The Gold and Silver Review

SILVER ROCKET
The Gold and Silver Review
by Chris Waltzek
SilverInvestor.blogspot
January 27, 2006


MARKET SUMMARY

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 Volcker 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.

© 2006 Chris Waltzek
Editorial Archive

CONTACT INFORMATION
Chris Waltzek
Lilburn, Georgia
Trend Traders website
Email Author

Please visit my blog and web site for free daily market articles and analysis. Click Here.