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$700 Gold Will Look Cheap in A Few Years


$20 or $30 dollar days are gonna be commonplace in the future

G'day. Well, well, well ….. gold and silver have had quite a couple of weeks/months and, whilst I am always concerned about the old "elevator shaft" phenomena so common in years gone by, I think the downside in precious metals is severely limited due to such robust physical market demand. Many times you have heard me make the suggestion to keep watch on the London Gold Fixes for tells about the state of the market. Physical metal is being accumulated on any dips, offers in size are being taken in the OTC markets and sell-offs are considerably shorter in duration than we have seen in recent history. $20 or $30 dollar days are gonna be commonplace in the future, IMO, especially on such short covering as we have seen recently. I suspect Barrick Gold (ABX) will be busy again this quarter.

Previously, big retracements in gold and silver had extended into weeks and even months, yet these days they are measured in hours let alone days. I have been expecting such and have written at length previously about this. Deeper yet shorter was my expectation. The disingenuous media is still all agog at this 25-year high gold price (in nominal US Dollar terms). When they include inflation adjustment from 1980, it will show that we are nowhere near such record prices. North of $2000 an ounce is where we need be today to take out the 1980 high.

I see new records in Copper and other metals are being set every other day as the rush for commodities continues unabated. Gold and silver have heaps more catch-up to do, IMO. Rhodium is over $5000 an ounce when it was just $400 in January 04. Similarly, I see no reason why gold at $3000 and silver at $100 should elicit so much laughter when I suggest those sorts of prices for the coming decade.

I just returned from Singapore where I caught up with some old mates who are all in the commodity derivatives market. It was unanimous that China is a big deal for future commodity price outlook, and that the "sleeping giant" basically hasn't woken up yet. Anecdotal evidence was provided indicating serious demand for all manner of commodities, with precious metals being at the forefront as they look to diversify their dollar reserves. Then there is Mr. and Mrs. Wong who are very keen to accumulate gold at any opportunity, now that they can as private citizens. India is in the same boat.

On the subject of Singapore, I was astounded to see a "new product" at the jewelry stores. Purple Gold. Seriously! I was intrigued so I investigated a little. It is a purple metal that is 80% gold and 20% "alloys" that aren't divulged. Why would anyone want purple gold rather than gold gold? Gimme the yellow stuff anyday!

I note that there are some commentators suggesting we are in a "commodity bubble." I disagree. I haven't heard a cabbie talk about a gold stock! Consider the Tech bubble and compare the mania that existed across all sectors of society in the late 90's. We are seeing nothing of the sort in precious metals. In fact, precious metals are still unknown to many investors. Many are "waiting" for a pullback to get an exposure and many are scared to "pay up" at present levels. $700 gold will look cheap in a few years, IMO and not advice. I would think that the $630 level will provide plenty of support if the paper market gets a roll on and clobbers the market for a few days. A pullback to that sort of level would not surprise me but it will take a lot of physical metal to keep the price down there for long.

Others are talking about gold being higher due to dollar weakness. I disagree, again. The dollar was at 1.35 vrs Euro when gold was $440. Today it is 1.28 with gold at $700+. I see this move as the initial stage of the "flight from FIAT" that we've talked about for years. It will continue, IMO, as there's too much paper chasing bugger all metals. Metals can't be printed like dollars or yen or pounds. Asset allocation shifts need only be tiny to impact metals. The Aussie gold price is over $900 an ounce even with the Aussie dollar pushing into the 80c region. Gold is priced in paper currencies, paper that is devaluing in front of your eyes, in every currency. Inflation is rampant and everyone is starting to notice just how poorly the "official" inflation numbers represent reality. Hmmm.

Many financial institutions are raising their metals price forecasts aggressively for 2007 onwards. A bit late, one might suggest.

The shares have underperformed the metal recently and I suspect that is a function of investor expectation that the metals won't hold these types of prices. Many companies will have reserve upgrade announcements coming soon as they lift their reserve calculation prices up from the current $400 or so, maybe up to $500. I wonder what they look like with a $700 price plugged in?? Two to watch are Golden Star Resources (GSS) and Nevsun Resources (NSU) in that regard, opinion only. The silver stocks have stalled. Time will bleed off any overbought signals and expect new highs for them in the next couple of quarters. Pan American Silver (PAAS) and Silver Standard Resources (SSRI) are still my core exposures in this arena.

I note Mr. Buffett doesn't have his silver anymore. That is a very strange development for such an outspoken dollar bear. I can't for the life of me figure out what would possess him to exit his silver position, given recent market action and current fundamentals. I wonder who took it off him?? The gold/silver ratio is back at 50 after a brief flutter down in the low 40's. Get ready to take advantage of any spike up into the mid 50's - opinion only. The forward dates look even better due to the gold contango and silver flat/back. Noted has been the rise in margin requirements for metal futures on the Comex. Hmmm.

Where to from here? I dunno, but reckon gold is probably gonna hit that $852 sooner than many would like or expect. The downside is limited to $625-30 at first glance. That is only a 10% fall from current levels so be careful. Silver looks just fine to me and the physical market suggests limited downside in the near term - maybe down to $11.85 on a big dummy-spit. Look at your weekly and monthly charts if you are getting concerned about the metals.

Have a great day,

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Positions in gold, silver, GSS, NSU, PAAS, SSRI

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