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Metals With McGuirk: End '06 With a Bang

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Managing the drawdown is gonna be more demanding than driving for return...

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G'day.

So much for a quiet end of year in preparation for 2006!!! It has been all good news the past fortnight for us long suffering precious metals bulls. The last 24 hours has been somewhat disorderly though! It seems to me that everyone had a view on gold and silver and they were all pretty much one way. A clean out was a formality. That kind of one-sided sentiment always makes me cautious due to the fact that so few people in the world have any idea about these metals, yet we get 20 opinions in any given hour watching the financial media. Where is the new "info" that is driving these metals prices higher coming from? Where, so recently, was such information "discovered?" Why was gold not a good buy at $460 only six weeks ago? What's changed in the big picture to have everyone so bullish on the metals??? Nothing - from where I sit!

The yellow metal has had an extraordinarily strong last six weeks, immediately following that brief dummy-spit down below $460. The increase of close to 20% dwarfed the metals shares move and I think we will continue to lag with the equities for a few more months. Certainly until we can get some time under our belts to work off the overbought conditions in the futures, on some of the short term charts. The dramatic fall from just on $100 above the $200 DMA for gold, was telling, IMO. The price ran too hard too fast, simple. Similarly with the runs from $320 to 390 and 355-435, we see the big retracement as everyone "got the bug" and piled in late. Latecomers to the gold markets have been hammered on almost all sizeable rallies in the past few years. I still want gold staying above $450 into the New Year before I get too cocky that $425 is well in the rear view mirror. Nasty, violent retracements like these are gonna be part and parcel of the next decade or so of rising metals prices. Managing the drawdown is gonna be more demanding than driving for return in this sector going forward, I believe.

I expect that we will trade sub $500 again in the short term and the $478 could be in danger should we see some serious paper capitulation. I have said many times that I think all pullbacks will be shorter in duration and steep. Same reasoning being that the physical market is booming and all dips will see physical metals hoovered up.

I note the Euro-zone Central Banks put their hands up and said they ditched close to 11 tons of gold last week. They will need a lot more than that per week to keep a lid on this metals price, IMO. I am interested in whether they are forward selling further years' gold at current levels, effectively creating supply that doesn't really exist at present. A forward sale of metal will always involve a spot sale of same and the effects of said sales can have significant impact on spot prices. Once it is sold, it is sold, no matter what the value date.

Indian demand has not been dramatically halted due to the gold price rise in dollar terms. The Rupee makes record highs with monotonous regularity against the dollar. The wealth effect in India is alive and well and this is only good news for gold bulls. Dubai jewelers are having a ball and I note that the local jewelers around Sydney are ramping prices of crappy grade jewelry before the big Xmas shopping spree. My sovereign guy here in Sydney reckons he has never been busier (he also said that a year ago too!) and he is seeing no increase in stock coming to market as the price rises. Hmm.

Gold has had a $40 roundtrip the past 24 hours and I would hazard a guess that there has been some official intervention in the market as it was getting a little too hot up there at $540. I recall Greenspan said after the LTCM bailout that "Central Banks stand ready to lease gold should the price rise" and judging by the less than 20 basis point - 1 year lease rate for the metal, someone is. Why would anyone lend out their gold for such a pissy return? Who would take the capital risk of borrowing gold, çoz it's no good to a borrower as gold, they want dollars. Anyone borrowing gold must sell it to use it. The issue is that at maturity, getting the gold back to repay the borrowing could be a problem, especially for a non producer of gold.

Silver has been on a wild old rollercoaster ride of recent days with $9.25 getting nudged in the same 12 hour period as $8.50! Talk about "up the stairs and down the elevator shaft." I still think silver should be double-digits today so this is just a bargain for any who thought they had missed the boat. Plenty of games in the paper silver market and I think this will just get more volatile going into year end and revaluation time for many hedge fund managers. Silver looks very appealing below $8.40 with big support around $8.22-25 area. Watch the delivery numbers in coming months as there may have been a stack of people buying silver futures that will want to take delivery of said metal. Watching where the physical is moving is critical at this juncture, IMO. I know where mine is and take great comfort as I fiddle with my bar under the table.

I read somewhere that there were some long silver-short gold trades being unwound in the last few days. That makes no sense to me and price action doesn't really support such claims. I am looking to add to current positions and not advice.

Note the increase in margin requirement for gold and silver contracts on Comex. Oil is back above $60 and crack spread trades look attractive on any compression.

We had a great costume party last weekend and we made quite an impression on the night. Lisa looks fine as a Playboy Bunny!! Not much else to report from the party - as the old saying "what goes on tour stays on tour" is applicable in this case. Take your pick - events were either highly immoral, borderline legal or just plain outright unbelievable!!

Maitrise ran 5th in her recent test at Randwick and looks like will now go and have a holiday for a few weeks and hope to measure up to the good races in autumn.

We have the kids down from Brisbane for the next two weeks staying at the apartment with us here in Town, starting in 14 hours. Christmas with the kids is very special.

Enjoy the day - maybe with silver at $8.25 and gold back at $507ish.... I think we may be waiting for '06 before we see $550 gold print or $10 in silver. But not a long wait.

Position in metals

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