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| Placing Trust and Confidence in
Gold
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“Rationality is born
from irrationality. Non-believers believe.”-Trader Rog
New York’s mental conditioning by mainstream
market pundits renders the Sheeple unable to think for them
selves until they finally read and hear enough to understand
the true picture. We knew when the hedge funds entered the
fray gold’s recognition would become more widespread.
This fact is now on the news table.
Pension funds invest billions in commodities
European pension funds eager for decent returns
are embracing commodities and not with a few million here
and there but billions. Trader
Tracks is always watching to determine why things happen
and when copper futures blew through 18 points in two hours
this week we knew the big boys had arrived with vigor. What
is so constructive and positive about this is they are not
short term traders but normally go long, trading the 200 and
50 day averages. Considering the ocean of cash they push around
short term trading is not a good option for them. The intermittent
technical buy and sell prices we offer our readers mean nothing
to these funds as they know a 10% profit taking event quickly
evaporates when the primary trend is long. For their size,
it’s much easier to stay invested.
With all the recent dust-ups in politics, war,
violence, oil, inflation, stealth currency devaluations and
rampant money supply growth, these alleged
gold bug conspiracy theories are suddenly becoming the real
McCoy; the truth. Big institutional traders are gravitating
to the market action. The world could be burning down around
them and they just focus on fundamentals first followed by
technical chart action. While they are affected by the news
somewhat, mostly they wisely disbelieve most as propaganda
and remain fixed on time and price. We have heard of superior,
top-notch traders who ignore all the
news. They do this to keep those mental trading Gremlins
away from their trading screens.
Basic materials and metals skyrocket. Gold’s
turn is next.
Our work is primarily on gold, silver and energy
but basic metals and materials so vital to commerce and industry
have in some cases surpassed gold as top performers. With
the exception of stocks and some limited stock options, nickel,
zinc, coal and steel do not generally appeal to small and
intermediate sized precious metal trading accounts. Copper
has been a recent consistent super star and those futures
offer a fine vehicle for trading. Lately however, volatility
has become extreme and we would caution smaller traders about
trading danger in this market at this time.
The good news for gold versus the basic metals
and materials is that now precious metals will play catch-up
programming our trading year for stellar opportunities. Copper,
zinc and nickel have increased 150-307% since 2003. Molybdenum
actually rallied 500% to 1,000%! Since inflation adjusted
gold ought to be $1750-$2160, this fun has hardly begun. Keep
in mind as good as the gold market appears today, the last
12-18 months of this longer term event will make today’s
extravaganza seem like a warm-up.
The gold and other markets
work this way as recognition of true value takes so long to
become apparent to the man on the street and further, they
wait a terribly long time to take any action. If gold
is going to rocket at the grand finale, the mainstream buyers
have to buy. At this juncture, we hear of highly educated
investors with experience and good jobs having no idea what
the price of gold is today.
To us, this seems amazing.
Central bank gold sales diminish
Earlier in this gold rally the role of central
bank gold sales was a primary concern. Since the Gordon Brown
gold sale debacle in the UK, these sales have skidded to a
mere crawl. We heard just yesterday that Switzerland has sold
half of their stored bullion and are finished with the proposed
selling program. The ECB has said they are finished selling
for the year. Germany and France still have some gold selling
quotas available but look for their legislatures to roadblock
and stall any remaining sales. Meanwhile, the Middle East,
India and most of the rest of Asia is buying with both hands
while trying to hide gold purchasing numbers. China has a
brand new law allowing its citizens to own $20,000 in a foreign
currency. We would suggest they will take the money and buy
gold with it as they have a long history of disrespecting
paper money no matter what the denomination or country of
origin. Also, they have new China rules allowing gold ownership.
In our view this is a potent combination for a country of
over one billion population with new found money.
China, Korea, Singapore, Japan, India, Indonesia
and the Middle Eastern oil producers are stuck with a mountain
of USA currency, notes, bonds and other specious paper. The
oil people in particular know that when the oil is gone they
have nothing left to sell. Understanding this, oil sales money
is moving to commodities, new and old company ownership with
good prospects, real estate, timberland, farms, precious metals,
mines with deep reserves, and a host of other “hard
goods” or investment prospects having a promising future.
