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Stagflation Nation Seeks Gold and Silver

By Roger Wiegand             Printer Friendly Version
October 5, 2006

“Moving slowly in the wrong direction.” –Traderrog

August was back to school shopping month and staggering consumers are beginning to buckle under a load of debts. Core inflation was up 2.5% and the overall economy grew at only 2.6% in the April-June quarter. Inflationary prices are beginning to bite and incomes are weaker or worse, disappearing. Gasoline prices are temporarily lower but are no bargain compared to where they were just a short time ago. Housing has been stopped dead in its tracks and should continue to weaken and sell down with much lower prices over the next two to three years. Absence of sales will be the biggest problem not needed inventory. Those who do not have to move will give up and stay put. Others that have no choice will rent a property if they are lucky and relocate to another new rental for themselves. These trends are screaming stagflation as the economy stagnates while prices of food, energy, real estate taxes and services are racing higher.

As usual the clueless economists expect an escape from recession. In our view we are already in one but not by their official measure of false information and goofy numbers. The savings rate has gone negative which means consumers are borrowing to live and pay daily bills. This speaks to an economy poised on the brink. As we have mentioned elsewhere in last week’s Trader Tracks we cannot find any strong sector for sustained price leadership to move the mainstream economic picture.

Precious Metals and Energy Ripe for Rallies

Energy, gold, silver and other commodities have nearly completed a correction and are ripe for new rallies. Analysts disagree and their majority says investors are leaving these sectors along with real estate and are moving into financial assets and stocks. Like any other times in the markets it all depends upon what you select and how long a sector performance can deliver the goods. Over-bought and over-sold technical indicators remain valid and should not be discounted in any market.

Basic commodities, like nickel, copper, steel, cement, lumber, zinc and lead should continue to rally although at a lesser pace for the last quarter of 2006. Certain energy groups have bottomed and are now consolidating and preparing for new rallies. Energy stocks should offer a long upside between now and next spring. However, when the general commercial stocks began to sell on economic weakness, we expect those basic commodities to sell along with the group. Gold and silver is firm at lower corrected prices and is set-up for the next rallies.

For the rest of 2006 and the first four months of 2007 we like grain, gold and silver. These markets had fine rallies and sold back on profit-taking and normal stock corrections. Cycles are off schedule for now but expect a gradual return to higher prices for 2006 and more vigorous rallies in early 2007.

The general stock markets are setting-up for a peaking action and in some cases a blow-off top. Yahoo Finance reported, “The Dow’s flirtation with a new high made investors nervous, said Scott Merritt, a U.S. equity strategist for JP Morgan Asset Management. “It doesn’t make a difference from a fundamental standpoint; it’s psychology.” We agree as Dow 12,000 or 11,000 do not really matter. All the childish chatter on CNBC last week about a new Dow high is not even good entertainment. Technically from our point of view, the Dow has built a huge double top and is ready to sell hard. How far it goes down is up to the manipulations of the PPT Plunge Protection Team. Ordinarily, we can calculate technical support prices but in this instance it’s a waste of our time. The PPT will keep it floundering above 10,000 for the election so why bother figuring the numbers. If the Dow Jones Industrial average were adjusted for inflation since 2000 it would be near 9350. If gold were inflation adjusted it would be 720 or more covering the same period.

We now feel it is safe to crawl back into energy and precious metals using smaller positions at first. As new rally assurances build we will recommend adding to positions. The big stock indexes at this point are obvious shorts but we strongly recommend not doing this as you cannot tell when manipulation will strike and support those markets.

