Monday, October 23, 2006

THE GOLD AND SILVER REVIEW, Oct 22th, 193rd Edition.

October 22nd 2006
193rd Edition
Chris G. Waltzek
*$592 Gold - $12.98 Silver*

Gold and silver bulls were victorious once again as the rally continued, closing higher for the second consecutive week. Strong Indian festival demand, firmer crude oil and the falling dollar helped buoy the yellow metal. News of UN sanctions against N. Korea. sent investors scrambling for the king of currencies, safe haven.

Meanwhile, a weaker than expected PPI figure hinted at a lackluster economy and that Fed. will hold rates steady at next weeks FOMC meeting slated for Wednesday, October 25th. Without the promise of higher interest rates, the dollar plunged sending gold and silver to the highest levels in a month. For the week, gold added $4 closing at $592 while silver gained 31 cents to close at $11.88 The yellow metal is now up 25 percent in the last 12 months, while silver has climbed twice as much posting an unbelievable 50% in same period. In fact, gold has risen each year since 2001, by more than one hundred percent, reaching as high as $730 this year. Whereas silver has nearly tripled from its $4 low point. Wise investors understand the fireworks display is merely beginning, picking front row seats at these discounted prices for the grand finale expected in the years ahead.

In related gold news, top market players including Goldman Sachs, JP Morgan and Citigroup continue to hold on to their $700 year end gold price forecasts. Adding support to the claim, one of the world's leading gold market traders and commentators, Jim Sinclair noted that the gold market has found a bottom and will begin an uptrend from this point. Jim Puplava concurs, stating last week on Financial Sense that he believes the down draft has passed for the precious metals markets. The two Jim's have spoken and the bears are trembling...

Moving on, according to the World Gold Council, Indian jewelery sales are reaching record highs in the sub-continent. India is the largest gold consumer, amounting to near one fifth of global demand. Demand was curtailed as gold soared to a 20 year high earlier this year. However, the recent pullback coincided perfectly with the Diwali festival of lights. The fact that precious metals are selling at discounted prices, well off their 2006 high point, combined with the seasonally positive period for gold sales has created an irresistible buying opportunity for Indian consumers.

Meanwhile, media sources indicate that gold demand will likely increase due to jeweler demand. As Christmas and the holiday season approaches, jeweler purchases are expected to increase markedly. Last year, jeweler demand amounted to three quarters of all gold purchases. More good news for precious metals investors in the coming weeks and months.

Looking at the domestic economy, after failing to breach its 200 period moving average 3 times in the past 2 weeks, the dollar index capitulated, giving back all of last weeks gains. The 2005 dollar rally appears to be nothing more than a dead cat bounce without the support of continued Fed rate hikes. In fact, Goldseek Radio's FOMC indicator is showing a negligible chance of a rate hike next week. The fed is expected to hold rates steady with only a 2 percent chance of a rate drop. A higher CPI figure combined with a lower PPI and slowing housing market suggests that stagflation is unfolding. It appears that the Fed. can no longer continue its series of rate hikes. As a result, the dollar downtrend may resume, effectively dissolving a major bottleneck from the precious metals advance.

In geopolitical news this week, The United Nations Security Council agreed in a unanimous agreement to impose sanctions on North Korea for its recent underground nuclear weapons test. The U.N. insists that North Korea destroy its nuclear weapons and is blocking all military related imports. After The US secretary of state, Condoleezza Rice arrived in South Korea, The US and Sheol warned on Thursday of "grave consequences" in response to North Korea's threat of a second nuclear detonation. The Chinese government sent a diplomatic envoy to dissuade Kim Jong-il’s regime from its follow up nuclear test. In a startling turn of events, North Korean leader Kim Jong Il announced on Friday that his nation would not conduct any further nuclear tests, regretted last weeks underground detonation and would consider returning to nuclear talks.

Meanwhile, the energy market continued to captivate investors this week, as the Organization of the Petroleum Exporting Countries agreed to limit oil production for first time in more than two years. A Thursday emergency council lead to Opec's announcement to curb crude oil output by 1.2 million barrels a day, 20 percent more than expected - the largest reduction since 2002. The decision becomes effective on the first of November. However, some market watchers are casting a weary eye, noting the Cartels past failures to hold to such agreements. Opec ministers told media sources that an additional 500,000 barell cut would be considered at the next meeting scheduled for December. Surprising to many market pundits, the world's largest oil producing nation, Saudi Arabia backed Opec's decision noting that the 60 dollar per barrel price would be defended.

Meanwhile, the gold market remains highly correlated to crude oil, oftentimes mirroring its movements closely. Top analysts such as Jim Puplava are now expecting crude oil to eclipse its 80 dollar high point and run well above the 100 dollar level in the next 12 months. On Friday, crude oil settled at $61, inching above last weeks close. Oil continues to trade within its month long consolidation as bears attempt to take it down to $50 while bulls try to run the market back up to $70.


In gold equities news, shares of metals and mining companies moved higher on Monday as expected but then entered a trading range for the remainder of the week. Gold stocks have meandered within a trading range for over one month. The market was hit hard on Friday, closing at the lows of the day. Kim Jong Il's announcement to halt nuclear tests on Friday may have contributed to the minor sell-off. THE BOTTOM LINE ON GOLD STOCKS: Friday's candlestick was bearish, I expect further selling early next week followed by an attempt to fill the gap in the 125 area.

Moving on to the precious metals charts: Gold and silver lacked conviction earlier in the week but then soared as the bottom fell out of the dollar market. However, by Friday, profit taking dissolved much of Thursday's gains. THIS WEEKS BOTTOM LINE ON PRECIOUS METALS: Although gold and silver are behaving well, gold was hit hard where its psychologically important 50 and 200 period moving averages met. I expect further weakness early next week followed by a second attempt to breach the moving average resistance.

And wrapping up this weeks market report, in equities news, excited by the prospect further injections of liquidity the Fed., addicted investors extended the artificially fomented stock rally to record levels. The market benchmark Dow Jones Industrials closed at an all time high point and psychologically significant 12,000 level. The Dow added another 42 points, closing at 12,002 a near vertical climb from its 10,700 starting point. Meanwhile, the S&P 500 broke out of its trading range, also posting a record close at 1,368 up 8 however the Nasdaq bucked the trend closing at 2,342 giving back 15. THIS WEEKS BOTTOM LINE FOR STOCKS: The momentum in stocks remains very strong. However, the Nasdaq divergence this week suggests that next week could lead to normal profit taking. I expect market volatility to dry up into Wednesdays FOMC meeting followed by the typical increase in price movement. However, since the Fed. will hold rates steady, I don't expect wild swings after the FOMC announcement.

You won't want to miss the second hour of the program with my featured guest Dr. Doom himself, Dr. Marc Faber from Doom Gloom

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Thanks for reading.