Gold: Swiftly Precious in 2006

By Roger Wiegand              February 23, 2006 www.tradertracks.com

Gold’s freight train of positives is running over the sellers. Technically, gold wants to sell but supporting reasons simply will not allow it. In this time of purported correction and profit-taking there are few sellers or buyers. Both seem to be standing around with their hands in their pockets like little kids, looking nervous unable to choose. Cycles and seasons say look out below but energy, politics and radical Islam conspire to prop gold’s prices, instilling uncertainty and fear subduing the profit takers. Nobody wants to miss the next rally as progressively weaker thoughts of weaker gold markets persist. On the other hand traders think the correction has some time to run and worry about buying into a selling market. What should gold traders and investors be doing?

After excellent fundamentals, high priorities for gold rallies are energy, politicians, and terror freaks. This President’s Day, George Bush is out stumping for energy policy and conservation. Since Nigerian oil pirates have effectively shut down nearly 500,000 daily barrels of high quality crude oil with their mischief, you might not wonder why Bush is doing this now. In our view, Bush has some other extremely serious Middle Eastern problems coming to flash points and they are presently unsolvable. Domestically things are quite mediocre at best. On television today, supposedly making a happy speech to a non-threatening corporate crowd, Bush seemed strident and visibly nervous. For a good ‘ol boy this is out of character for him. We sense something is very wrong. We think he is terrified of an outrageous oil price spike about to drive a stake through the heart of his “economic recovery” and currently very fragile second term presidency. A major oil spike and gold rally will not help his political friends in this fall’s coming election either. And for politicians, getting votes and getting elected is all that matters.

Energy and gold prices often follow each other and in 2006 this rule has proven to be consistent. In other years, oil rallied and peaked into mid-April while gold had a modest rally the last week of March. Seasonal gold charts show us gold sells down to range bound prices from late February through most of August. However, in these times of maladjusted markets, timing is suspect at best.

We think this year is different as more of the Middle East rapidly goes sour. The wrong people won the Palestinian election, Syria is killing internal and Lebanese enemies, Turkey’s Muslims are misbehaving, Egypt took an unpopular USA position, the Iraq war grinds on out of control, fighting continues in Afghanistan, and worst of all Iran is moving into the nuclear club while Israel warms up its retaliatory missiles. Making it worse, Putin antagonized Europe temporarily cutting off their natural gas and is pretending to be an Iranian mediator but secretly chuckling and doing nothing while Bush squirms. Putin has quickly reverted to his old KGB ways and is effectively nationalizing (stealing) the entire Russian energy industry and is not allowing any new bidding on precious metals leases by western mining companies. What happens to existing mining operations has not yet been addressed. Country geopolitical risks are popping up all over the globe and gold investors should be very careful and aware of these potential threats to gold miners.

A formidable cabal of USA enemies are politically ganging up while signing new and significant energy contracts not only advantageous to themselves but deliberately disadvantageous to the United States. Further reinforcing this negative effect will be the re-pricing of oil sales in Euros, other non-USA currencies or direct barter trading of armaments, technical support and industrial goods for oil. Iran’s new leader has threatened to rally the entire Muslim world against western nations including the USA and Israel if his nuclear installations are attacked. What most are not watching is the daily violence in Pakistan where its leader has survived two assassination attempts. Western governments are holding their breath on this one. If the Pakistan leader is killed, this government and all of its ready-to-go missiles and nuclear arsenal would be in the hands of radicals. They would be passing around nuke-tipped missiles like candy to every Middle Eastern nut case who wanted one and had the money. This is way beyond Iran who is in the very early stages of building something nasty that can fly against Israel. We do not need a large oil curtailment to drive gold prices, only the impression of such a situation.

Forthcoming gold seasonal selling in typical range bound patterns might be obviated by energy, political problems or both. Gold mine production has been down the last four years and exploration budgets have shot up the last three. Focusing on the best production and reserve locations in Canada and the USA, Nevada and Alaska have 19 major known deposits. Fifteen of those projects have over three million ounces and five projects have over five million ounces. Fundamentally, all annual production continues to slip, while physical and gold trading fund demands are rising. Jewelry fabrication for 2006 is forecast at 3312 tons and production is expected -5.6% lower providing 3,997 tons of supply. Some time ago we forecast 2006 gold demand at 4250 tons, approximately 250 tons short of estimated needs.

All of the Asian nations seemingly without exception are promoting the purchase of gold. Indian jewelry buyers slowed down their gold purchases during the last quarter of 2005 due to higher prices. Now that gold has topped and settled back toward $550, those gold buyers are ready to load the boat when a price near $500 gold is reached. This is the best they shall get in this long rally and they know it. Understand India consumes 25% of global gold production and they need the product to keep feeding their jewelry machine. Additionally, gold fabricators are expanding in Dubai to produce jewelry for sale in the Indian markets. The jewelry gold buying in Mumbai is seemingly insatiable.

Next, we have the new Dubai gold exchange announcing they traded 1,000 gold contracts today. Three new members have signed-up to trade and we should never under estimate the buying power of this group. We suspect if a foolish central bank put 500-600 tons of gold bullion on the auction block, somebody in Dubai would step up and write a check with no problem. We think at this juncture these rich oil sellers would rather have the gold bullion than be holding U.S Dollars diminishing in value.