Gold, Silver and Energy Finding New Support

Fundamental reasons why these markets will turn bullish are: (1) Inflation continues and will accelerate. (2) Supply and demand balance will tighten even more as most commodity markets are finding tightening supplies. Central banks are closing their fiscal selling year for gold. Primary gold suppliers, the seniors, are forecasting less production in 2007 budgets. Silver supplies are dwindling with each passing quarter. New silver production with the exception of increases on existing mines cannot appear until 2009 or 2010 according to approvals and modest development schedules. (3) Newer, larger gold and silver markets have begun heavier buying in China and the Middle East. China wants to re-cycle diminishing  valued U.S. Dollars with gold. Middle Eastern gold buyers are re-cycling U.S. Petrol-Dollars. With exception of recent PPT gold short selling, other aggressive short sellers are absent since the 9/11 incident. A new gold market problem is just beginning to surface and that is the demise of several hedge funds, many of which held larger gold positions and are now going out of business in droves. We think this one will not be that bad, however, as their previous exits from gold were contributors to the recent selling. We think most of them are out at this time.

Gold has been in a five year bull market which we call Phase One. In the transitioning from this Phase One beginning a move into Phase Two, more powerful corrections must be endured like those we saw this week.  Futures gold positions have dropped 35,000 contracts while an additional 6,000 short contracts have been traded since early August according to Citigroup.

The world was changed after 9/11 and with continuing strain from the Iraq war, Afghanistan, Iran, and conflict with Israel and Hamas-Hezbolah, there is a firm base of safe-haven buying and holding of precious metals.

Gold as money not a commodity reacts to market fears and today we see several that will not go away anytime soon. Among those would be diluted U.S. Dollars, America’s trade imbalance, and mountains of un-payable debts both public and private. Derivatives and housing bonds are a primary, formidable obstacle which cannot be eliminated unless and until the debts are either repudiated or paid in full which is highly unlikely. Further, thousands of banks are real estate portfolio exposed and we think this one can only end in tears.

Citibank also reported the gold markets’ size has shrunk as fabrication fell 22% year- over-year as more of this market was supported by investment demand and speculation. For now, we feel much of the speculation has evaporated and today’s gold price reflects physical supply and demand at the $575-$585 price range. This new major price support range, in our view, is the bottom springboard for the next rallies.

Gold is now reacting to holidays. China’s New Year (China closed for the week) and India’s wedding season are all in full swing. Gold and silver market supply is being sopped up quickly at today’s lower prices as commercial precious metals business must have enough on hand to stay to stay in the game and keep producing product for those markets.

Central banks by agreement were authorized to sell 500 tons of gold this year and current reports are saying the actual amount is less than 393 tons. This selling is now over. Open quotas still exist for France and Germany but political arguments are blocking those sales.

Russia and China have both publicly stated goals of increasing gold supplies. Soon, we expect the same for silver as this supply squeezes tighter as well. Russia has the oil income paid to them in several currencies some of which will be traded for gold; especially U.S. Dollars.

Gold and silver enjoyed support from other commodities as the asset group of base and precious metals moved in rallies together. As base metals decline in prices with general business slowing into recession, some of the bloom will come off the golden rose as well. On the plus side of this event, as copper mining slows down, so will the gold supply arriving as a by-product. Fifteen percent of all gold is mined as a secondary by-product coming from other base metal mining. This event tightens gold supply driving prices higher.

As gold prices rise, more scrap will appear to be sold with larger price gains. This can slow the gold trend but eventually scrap sales will decline. De-hedging took about 250 tons out of the gold market last year as hedges were un-wound. This larger use for gold will diminish in 2007 as less of this is required. Our forecast says less de-hedging will be offset by certain central banks, especially in Asia, re-stocking gold bullion supplies.

The jewelers are using less gold as the prices go higher and former customers are loaded up with gold. Citibank reports this major use of raw gold is going downhill and trending toward numbers like the early 1990’s. We think jewelry will continue to expand, particularly in India where the economy is growing and Indian salaries are higher with growing new employment.

A combination of all these trends and factors are moving gold higher and to the plus side as newer ideas for gold appear. Precious metals ETF’s require large amounts of gold and silver for backing of those funds. Singapore announced this morning they will open a new gold ETF which will be quickly invested in this very wealthy region of the world. Even in our lower priced precious metals transition period ETF purchases did not wane. Instead they held steady or moved higher. More new funds are on the way and they need hard bullion backing for investor confidence.

