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Time To Buy Gold

By Roger Wiegand             Printer Friendly Version
August 17, 2006

“For the times they are a changin.”- Bob Dylan

Meandering markets are no fun. Nothing decisive is happening and if you’re trading them it’s a great way to empty your trading account. Gold traders and longer term investors need to begin seriously planning their fall gold campaigns as we are only days from the opening round. Very soon choppy, sliding prices from summer doldrums will base and firm providing excellent opportunities to buy gold and silver in several formats.

To help our readers and the gold world at large, sometimes it’s worthwhile to review the several ways from which to choose in buying gold and its trading instruments.  In ascending cost order we can buy penny stocks, junior stocks, intermediate stocks and options, senior stocks and options, exchange traded funds and options, and physical gold. Gold futures or futures options on either the New York’s Comex Exchange or Chicago Board of Trade are quite risky for those not experienced.

Futures offer superior leverage but leverage cuts both ways and can bite you. Our forecast is for increasing volatility in gold markets with wider trading ranges moving with increased rapidity. Experienced gold futures traders will do very well this fall in this environment and welcome fast markets. For the inexperienced, please restrain yourself and confine your riskier trading to stock options which can be quite productive. Of course we recommend the better junior and senior metals stocks as well.

Major Gold Rally Dates

Statistically, as proven over the years, we would be invested from the last week of August though the first week of October with an exit. Being out the last three weeks of October provides a profit event and our next trading set-up from November 1 through the first week of February, 2007. The second trading rally is historically tougher to buy and to stay in the trade. Usually, there are not less than three selling periods in that latter group, but the major and primary trending move is continuously upward. These schedules are from 15 year and 30 year average gold prices and are subject to schedule changes roughly two weeks in either direction-earlier or later.

From the second week of February 2007 until the following August our gold market has rallies but the main trend is sideways to down.  Day traders and screen watchers can also trade futures in this period but for most it is too difficult. Within this market time frame aggressive gold traders can trade faster moving reactive gold stocks in at least three rallies. However, to be in this game you should be a strong technical analyst or know one who will help you. Futures traders can go both long and short but we never recommend a short trade in a bull market knowing full well it can be done. It’s tricky and very fast.

Prepare for the Big One

Those three February to August rallies are smaller but money can be made here using market entry buy stops which trigger a purchase from a pre-selected price based upon technical chart patterns.  In this event, we forecast a price wave and design an entry and exit to capture a slice from the middle. Calling tops and bottoms is high risk and will usually cost you money. At this juncture, however, we strongly suggest gold traders best prepare for the big one; fall 2006. In previous essays we discussed potential for an early and abbreviated gold rally created and slightly rescheduled by trading action in the dollar, bonds and mainstream stocks. Federal Reserve discussions, speeches and decisions can have a bearing on these dates as well. This can still appear and we must be ready for it.  Should this be our outcome, I am expecting a lesser fall initial rally followed by a much more powerful one in November through February, 2007. Either way, we expect to attain our goal of $850 gold. A shortened fall rally would merely delay reaching the objective until late January, 2007.

Checking old gold charts we find some dandy, fast gold moves from December 15th through the first week of February. This one is tougher to trade but we fully intend to be in position and greatly involved with our Trader Tracks recommendations. It is entirely possible this trade period could be the largest upside for gold in the next five months. We do not want to be a spectator if this happens. Plan in advance to participate as once it starts the trading action will be quite fast.

How Long Will the Gold Rally Last?

The truth is nobody knows for sure how long our gold rally will bull.  In our research today we discovered a report saying there are 32.5 years between gold rallies and it was presented on a large graphic. The length of gold rallies between those barren periods was 9-10 years. If this timing prevails again, the dates would not line-up with our current gold rally. In our view, the current bull market could end in 2008-2010. However, these dates don’t match with that report’s 1980’s all time modern high. We wonder about the validity of that study as to its trading value. Cycles and time are on occasion, uncannily accurate, but since the 2000 stock crash was artificially delayed and propped with Mr. Greenspan’s induced housing and consumer debt bubbles, gold’s rally might extend several years further in time. If we move forward six more years, we see gold concluding 2014-2016 which some analysts have forecast.  Aberrations in one market reflect themselves in others.

Reasons and Rebuttals for Negative Gold Thoughts

Recently, we read several new institutional reports on precious and base metals forecasts. Very few have the nerve to project $850 gold for this winter but some surprisingly do. One was a strongly written report from a top ten New York stock brokerage company, which is highly respected.  We saw a very fancy, schmancy gilded report today with way too many pages of not much in specifics but lots of generalizations.  What we did see however, were several ideas that we feel play fast and loose with the facts. Everybody is entitled to an opinion but we also enjoy using opposing views as discussion points and the basis for arguments. The following repeats some of these ideas; both correct and incorrect with our opinions.

