Making our bottom before the market move
September 13, 2006
Tough last week, but looks like we're making our bottom before we start getting the news that will really move the gold market.
The Fed will make the interest rate decision next week and if they stay true to form, the statement will give them all the flexibility in the world, but also say that they are continuing the pause on raising rates. We believe that the pause will stay in effect until January of 2007, when the Fed will begin to cut interest rates as the economy continues to weaken, soft landing or not.
Yesterday, if you blinked, you missed the mention of the US trade deficit being at $68 billion plus...which was the largest trade deficit that's been ever posted! In the past, this number would have propelled precious metals up on it's own, but yesterday it was merely an afterthought in the market. Afterthought or not, the deficit picture isn't getting better, which will eventually have a significant impact on the dollar index. Even the IMF is putting out notes now stating that a "disorderly dollar drop" will have negative ramifications across the globe, and with the US doing little to clean up it's deficit and debt issues, how many countries will continue to sit by and wait for an orderly, orchestrated dollar depreciation? Things could get very ugly with the dollar index in short order if certain dollar holders begin getting antsy.
More news was out yesterday that South African gold production is continuing to fall...this is nothing new. Gold production across the globe is continuing to slump and instead of being a one off event, stable to falling production is now the trend. The reality, despite Econ 101 (and every talking head on CNBC) telling us that increased prices will increase supply, is that gold production most likely hit its peak in the late 1990s and we'll never see those levels of annual mining production again.
Along with that news, updates that power outages in Ghana, another big African gold mining country, are cutting deeply into production, Peru is proposing new mining royalty payments and more M&A activity in the market will continue to shrink production.
A large number of economists, market commentators and the like are calling the commodity bull dead. A four year commodity bull market...that will go down in history as the shortest commodity bull market in history. It's not that simple. We have to reverse decade long trends, if some of those commodity supply trends can ever be effectively reversed, which I believe some can't. Maybe we won't have a 15 or 20 year commodity bull market, but we certainly aren't only going to have a four year run.
Finally, we're sticking to our guns on the Central Bank sales...Central Banks in the Washington Agreement (now called the Central Bank Gold Agreement) will not hit their sales quotas for the first time in seven years. The average gold investor will not understand what this means to the market. Let's educate them! The largest holders of gold on the planet will signal to the market by not hitting their annual sales number that the amount of gold they are willing to part with is getting smaller. This announcement at the end of September will be one of the single most bullish factors influencing the price as we move towards new yearly highs at the end of 2006.
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