Some are claiming the gold-dollar’s inverse relationship has been disappearing again. It seems to ebb and flow. Over the last five years we’ve reported this event twice and it seems to be slowly appearing once again. We have noticed a common trend between gold and crude oil but this cannot, in our view be traded.

We would look for crude oil demand to slide with a slow down in business. However, our price forecast indicates oil prices should remain above $60 or higher for years to come. Meanwhile if oil sells with a recession, gold will rise in price with a safe-haven influence pushed even harder by geopolitical events. The outspoken and hidden enemies of the west seem to be gaining momentum. This factor will pressure gold and silver to steadily higher prices. Review the charts for gold, silver and oil on the following pages for ideas and captioned explanations for trend and forecasts.

Daily Gold for October 3, 2006

Gold closed today at $576.40 after completion of an A-B-C correction and landing on primary support.  Follow the $575 price line from right to left and count the support and resistance price touch points or close calls. This pattern is saying gold would prefer to support at $575 before resumption of the next rally. The negative here is price dropping beneath the 200 day moving average which is very important. Next major gold support under $575 is $550. This is possible but momentum lines in the lower box are forecasting a tentative bottom has appeared. Note the recent, tiny double bottom for gold preceding the last chart rally. This is also a signal confirming price support for gold. December gold futures are actively traded with 194,767 open interest priced at $579.50.


Silver Daily October 3, 2006

Silver has produced a better looking chart by supporting on the 200 day moving average. Momentum has turned sideways for now and silver recently touched both the 20 and 50 day moving averages demonstrating more recent strength than gold. While there is not quite as much support indicated for silver at its current price, we think it will support and hold. Next lower support for silver is 10.00-10.50. Watch for wider trading ranges for both silver and gold in the forthcoming rallies as volatility increases. December silver futures have open interest of 61,347 contracts priced at 10.885 very close to the 10.80 support price.  

Crude Oil Daily October 3, 2006

Crude oil is trading much higher on the futures for November and December. The November open interest is 251,124 contracts priced today at $58.59 which is the lower portion of our forecast trading range. That trading range is $58.50 to $62.50 which has previously proven to be a major trading price. The December oil futures are trading at $59.97 with an open interest of 191,647 contracts. While the selling was hard today with higher volume notice the support with momentum at its maximum of -5.0.  Seasonally, oil should be selling in October and November with a price rally December 1. Crude oil primary support is back at $65 and our fall forecast is $68.50 to $72.50 as the 2006 forthcoming high.  

December Copper Futures Weekly 10-3-06

Copper forecasts the direction of business as it is heavily used in autos, housing and other commercial businesses.  Copper price produced a continuation triangle from which it could either buy or sell and not continue sideways any further. Price sold and broke the triangle in mid-September showing market weakness. The weekly chart close today was 328 closing on a down bar portending more selling ahead. From later June through the present the pattern has also shown us a selling parabolic top. While copper prices can recover, they are telling us business is slowing down and the use of copper is on the wane. Sometime just ahead, we expect more copper selling to coincide with companion selling in the general stock markets. The transportation index is a leading indicator and is not confirming the rising Dow Jones price which set a new record today and this top is perhaps its final blow-off as a prelude to major down stock markets.

In Summary

We expect copper to support at 300-315 and the mainstream stocks to correct back at least 6-8% from their highs. Watch for the Nasdaq to lead the selling downward ahead of the pack. We do not forecast a stock crash for 2006 as the manipulators will ensure all is well prior to the November 2006 elections. We do expect the Dow to settle next spring near the 10,000 number which will be fiercely protected by the Plunge Protection Team. Gold and silver will move mildly higher this fall and then much higher and faster in the first and second quarters of 2007. –Traderrog-Trader Tracks Newsletter forecasts futures, commodities, stocks and bonds specializing in precious metals, grain and energy markets.