  1. Precious metals rose in July on strong investment demand mostly from funds. Actually, the rally was from mid-June to mid-July and yes, this 100+ point rally was mostly ETF driven. Reports stated 23% of new gold buying was through ETF’s in the second quarter of 2006. Expect this to accelerate in forthcoming gold rallies as fund managers are like good hunting dogs and smell a good deal with no pause (Pun intended) to buy.
  2. Small investors since May have backed away from these (precious metals) markets. Yes, they have to some degree, but there are small investors with larger positions who have sold little or nothing. They endured the draw down since spring and are waiting for the next rally to repair this selling and earn much more. We talk to some regulary.
  3. Fabrication (base and precious) is showing signs of weakness across most metals. In base metals we had some selling but copper is holding firm through and until April, 2007. Housing and auto declines will bring copper down but this is overcome for now by China’s buying and supply problems. Next we are seeing copper strikes everywhere as working mine employees fight for higher wages. Please note that 15% of new global gold production is a by-product from base metal mining. Should copper prices collapse, a large chunk of by-product gold stays in the mines. Other base metals have corrected too, but these rallies are not over. Watch while BP has to pay list price plus at least 15% extra for $175,000,000 of steel pipe to repair their Alaskan problems. BP said they will be buying American and U.S. Steel gets the bulk of this order. Nickel and zinc remain very expensive. Copper had the highest percentage of precious or base metal cost increases rising +100% from January, 2006 to April, 2006.  At the copper’s rally inception, average copper prices were $.75 per pound and miner’s were geared to make a profit at that price. Today, the average is $3.50 per pound.
  4. There was a discussion of less silver being used in photography but that is an old story and the bulk of that former demand has been replaced by newer buying from China, Korea, Japan, and India for electronics and long list of other commercial uses. Further, we see continuous reports of above ground silver supplies diminishing which firms and drives silver prices. Old silver prices, pre-rally were $3.50 and today are over $12.00. Watch what happens when silver gets very serious in trying to catch-up with gold. We think you will see a handful of junior silver company stocks moving 2000% to 5,000%. Question is; which ones are they? They will be the ones with huge newly discovered resources near the surface and cheap to mine in prodigious amounts. And, their good news must hit the markets on time just as larger price swings and rallies arrive. That is a tall order indeed.
  5. High precious metals prices are creating sharp declines in jewelry around the world. This is not true as the Indian jewelry buying for their annual gold festival is visible next month. Further, silver and gold that might have been fabricated into jewelry is now moving into central bank treasuries for coinage, and ETF bullion backing.  The Canadian mint is behind in production despite manufacturing record amounts of coins. Next they plan to open a new ETF when development preliminaries are complete. Our guess on this one is late 2007. They are doing a fabulous job in our opinion to help gold and silver. The U.S. Mint had to buy silver and possibly gold for coin manufacturing in the open market to keep up with new heavy buying coin demands. A few week’s ago Russia designated a proposed increase in their central bank gold bullion supply of +$250 Billion; doubling it from 5% of assets to 10%. That amount was reported as being 25% of all annual global gold production. Who has that amount of gold to sell them at this time?
  6. Mine production is rising for most metals. Yes, the production had rallied but new information suggests we’ll get a smaller total gold production for 2007 and silver is nearing the supply danger point despite higher world-wide total production. Smaller supply equals higher prices.
  7. Another statement said Peruvian mines are increasing production when we know for a fact the largest gold mine in South America will not receive any more new investment dollars and will close by schedule in 2009 due primarily to the unsaid threat of country risk. Some explorers have sold positions in Peru in both energy and precious metals for fear of nationalization. The new dictator says otherwise but we expect a “taking” or higher taxes, or both.
  8. Canadian and USA mine output continues to decline. Temporarily, this may be true as recent mine operations costs are much higher. However, in our view we see several new major mining operations coming on stream or about to. A top five copper producer is opening a new copper mine in Arizona. A senior gold miner is building a new $250mm electric power plant to drive expanded Nevada operations. A premier gold junior is assembling a massive group of tested properties in a proven Nevada gold field. An Alaskan gold mine just opened after long battles with permits and lawsuits. We also see a formidable list of new properties at various development stages throughout Canada. Alberta is booming with energy mining and other provinces have new efforts in coal, copper, iron, oil, gas, zinc, nickel, gold, silver and diamonds. The problem with our entire industry is the years’ long lead times for mining projects’ evaluation and permits. We can assure you global mining is not diminishing. It is expanding at a rapid clip.
  9. Central banks are set-up by international agreement to sell several tons of gold into the market place. Yes, this is true but those who are selling are not selling  full allotments and some others who hold substantial schedules for selling high tonnage are not selling anything. These agreements are permissions to sell by an allotments agreement and the selling is not mandatory.  In the U.K., Treasury Secretary Gordon Brown sold a massive amount of gold at a rock bottom price costing the Bank of England over $1 Billion U.S.  Criticism was both immense and embarrassing. Other central bankers are fearful of making a similar mistake. We think sales talk will be plentiful while legitimate sales are token in nature, politically expedient, and miniscule.
In summary, base and precious metals mining will not disappear soon. It is growing by leaps and bounds. Price increases of certain metals might level off with lesser demand from industry and commerce. However, gold will not wait for anybody. Get aboard and earn your share. –Trader Rog