Monday, October 30, 2006


October 29, 2006
Edition: #194
Chris G. Waltzek
*$598 Gold - $12.00 Silver*

As the smoke settled on Friday, it was clear the Gold and silver bulls were victorious with precious metals recording a higher close for the third consecutive week. In fact, precious metals have rallied in five of the past six weeks. Slower economic growth and a weak housing sector lead investors to expect future Fed. rate cuts over rate hikes. Lower rates are negative for the dollar and positive for inflation hedges such as crude oil and precious metals.

Meanwhile, the Federal Open Market Committee announced Wednesday, rates would remain unchanged, as expected, for the 3rd consecutive meeting. The news sent the dollar reeling as investors sought the king of currencies which require no central banks support, precious metals and crude oil. Dollar weakness and crude oil strength was the perfect recipe to sustain the uptrend in precious metals. For the week, gold tacked on $4 to close at $598 while silver gained 12 cents to close at $12.00. Only one year ago, the yellow metal was trading at $460. Its currently higher by $138 a 30% gain. While silver has climbed from its $7.50 low point to $12.00 today, by a mind-boggling $4.50 a gain 60%. With very little discussion of the precious metals bull market in the major media outlets, sharp investors continue to use pull-backs as incredible buying opportunities.

The top story affecting precious metals this week was the precipitous dollar decline. Although many leading market pundits, such as Jim Rogers and Jim Sinclair have been sounding the alarm regarding a dollar capitulation, the advice seems to have fallen on deaf ears. Following Wednesdays FOMC announcement, traders sold a flurry of dollars that ended only at the close of Friday's trading session. In only 3 days, the market erased over a months gains. Bears pushed the currency beneath the psychologically significant 50 period moving average. Just 3 weeks earlier, the bulls and bears waged a bitter battle at the 200 period moving average. The bears defended the line, repealing 3 consecutive assaults, dashing the dollar advance.

In related news, The Commerce Department noted 1.6% growth in the third quarter, lower than anticipated. The weaker than expected 3rd quarter figures worried dollar investors that the Fed. might shift its policy to address unemployment and the ailing housing market by lowering rates. Declining interest rates threaten the dollar as investors search for a better return in the Euro and the inflation hedges of gold and crude oil. Only adding to the dollar sell-off, the European Central Bank Head Jean-Claude Trichet stated his heightened inflation concerns, hinting at further rate hikes. Higher European rates diverts funds away from the dollar.

In geopolitics this week, although tensions with North Korea relaxed somewhat, concerns abound. A Chinese envoy met with South Korean officials regarding sanctions against Kim Jong Il's North Korea following the Oct. 9th nuclear test. Leaders are attempting to negotiate terms for trade sanctions against PyongYang. Meanwhile, the US is pushing for Japan to agree to inspect North Korean ships for weapons related cargo. US officials are insisting that any ship leaving North Korea remain open to inspection, regardless of its final destination. Although North Korea has temporarily agreed to halt its nuclear testing, it has not altogether ruled out future tests, leading some to believe the nuclear question remains unanswered, posing a potential threat to Japan and Western allies.

In energy related news, the price of a barell of crude oil plummeted at the open of the trading session on Monday to the lowest point this year, near the $58 level. But black gold rebounded with a vengeance, soaring above the $60 level by Friday's close. A government report added support to the market on Friday indicating a surprise drop in oil and gasoline inventories combined with the highest demand level this year. Furthermore, crude oil clearly received its biggest boost on Wednesday as the FOMC left its benchmark short-term interest rate unchanged at 5.25% which in turn sent the dollar careening to lower levels and crude oil soaring.


In gold equities news, shares of metals and mining companies continued their three week rally, effectively breaking out from trading range resistance. The XAU rallied into Wednesday, closing above the 50 period moving average for the first time in almost 2 months. By Friday, gold stocks settled into a narrow range. THE BOTTOM LINE ON GOLD STOCKS: Although this weeks rally was impressive, there was some selling pressure on Friday. I expect selling early next week as traders attempt an assualt on the 200 period moving average.

Moving on to the precious metals charts: Gold and silver rallied sharply from Tuesday into the weekend. Gold managed to close above its 50 period moving average, but still remains below the 200 period moving average. THIS WEEKS BOTTOM LINE ON PRECIOUS METALS: The weekly chart reveals a somewhat bullish candlestick, indicating some capitulation on the part of the bears. The battle is now at the 50 and 200 period moving averages as well as the $600 level. A solid close above $608 should end the trading range and lead to the $630 area. On the other hand the silver market remains very strong relative to gold. Silver is holding firmly above its 50 and 200 period moving averages.

And wrapping up this weeks market report, in equities news, the broad based market rally continued to record levels. The equities benchmark Dow Jones Industrials closed well above the 12,000 point. The Dow added another 88 points, closing at 12,090. Meanwhile, the S&P 500 continues its ascent to close at 1,377 up 9 and the Nasdaq regained its upward bias, closing at 2,350 a gain of 8 points. THIS WEEKS BOTTOM LINE FOR STOCKS: Market momentum couldn't be stronger. However, Friday's close was one of the sharpest sell-offs in recent memory and the semiconductors have reentered a bearish trading range. I expect the markets to consolidate recent gains next week.

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

Thanks for reading.

Chris Waltzek
Please visit my blog and web site for free daily market articles, audio broadcasts and analysis.
Click Here.