Wednesday, September 06, 2006

The Gold and Silver Review, Sep. 3rd: 186th Edition

September 3rd, 2006
186th Edition
Chris G. Waltzek
*$624 Gold - $12.92 Silver*


Gold bolted higher on Monday only to succumb to sluggish mid-week trading due to conflicting Fed officials statements over the economy and a firmer dollar. However, lackluster trading gave way to renewed buying interest on Friday, as tropical storm Ernesto bolstered oil prices, reviving the gold market.

The yellow metal advanced $10 finishing at $621, while silver climbed $.36 closing at $12.33. For the year so far, the metals remain the investing sector of choice. Prices have soared 16 percent since rebounding from a two-month low point of $546.40 set on June 14th. Gold is up a stellar $100, a 25 percent gain - while silver has tacked on a $3.00 profit, more than a 30% increase.

The National Hurricane Center warned on Friday afternoon of the Caribbean Tropical Storm Ernesto's potential as this years first Gulf Coast hurricane. Ernesto moved toward Jamaica and the Cayman Islands and is expected to reach Puerto Rico, the Dominican Republic and Haiti over the weekend, bringing only heavy rains to the area. Traders bid up crude oil in after hours trading due to concerns over the crude oil producing Gulf Coast facilities, sending prices near $74 per barrel. This year, the Gulf states remain unharmed by the hurricane season.
A managing partner with Gold Arrow Capital Management, noted that gold could rise to as high as $850 to $900 in the months ahead because of seasonal factors and Middle Eastern tensions. he expects a rally in September and October due to pre-Christmas demand and related holidays, according to media sources. He added that silver could launch higher if the silver ETF acquires more of the precious metal to meet investor demand and silver could rise above $15 and climb as high as $25 an ounce should physical supply become scarce.

In related gold news, a GFMS report on Wednesday indicated an increase in demand for gold by almost twenty percent in the second quarter to 130 metric tons. Furthermore, gold jewelry demand climbed 12% during the same period.

Moreover, the new trend of lowered central bank gold sales continues to encourage gold and silver investors. Central banks failed to liquidate their predetermined gold reserves, according to Virtual Metals Research and Consulting. Up until next month, 500 tons of gold sales was permitted, however, only 331 tons were sold. The report indicates that not only will central banks fail to fulfill the alloted quota, but that assumptions regarding lowered future sales will result.

Adding support to the gold price, the article noted that in the past six months, big gold producers have reduced forward sales commitments, by the largest quarterly decline in Virtual Metals records. Mr. Turner noted the significance of increased de-hedging was related to lowered supply and thus increased demand and price. Leading the pack were Barrick Gold, AngloGold Ashanti and Newcrest which resulted in more than eighty percent of the de-hedging.

Meanwhile, despite a firmer dollar, investors shifted to gold's safe haven on this weeks bigger-than-expected decline in existing home sales data. A Commerce Department report showed a 4.3 percent slide in new home purchases, the largest decline in months just as a National Association of Realtors study indicated a big drop in pre-owned homes. The promise of slower economic growth was encouraging to gold investors, since the Fed. is viewed as likely to raise rates at the upcoming September 20th FOMC meeting.

In geopolitical news, Lebanon insisted that the United States force Israel to end its air and naval blockade, in place since the onset of the 34 day Israeli - Hezbollah war. The Prime Minister of Lebanon pleaded for an increase in financial aid as a result of billions of dollars worth of war related damages. Lebanese troops joined forces with U.N. Peace-keepers to dissolve Hizbollah strongholds while Israeli forces returned home. The tenuous week-long ceasefire between the two nations concerned German Chancellor Angela Merkel who referred to the situation as "very fragile."

In related Middle East news, Iran requested that the U.S. lift its sanctions regarding Tehran's nuclear enrichment program, according to media sources. Iran claims its atomic ambitions are geared toward electrical power for its populace. However, the West remains skeptical and insists that Iran intends to use its new technology towards nefarious ends. U.S. and French authorities noted that Iran has failed to completely halt its nuclear program despite proposed incentives. A top Iran leader said the Islamic Republic would continue its nuclear program and thus ignore UN demands. The world's fourth-largest oil exporter, must comply by August 31st to the UN's demands or face further economic sanctions.

Moving on to the Federal Reserve news desk, a hawkish statement from a Fed. official lead to dollar strength and gold market volatility. Federal Reserve President Michael Moskow warned investors of the threat of higher rates. Although the Fed. is expected to continue its neutral stance on rates at the September 20th FOMC meeting, increased inflation fears could lead to a push above the current 5.25% federal funds rate.

