Nothing Like Uncertainty to Boost Gold Prices

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"Gold and silver prices on a tear and look set to become turbocharged."

A snapshot of the year, captured in the following chart, shows silver in first place and gold in second. Close behind in third are the gold producers and, coming in fourth—heading the wrong way—the U.S. dollar. Despite the stated strong dollar policy, the reality is that the USD is in freefall.

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As things stand we have the sequel to quantitative easing about to darken our doorway in early November when the Federal Reserve will announce its intentions, which it has already trailed, so all we need to know just how much will be allocated for this purpose. Then we have the Obama administration losing its popularity and facing the mid-term elections also in early November. The results of which may well throw up a few new faces who just might have something to say about how things are being run and the wisdom of printing more money. We won't know until the results come in and we get some indication of where the power lies and just how vocal and influential these people will be.

We also have the unfolding subprime mess, which throws into question home ownership and puts a question mark above property investment—placing both buyers and sellers into the doldrums as the situation stagnates while ownership issues are resolved. Housing is not only an important part of the economy it weighs heavily on the minds of home owners who are now wondering if they do actually have the correct paperwork in place and can clearly demonstrate that the roof over them is in fact theirs. The only certainty we can see here is that the lawyers will very busy. Enough said.

Looking at the external forces that come into play the biggest by far is the stance that foreign governments are taking by disparately trying to maintain parity will dollar in order not to lose their competitive edge. And so the race to bottom continues with the competitive advantage being won and lost on a momentary basis as the other countries try to fall into line by making similar devaluations.

Over on Wall Street the 'DD' phrase is being played down, however we do have the possibility that we could experience a double-dip recession as the recovery—in the Western world, at least, remains fragile with robustness still a long way off.

So just where are the winners? The answer: the precious metals sector where both silver and gold prices have been on a tear and look set to become turbocharged. It's also true that the other commodities have also sprung into life, but that's a discussion for another day.

Please read what we have to say with a pinch of salt as we are not in the 5% to 15% of our portfolio allocated to the gold and silver group, apart from a little cash, we are fully loaded with physical gold and silver, their associated stocks and tranches of Options Contracts. These opportunities do not come along everyday and we are hitting it as hard as we can, a strategy that is not for the majority of investors.

Below we have the chart for gold prices where we can see a stupendous rally which started a little over two months ago adding $200/oz., driven by strong fundamentals and a weakening U.S. dollar. Also note that the technical indicators are at the top of their ranges, in particular the RSI, which could remain there for some time to come, as in this instance we expect the fundamentals to overcome the technical analysis and drive gold prices ever higher.

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Taking a quick look at silver, we can see that silver prices have been outperforming gold prices recently, which adds a little spice to the world of precious metals. Since the end of August, silver prices have gained a staggering $6/oz. That should come as no surprise as the gold:silver ratio has been out of kilter for some time. There is now a yawning gap opening up between the price and the 200dma, which is now about 33% above that of the 200dma, but it can go to +50% before we get a breather. Although the indicators suggest a breather is due, as with gold, we expect them to remain on the side for some time yet. With the occasional shallow pullback, we expect silver prices to climb all the way to the end of the year.

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Finally we have the U.S. dollar, which as we write has just fallen through the '77′ level on the U.S. Dollar Index, next stop could be as low as '72′ where it will need to find a few friends in order to stop the rot.

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Stay on your toes and have a good one.

Bob Kirtley
SK Options Trading (Winners of the GoldDrivers Stock-Picking Competition 2007)

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