Market Commentary

Gold: The One Investment that cannot be ignored

Gold has hit the headlines again. So what lies ahead for every trader's favourite metal? 

We see higher inflation in the US for starters. We have suspected for some time that the official US figures for inflation are fudged. With the increase in easy credit through the recent rate reduction in the US it will get harder for the Fed to contain inflation. But that is another story.....

The market has taken the Fed rate cut as acknowlegement of the seriousness of the subprime mortgage crisis. The Dollar Index fell to a new 10 Year low, while gold broke through resistance at $730 to establish a new 10 year high. The weekly charts suggest there is even more upwards momentum to come. While it is likely that the ride up will not be without pullbacks, the next target is between $US750-$775 before some mandatory rest is required.

The more bullish commentators are predicting USD$900 an ounce before year end and we would not be surprised if it went even higher.

Black gold is also soaring, hitting as high as $82 a barrel last week, an ALL-TIME record high. Think it's solely due to the hurricane season or worries about Iraq and terrorism? Think again!

Oil prices are rising because demand all over the world is continuing to grow … because oil supplies are low … and because the value of the U.S. dollar is plunging.

The oil chart looks extremely as bullish. There's increasing support for the belief that $100-a-barrel oil  will be reached by the end of this year, if not sooner.

So what else has been happening with Gold?

Gold companies have continued merging and making acquisitions left and right. In 2006, we saw the most M&A activity in at least a decade. There were 357 deals valued at $24.3 billion, way more than the $16.2 billion in deals a year earlier.

Why the sudden activity?

For the simple reason that mines are being depleted faster than new reserves can be found. The number of discoveries with 2.5 million or more ounces has declined for eight straight years, according to the Metals Economics Group in Halifax, Nova Scotia.

If anything, we expect the M&A feeding frenzy to get more frantic during 2007. And we will be keeping a close eye on possible targets for our trading recommendations.

Mining production looks like it will continue its failure to keep up with demand if last year’s results are anything to go by. Despite rising gold prices, global gold production in the nine months ended September 2006 fell 2.2% to 1,804 metric tonnes from a year earlier, says London-based researcher GFMS Ltd.

The U.S. dollar has fallen further recently helping gold prices rise.

In 2006, the once mighty greenback fell 8.1% against a basket of six currencies such as the euro, the yen and the Aussie dollar. That was its fourth annual decline in just five years. The dollar has enjoyed a short-term bounce since November 2006, but the larger downtrend has recently reasserted itself.

The money printers

Without a gold standard, central bankers are free to print money and credit to inflate their economies, avoid recessions and to pay off governmental debts. There’s not a central bank or politician in the world that will sacrifice growth in the name of tighter money. Central bankers are systematically devaluing currencies (with the U.S. dollar leading the way down), inflating their economies and pumping up money supplies.

Ironically, these central bankers have continued printing money at the worst possible time:

• When global demand for goods and services is already at all time highs;
• When the world’s most essential natural resource, oil is already facing severe supply limits;
• When the U.S. dollar has already lost a great deal if its purchasing power;
• And when the world is already dealing with massive issues like terrorism

Always keep in mind: While central bankers and politicians can effectively create paper money at will, they cannot control the supply of gold in the world.

And there isn’t much of it to go around: ALL the gold ever mined in the history of the world (about 151,000 metric tonnes) can fit into a 62.3-foot cube.

All the ingredients are in place. Record demand for gold continues. Meanwhile, available supplies are dwindling, as are new discoveries. On top of that, central bankers around the world continue to print money freely, depreciating their paper currencies in the process.

Add it all up, and you can see why the bullish trend for gold should now continue. Since 1800, the industry's boom and bust cycles have averaged about 10 years. However, the last downward trend lasted 14 years (from 1986-2000). So in our view we think we’re only about halfway through the current upward cycle.

Our target for gold is a minimum $730 for 2007 and we could easily achieve that within the next few months. That’s about a $70 move from current prices.

The narrow consolidation over the last few days is likely to resolve in a downward direction, which would signal a test of support at $630. The primary trend remains up however. In the long term, a rise above $690 would signal a test of the upper trend channel and a mover to $730; while a fall below support at $630 would signal that the trend has reversed.

And we would not be surprised to see a spike to $800 per ounce if geopolitical forces boil over. 

Current bid, $ change, low, high

24 hour GOLD Spot Price

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