On Friday, Federal Reserve Chairman Ben Bernanke warned against protectionist measures that would crimp global expansion at an economics conference sponsored by the Federal Reserve Bank of Kansas City. The Fed. chairman gave his speech on the heels of recent inconclusive trade talks between the US and China. The United States accumulated its 4th consecutive annual record trade deficit amounting to $716 billion last year, with more than a $200 billion trade deficit with China alone.
Bernanke noted: "Geopolitical concerns, including international tensions and the risks of terrorism, already constrain the pace of worldwide economic integration and may do so even more in the future,"

In numismatic news this week, The Bank of Jamaica announced a set of commemorative coins in Bob Marley's likeness comprised of gold and silver. The coins celebrate the late legendary musicians' 60th birthday in 2005. The British Royal Mint will sell the coins at 100 dollars a piece. Marley passed in 1981 and remains Jamaica's most prominent national hero.

Soaring gold prices and difficult economic times are leading many to search for unwanted items for sale. Sources indicate that sellers can expect as high as 80% of the gold content in the transaction. However, if the jewelry has poor craftmanship, items may bring no more than half their retail sale price. Caveat Venditor, let the seller beware. And in related news, a group which backs the continued usage of the Lincoln US penny, Americans for Common Cents released a survey indicating that more than 2 out of 3 Americans polled favored continued circulation of the one cent piece. Sources indicate that the loss of the Lincoln penny would lead to price rounding which typically leads to slightly higher prices and add a small amount of fuel to inflation. One Penn State study by Dr. Lombra showed that the move could cost consumers more than half a billion dollars each year, with more than half of daily transactions increasing in price as a result.

Here's a review of the Gold Stocks & Precious metals charts. The following section is included to help investors identify low risk, short term entries for long term precious metals positions. Although the analysis may indicate a somewhat bearish stance at times, I expect gold to breach $1000 dollars in the next few years and silver to eclipse $20 per ounce.

Gold stocks moved higher this week as forecast in last weeks commentary. The bullish candlestick pattern lead to early strength which subsided somewhat by Friday. Looking ahead to next weeks trading: the daily and weekly candlesticks are almost identical as of Friday's close. Long upper wicks often lead to a lower bias. Also, the XAU left a large unfilled gap between Friday's close and Monday's open. I expect next week to bring continued choppy trading within the well defined range in the daily chart.

Shifting over to the gold and silver charts: Last week the charts indicated that precious metals would move higher within their trading ranges. Gold and silver both cooperated this week posting higher closes. The charts are less cooperative this week. Gold and silver both posted marginally positive closes on Friday. However, the weekly charts are offering few clues. Watch the trading ranges for potential direction.

Shifting over to the stock markets

In equities news, the major indexes parred last weeks explosive gains. Investors were discouraged by a hawkish Fed statement and by reports of a weakening housing sector. The Dow Jones and the S&P underwent an orderly retreat. The Dow closed at 11,284 giving back about 100 points. Meanwhile, the S&P finished at 1,295, off 7 and the Nasdaq at 2,140, down by 23 points. Last week I suggested that a normal reaction to such a powerful move was due. Right on cue the markets pulled back. For next week, I'm somewhat skeptical regarding this weeks charts, however, there appears to be some upside potential early on next week evident in the daily and weekly candlesticks. The only other scenario that seems plausible would be a continued consolidation.

September 3rd Goldseek Radio Highlights:

*Jay Taylor & Chris Mayer*

In the first hour, I lead off with a brief recap of this weeks top market headlines. Next, all of the Goldwizards return. Bob Chapman reviews a few of his favorite gold stocks. He thinks the professional traders are bidding up bonds due to the FOMC halt in rate hikes. Bob thinks that the domestic inflation rate is three times higher than the government statistics are showing, over ten percent. He remains bullish on the precious metals sector and expects a powerful rally to unfold in the coming months. Next, Gary Kaltbaum thinks the housing sector may have put in a bottom and related stocks are turning the corner. Plus, Jack Chan examines the major indexes and we explore his trading techniques.

In the second hour, you'll want to stay tuned to hear Jay Taylor and Chris Mayer's market commentaries. Don't forget to bookmark for your daily source of leading precious metals news and commentary.

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

Thanks for reading.

Chris Waltzek
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