These traders know the USA dollar will not disappear but its
buying power is rapidly diminishing. Precious metals markets
are so tiny compared to most of these other ideas GE for example
has more market cap than the entire silver market. What do
you suppose will happen to gold when these big bucks buyers
begin to scoop up gold by the ton? How many tons could a hedge
fund buy? How much gold could Lee Raymond, the retiring Exxon
CEO buy with his $400mm retirement package?
Gold hedgers not a factor any longer
Along with central bank concerns a few years
ago, gold investors were concerned about gold producers de-hedging
the metal to escape being on the wrong side of the trade.
While the hedgers just stood there and took a whipping for
several months, when gold’s price jumped over $500 the
pain was beyond excruciating. Hedgers have been actively off-loading
these negative positions at a steady clip. While exposure
for some is still quite scary, the majority of the hedged
gold has been de-hedged. Further, at this juncture, if a major
gold producer was ready to sell a pile, they can pick up the
phone and call the Middle East or Peking and they will gladly
both write a check and take delivery.
Several tons of gold in a transaction like that one will never
go to market. It is moved directly to the basement vault of
a bullion bank or in the alternative, stays where it is now
and the name is changed on the title. We got wind of some
little gold exploration companies who hedged gold in new mines
in Russia as a contract financing demand from their banks.
We wish them well but know where that one ends up; in tears.
Our forecast is they go bust and the banks get the gold. If
the truth be known, the banks probably planned it that way.
Gold scrap rapidly used up
When gold or silver prices skyrocket, scrap
comes out of the woodwork for sale. When gold prices rallied
last fall in 2005, the fourth quarter observed a 30%+ increase
in gold scrap sales. This event is impossible to time or measure
as the sales are intermittent and spur of the moment. Citigroup
reports gold scrap sales can vary by 400 tons from year to
year. In 2006, the gold scrap sales are moving even faster,
but the amounts in the context of the global market are probably
under 7% allowing for remaining potential sales from inventories.
It’s difficult to determine but that scrap will run
out sooner rather than later for the most part. At least the
total will be vastly reduced year over year as gold prices
continue to climb.
Will higher gold prices reduce gold jewelry
fabrication?
India buys 75% of the annual global gold production
for jewelry. With much higher recent prices, some of the Indian
and Middle Eastern jewelry suppliers have been holding back
in hopes of buying raw gold at lower prices. Some market observers
fear this bullion inventory back-up will translate into lower
gold prices as fabrication begins to slow. We forecast just
the opposite. While gold is pausing and correcting for late
April and May of 2006, we forecast cash gold and futures will
sell gradually with more of a continuation pattern than a
big drop in price. While anything can happen in gold trading
markets, our revised lower correction price is now $600 for
June gold futures as a supporting base-bottom. We are roughly
five weeks from completion of this correction event and do
not see any smashing sales on the horizon whatsoever. On the
other hand, as Indian jewelry fabricators and others supplying
that market witness the next firm gold up-tick in prices,
we think they are buyers at near term higher prices to avoid
having to buy more in the fall at further increases.
Higher interest rates provide imaginary,
illusionary returns
Some argue that higher interest rates hurt buying
and holding gold as the financial markets provide higher returns
and gold offers none. In our view, those that offer that discussion
are missing the point of valuations and risk. While it’s
nice to earn higher interest rates on an investment, what
about the inflation? If higher rate investors do not believe
the inflation is a bad as we think, they are compelled to
invest for the higher rates and hope
for a return of principle. When the world is proceeding
through a drama like today, would you prefer 10% interest
on some high risk paper or the solidity and rocketing real
valued price of gold on your principle investment? One fund
manager said this last weekend, “ When the markets provide
a safe and reasonable 5% return and you go buy something promising
10%, chances of getting your principle back are not good at
all.” The old saying says, “I would rather have
the return of my principle than return on
my principle. Further, the way gold is behaving, a
physical buy and hold bullion investment surely has a better
chance of exceeding 10% for 2006.
Be careful out there. Like the big investment
bank screen traders, keep your eye on the golden ball and
forget New York buy and hold stock and bond cheerleaders.
One of the most highly respected famous, big time investors
with a 40 year track record also said last week, “Bonds
are the worst investment I can find anywhere right now.”
On an inflation adjusted basis, our
forecast calls for a new high in gold 500% above today’s
price and a projected new corrective support at $600 gold.
Soon we shall see.
Daily June ’06 Gold Futures Show
$642 Topping Action and $600 Support.
Daily December ’06 Gold Futures Show
$662
Resistance and $640, $620, $610, $600 Support.
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