 |
Gold and silver are off and running
October 26, 2006
Gold and silver are off and running this morning and should be both challenging their significant resistance points at the $605-612 level for gold and $12.25-12.45 level for silver. We need to see gold and silver hit and retain these price levels for a few days and then we should have a quick sprint up from there to much higher levels. Despite all of the negative press recently about the bull market in commodities being over and gold losing steam, we've seen gold and silver hold prices that are 25% higher than they were this time last year in the face of negative sentiment and continue to fight back from falling prices and a media-perceived lack of investor interest.
The precious metals markets, as we said yesterday, have been searching for a catalyst to catapult markets higher. We might be setting up for a perfect mix of dollar weakness, higher oil prices, a change in government control with the election, continued Fed pausing and the beginning of a strong seasonal period for prices as we move into Nov.-Dec. This seasonal aspect for higher prices always starts around now and will last into the 1st quarter of 2007.
Remember, you're clients will be much better off buying in at lower prices and on dips, rather than trying to chase down returns in a market that is moving upwards. Let's break the counterintuitive investor activity in our own market. Buy low and sell high.
Why will the elections affect metals prices?
Only two things can happen with the elections. Either the Republicans retain their power or the Democrats take partial or total control of the House and Senate. We think either scenario will be a positive for the precious metals markets and here's why. If the Republicans retain control, nothing will change. Government spending is completely out of control, trade deficits are ballooning, the Fed has said they will tolerate moderate inflation as long as the economy keeps growing (read: stock market keeps going up), and the US has taken the track that they will isolate the rest of the world in order to pursue current agendas. And this is from the party that is supposed to be fiscally conservative. If the Dems can wrest control from the Republicans, it will be viewed as a negative for the economy as a whole and while it won't necessarily mean an immediate move into a recession, the presumption will be that policies will be implemented that will weaken the economy and plunge the US further into debt. The potential becomes the reality rather than what the actual actions are by Dems.
Will the commodity sector dictate gold and silver prices?
While we believe than the entire commodity bull market has a ways to go, we've seen a recent pull back across the board in commodities, be it in energy, base metals, precious metals, agriculture, etc. which has caused a sell off in the entire sector. The commodity sector will continue a march upwards over the next 5-10 years with periodic price consolidations. However, we believe that gold and silver will begin to decouple from being strictly commodity trades and begin exerting their roles as alternative monetary assets. So both will trade upwards with commodities, but also function as alternative currencies to the Dollar, Yen, Euro, and so on.
Will gold and silver supply just ramp up and absorb the new demand?
In the past, it's entirely possible that could have happened, but we're in a new paradigm for the precious metals markets. The low hanging fruit has been picked. Production levels will most likely never reach what they were in the late 90s and might continue an annual decrease for the foreseeable future. Years of underinvestment in the mining sector will continue to cause less and less production moving forward. Deheding has continued to act as a floor to prices. Central banks are running out of gold they're willing to part with via sales at these price levels. We're not in a situation where the normal economist view that higher prices will be met by higher supply is a reality in our market. This is a macro issue. There has been a fundamental change on the supply side to our markets we don't believe will ever recover.
|
|
|
