Daily Commentary

Metals Continue to Consolidate

Gold is down about $6 in early trading and silver is down $.30 as these metals continue to consolidate around these levels.  This is, as I said yesterday, a high level consolidation and is a positive sign for the market.  Barclay's Capital said that gold's upward momentum is firmly in the hands of investors and that another test above $1,000 an ounce is in the offing.  They also said, "On going credit market problems, lower U.S. interest rates, inflationary concerns as well as a weaker dollar, all have the potential to continue to boost investment demand." Yesterday Gold Fields Mineral Services said they believe gold is headed over $1,100 an ounce this year.  These are very prominent analysts whose opinions are valued highly throughout the market place.  Therefore, these dips are all great buying opportunities.  While gold and silver are in this consolidation phase you can take advantage of that by accumulating gold.  So far this week gold and silver both have solid gains.

This morning nervous traders were influenced by weaker oil prices, down $.60 a barrel at $110.26.   Overnight oil reached $112.20 a barrel.  However, the dollar continues to be lower and that is providing some support to the market.  The dollar is down 13 basis points at 71.70.  Another factor influencing the market were statements by ECB President Trichet.  His comments helped the dollar to move upward from its lows.  Rising inflation in the European economy of 3½% added to expectations that the ECB will be slow to lower interest rates. 

This morning Treasury Secretary Paulson said the economy continues to weaken and is likely to weaken further.  As the economy weakens the Fed will continue to increase money supply and lower interest rates.  With the banking system in trouble, no doubt Congress will also pass legislation in an effort to help them to get through this problem.  The solution of your Congress will be to throw money at the banking system.  However, this is not likely to fix the underlying problem.  Paulson further said that real estate prices simply just have to continue falling until the laws of supply and demand take over to support the market.  That is a solution that would probably be disastrous to the banks.  When the value of the home is worth less than the mortgage, people tend to walk away from the house.  Moreover, the IMF is urging the central banks of the world to standardize their bailout programs to handle the credit derivative crisis. 

Another factor affecting the U.S. economy is that the trade deficit unexpectedly grew about 6%.  It was expected to be about $57 billion and came in more than $62 billion.  That to a large extent is due to imports from China, oil imports and the falling dollar.

As I see it all of these factors continue to be extremely bullish for the precious metals market over the longer term.  Clearly, a new base needs to be built and the tremendous rise that we have seen from a year ago needs to be consolidated.  However, once this base building process has been completed and the overbought conditions have been worked out of the market, I believe we will see a substantial move to the upside.  I further think that over the next three months we are likely to challenge $1,000 an ounce again.  I believe that Gold Fields Mineral Services and others who are forecasting gold over $1,100 by year-end are also likely to be proven correct. 

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