoming Sept. 26 central bank gold sales deadline and increasing jewelry demand due to the approaching holiday season.
For the week, gold rebounded from last weeks lows, to gain $12, closing at $588 while silver tacked on $.31 ending at $11.22. Looking at the bigger picture on gold and silver. Precious metals continue to impress, outperforming near all the major indexes. To put recent activity in clear perspective: Silver has gained almost 70% in the last year alone while gold is up over 30%. Incredible returns for a market barely noticed by Wall Street, Main Street and the typical investor.
In related news, The Chief Market Technician at Trends In Commodities, Dale Doelling, commented on what might send precious metals skyward: "Only the eventual meltdown in the stock and bond markets...would be the event that would not only halt the slide in the metals complex, but provide the catalyst for a monumental rally in these markets." Similarly, Gold fields Mineral Service is proposing a $700 an ounce forecast for the yellow metal and Goldman Sachs is suggesting that gold will roar higher, averaging more than $780 next year.
In international gold news, one media source reported that physical demand remains robust in spite of the significant price advance last year, particularly in China, India, the Middle East and Asian nations. In fact, Indian jewelers are witnessing record sales due to the recent pullback in the metals and a favorable Monsoon season. Several bullion dealers are reportedly finding it difficult to keep up with demand which has increased by more than one hundred percent. India is the home to more than half a billion people, most of which make regular precious metals transactions. September 23rd was the end of the gold unfriendly period known as Shrade. Conversely, gold demand is expected to swell during the Diwali holiday. Diwali, the Indian Festival of Lights, begins next month and is known for a significant increase in weddings and related jewelry and bullion gift purchases.
Meanwhile, in less than 2 years, gold ETF's have consumed more than 10 times their size in gold bullion. Just two years ago merely 1 billion dollars was held in gold ETF coffers. Today ETF's claim more than 10 billion dollars of the yellow metal. One gold market analyst mr. Schmidt, suggested this week that the $10 billion dollar figure could climb as high as $100 billion in the next few years. The recent introduction of Barclay's silver ETF helped push silver from $6 to over $15 in less than one year. Many are now calling the silver ETF, the reincarnation of the famous Hunt Brother's silver corner. As investors continue to adopt precious metals ETF's as a simple and effective method to diversify their investing portfolio's as well as profit from the commodities bull market, the ETF's will continue to devour precious metals, sending gold and silver prices to remarkably higher levels.
Meanwhile, next Tuesday, September 26th represents the end to the Central Bank gold sales deadline. In recent weeks, sources are suggesting that various central banks sold part of their gold reserves. The World Gold Council reported that 120 tons remains of the 500 ton quota. Market watchers are hopeful that the gold market will regain its footing following next weeks deadline.
Meanwhile, at Wednesdays FOMC meeting, by a vote of ten to one, the fed left rates at 5.25 percent fixing the Prime Lending rate at 8.25 for the second consecutive decision. Following an unbroken string of 17 rate hikes, the longest series in history, an increasing consensus of economists agree that the Fed. may be finished for the remainder of this year. Others are speculating that the Fed. may have held the brakes too long, stalling the economic engine which may require lower rates as early as next year. The official FOMC statement noted a cooler economic environment due to the weakening housing market and energy prices. However, the Fed's officials expressed continued worries over inflation and left the door open for further rate hikes as needed.