Engineering News reported 2-22-06, that The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall, 14% higher in spite of those higher prices we just discussed. What impresses us very much is the institutional demand which means the big boys and the big money are coming into the gold game. Further, it was impressive that this forth quarter demand both absorbed a 10% year on year increase in supply and a 12% price increase. Higher prices are not going to slow gold demand but rather increase it.

Recently, in the USA, the gold and commodity funds took the lion’s share of contract positions while physical sales were down. Thirteen commodity contracts are now collectively up to $100 billion from $25 billion in 2001. Of the seven existing ETF gold funds approved, five are currently trading. Central banks are slowing on their international bank gold sales agreement and seem to have gotten off the notion of being so anti-gold. While we do not trust their numbers, central banks claim they hold 43% of the above ground gold (stored bar bullion) with the USA having 26% and the IMF 10%. The balance is being held by others. Anti-gold forces are still very busy in collusion with central banks to suppress gold’s price in efforts to continue propping sick stock markets and fiat currencies. They are not only losing in these efforts but their dramatically huge short positions are getting worse by the day. One of the largest gold hedgers in the world is in jeopardy of bankruptcy if gold hits $850 according to one analyst. We cannot forecast a BK but we do forecast gold at $850 for fall, 2006.

Hedging was on the wane but lately the big companies continue to de-hedge while some smaller ones are installing new hedges per lender mandates. Japan was a large physical buyer until recently when a weaker Yen curtailed some purchases. They sell gold in 7,000 Japanese 7-11 convenience stores. We showed dollar-gold comparative charts recently which graphically demonstrate gold and the dollar have decoupled. What has not decoupled but increased in velocity in our view is the oil fear premium coupled with gold. In recent days energy supplies of crude and refined products have increased in storage. This new supply with a quieter Middle East (for a few days) cut oil from $69 to $61. This week expectations are for higher crude oil. Gold may very well run right along with it, ignoring its cyclic correction. Gold bullion and crude oil cash values almost instantly revalue their underlying futures commodity product and their related stocks. This is why traders and investors should focus on weekly and monthly charts for directional guidance not trading entries. The shorter term charts including tick, 30 and 60 minute and daily charts do the shorter term work at entry time, not evaluation time.

We suggest gold buyers are nearing a point when the junior gold stocks will have seasonally bottomed and it’s almost time to buy once again. If you own them now and want to exit, wait until fall. Senior gold stock buyers should wait for a better price. Senior gold stock option buyers are nearing a lower price where they can enter positions for fall 2006, winter 2007, and identical seasons for 2008. For this week, we suggest waiting on the buying to determine if gold prices slide from $550 to 540, 526 and possibly 507.

In summary, gold can only go higher in price, ever faster. Technically, gold has moved into its second and largely more volatile growth sector with our forecast of $850 by late fall seemingly assured. Other major gold driving forces are at work with a soon to arrive severe stock market decline, followed by the fall 2006 selling in bonds and our dollar. Imposition of these technical weaknesses with geopolitical trouble onto advancing gold markets can only produce higher gold prices a whole lot faster. We expect some market fear when stocks cave-in this spring. Will these losers go to gold? We think they will. In addition, the institutions with their “long only” buy positions have great power to lift gold prices. They are struggling for client returns and understand gold will provide them.

The first leg of gold’s rally was 2001 through the last fall. Now, gold has broken upper resistance moving almost vertical in price. This usually signals a top and subsequent selling, some of which we have seen. As we move toward March and a forecast gold price of $507 support, we wonder if other events will either extend the current softness sideways followed by strongly advancing prices or, will the $507 number appear right on schedule in Mid-March or the end of July.

Seasonal gold charts show a double bottom in late July and late August. Last year, however, gold bottomed on June 1. This is fully 60 days early compared with 15 and 30 year seasonal chart dates. Should gold move another 60 days backwards from last year’s June 1, the newest gold rally would be underway April 1, 2006. Traders and investors with far out long option positions for fall 2006, and into 2007-2008 are not only safe but are buying into a lower price today. Junior gold and silver stock holders who have not exited for any reason this year should hold until fall for exits if at all possible.

We are looking for a minimum 35% gold price advance from this spring-summer’s basing bottom to a Thanksgiving top in 2006.

Watching little market nuances and movements among gold funds, gold stocks and far out futures can provide clues to forthcoming support and resistance for gold. An inflation adjusted gold price today would not be $550 but $1850-1950. Adjusting prices 35% beyond the $1950, it is easy to see a $2650-$2950 price range top we forecast two years ago. While forecasting three years forward is generally not a good idea, we are expecting a high for gold of $2960 with a later adjusted, correction-settled price of $1250 per ounce. Inflation is insidious and has eroded a great deal of gold’s true value relative to the $850 1979-1981 rally top. Understanding these numbers and the basis for their reference, it is no surprise gold has a very long and positive trail ahead.

The average of commodity bull markets is 16-17 years. Since the current one began in say 2000, we have possibly ten more years of bullish gold and other commodities moving through an inflationary and volatile period of time. With each year we advance, gold prices can only go higher faster. –Trader Rog