Moreover, government statistics indicate a 50% decline in economic growth in the past six months. Analysts are speculating that the Fed. has accomplished its economic soft landing goal - containing the inflation specter while maintaining a stable employment rate. However, declining construction jobs combined with sharply lower housing sales has skeptical Fed watchers questioning whether Bernanke's soft landing may actually transform into a dead cat bounce.
In energy news, crude oil prices have now declined 22 percent since trading at a record high near $80 on July 14. Ending its fifth consecutive lower weekly close, black gold approached $60 before rebounding to $61 and change. Lower crude prices are putting downward pressure on prices at the pumps, easing gasoline costs from the $3 per gallon level to a $2.50 national average. UBS analyst John Reade said gold's correlation to oil prices has increased since the start of 2006. Although the correlation between gold and the dollar has also tightened over the past few months, the correlation with oil remains higher than that of the dollar.
Meanwhile, following two weeks of sideways trading, the dollar collapsed on Thursday following the previous days FOMC rate decision recording one of the most brutal sell-off's in months. The dovish Fed failed to support the dollar with higher rates which in turn rattled investors as funds flowed out of dollars into currencies with more supportive policies. A handful of key central banks outside the US continue to talk of further rate hikes which increases the desirability of foreign currencies while lowering that of the US dollar. A lower dollar generally leads to firmer precious metals prices.
Meanwhile, the commodities based hedge fund Amaranth Advisors reported catastrophic losses this week. The Connecticut-based firm announced a more than 35 percent loss due to staggering draw downs in natural gas related trades. One source reported that the firms ultimate bloodletting could exceed the $2.5 billion short fall of the now infamous LTCM debacle of the late nineteen nineties. Unfortunately for Amaranth, the Fed is unlikely to come to the aid of the fund. In fact, media reports indicate that the fund will sell off its components to cover its recent losses.
In economic news, the last significant inverted yield curve occurred in the year 2000. An inverted yield curve simply means that short term government bonds are paying larger coupons than longer term bonds. However, each recession since 1970 was preceded by an inverted yield curve, according to a 2003 report by the Federal Reserve of San Francisco.
Its generally accepted that the Fed. creates such phenomenon by keeping rates artificially low and injecting the economy with liquidity. As inflation appears, the Fed must then send rates quickly higher, which in turn leads to an inverted yield curve as we have today.
In numismatic news, precious metals appear to be far from a speculative bubble peak as some have suggested. In fact, the U.S. mint is reporting merely 214,000 oz. in sales of American gold Eagles so far this year, far below last years 400k sales figure. However, in its first four months of production, the buffalo 24k has registered more than 250,000 oz. in sales. The total gold sales for the US mint remains at or below last years and well below 2004 and 2003! In other words, investors are simply nonplussed by gold at this point, far from the speculative frenzy one would expect near a bull market top. So is this the end of the up trend in the gold market? Not likely, the general public is not even aware that the bull is alive and kicking at this point. Looking at the silver figures, the silver eagle is actually declining in demand, dropping from 9 million two years ago to 8 million last year and currently near 7 million this year. Once again, this is not at all what one would expect near the top of a bull market. Such figures will likely appreciate by a factor of several fold or more as gold and silver top out in the years ahead.
In related news, A treasure hunter located a shipwrecked gunboat off the Nova Scotia shoreline dating back to the War of 1812. Found among the 192-year-old ship remains are thousands of coins and various items . The ship was apparently carrying plundered treasures from the then burning remains of the President's House or Presidential Mansion in Washington D.C., which would latter be painted white and renamed the white house. London authorities are insisting that the site falls under their jurisdiction and a legal entanglement involving the treasure hunters, Canada, US and the UK is unfolding.
In gold equities news, shares of metals and mining companies whipsawed all week ending with a bearish close on Friday. In last weeks report I wrote: I would not be surprised to see some strength on Monday followed by one more attempt to fill the gap at the 122 level. The market did gain strength on Monday only to succumb to further weakness. HERE'S THE BOTTOM LINE ON GOLD STOCKS: The daily and weekly candlesticks indicate further selling ahead. I continue to expect the XAU to fill the gaps at 122 and 120. However, I would not be at all surprised to see a powerful counter rally unfold.
Moving on to the precious metals charts: As forecast in last weeks report, gold and silver sold off early on. Looking forward, gold touched and recoiled from its 200 period moving average in the weekly chart and silver fell back within its two week trading range. THIS WEEKS BOTTOM LINE ON PRECIOUS METALS: Gold and silver are both range bound with a downward bias. If silver should break out, it would confirm golds strength on Friday. However, if the metals should break down next week, I expect a retest of the previous lows, gold at $550 and silver at $9.50.
In equities news, investors were skeptical of the Fed's rate decision this week. The major indexes recorded a broad based sell off. The Dow closed at 11,508 down 52 points. Meanwhile, the S&P finished at 1,314 off 5 and the Nasdaq at 2,218 down 17. THIS WEEKS BOTTOM LINE FOR STOCKS: The major indexes are registering mixed signals at this point. I wouldn't be surprised to see the Dow and S&P stage a rally in an attempt to breach the high points and the nasdaq to continue its battle at the 200 period moving average.
Don't miss the second hour of this weeks program with my featured guests The Adventure Capitalist, Jim Rogers, Arch Crawford and Jim Letourneau.
Stay tuned, Bob Chapman and I investigate this weeks markets after these messages.

Sept. 24th Goldseek Radio Highlights:

*Jim Rogers, Arch Crawford & Jim Letourneau*

In the first hour of the show, I start off with a recap of the leading market headlines. Next, Bob Chapman and I discuss the implications of this weeks FOMC rate decision. Bob thinks that the Fed has painted itself into a corner. If they raise rates the housing market will collapse. Whereas, lower rates will send the dollar reeling off the edge of a cliff. Bob is concerned that if rates stay fixed too long, foreigners will cease to purchase our bonds required to satisfy the $2 billion dollar weekly injection of capital. Next, the second installment of Goldseek Radio's audio book review of the investing classics. We'll listen to a few excerpts from Benjamin Graham's, The Intelligent Investor.
In the second hour, The Adventure Capitalist and commodities Mogul, Jim Rogers returns to the show. Jim expects the Canadian or Montreal stock market to outperform US stocks in the next decade. He also outlines which sectors and industries he's monitoring in anticipation of spectacular returns. Jim remains bullish on gold and expects the yellow metal to climb to $1,000 per ounce. Next up, Arch Crawford scans the firmament for market clues. Arch expects the year 2007 to provide incredible profits for precious metals investors, as hyperinflation heats up. Plus, Jim Letournau joins me from the Big Picture Speculator. Jim is a geologist turned investor who is wildly bullish on the energy sector. In fact, he believes the oil industry may require five years before reserves reach a sustainable level. He expects silver to run to $50 and the precious metals advance to accelerate once the general public awakens to its incredible potential.

To This Weeks Guests and the Trading Wizards Gold & Silver Forecasts, Please Go To:

Thanks for reading.
Chris Waltzek
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