The bull run on precious metals continued in October, with all four important investment-grade commodities up at month’s end from their opens for the month (which were themselves huge increases over September’s opening prices).
The problems that were driving metals in September never went away: All-time dollar index lows, subprime-lender-caused liquidity problems, and fears of inflation, despite action by the Fed, which eased interest rates.
Platinum rocketed to an all-time high, closing the month at $1,445.50 per ounce, 4.1% over the open, and up overall 22.4% since the year began. Platinum’s high came without the run-up accompanying speculation about an ETF that caused its price to spike last fall.
Palladium, which had advanced least in September of the precious metals, led in October with a 6.4% increase for the month. Gold surged 5.2%, but made news by briefly topping $800 on the futures market. It closed slightly off that high, but still well ahead of its open.
Silver was up just 2.8%, having tumbled farther than any of the other metals, but had climbed more than 18% since the beginning of September.
Gold/Silver Ratio
During October, the gold/silver ratio – the quantity of silver (in Troy ounces) required to obtain one ounce of gold – saw a decline by mid-month to 54. In the third week of the month, the ratio rebounded to above 56.3, from which it declined back to the mid to upper-54 range at month’s end.
| October Spot Price Summary (U.S. Dollars) | ||||
| Silver | Gold | Palladium | Platinum | |
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| High | $14.60 | $795.30 | $387.00 | $1472.00 |
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| Low | $13.13 | $723.00 | $347.50 | $1345.00 |
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| Open | $13.83 | $745.38 | $350.00 | $1389.00 |
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| Close | $14.23 | $783.90 | $372.50 | $1445.50 |
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CONTENTS
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Market Summary - October 2007 |
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Ross Hansen: What $800 Gold Means |
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Joe Nicholson: Targets in Gold and Silver |
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Precious Metals Worldwide |
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CHARTS
The following charts display the daily low and high spot price of each metal for the month of October, 2007. Source: Northwest Territorial Mint spot prices as posted at nwtmintbullion.com.
The following charts display the daily spot price range of each metal for the six months ending August, 2007.
What $800 Gold Means
by Ross Hansen
We are looking at the highest price for gold — in dollars — that has been seen since 1980.
Pricing has brought gold to $800. That $850 gold high that we’ve venerated for 27 years no longer looks like an inconceivably absurd spike on the historical price chart.
Everyone knows the factors contributing to the double-digit percentage run-up in gold (as well as silver, platinum, and palladium) since the end of August. Credit problems. Dollar decline. Housing bubble. War. Inflation. Add two straight months of significant declines in consumer confidence, and it’s no surprise that Americans are headed for the hills, and the hills in this case are made of shiny metals.
As the dollar declines, other currencies, most notably the euro, are soaring relative to the dollar. This makes gold relatively less expensive to buy overseas, because gold is denominated in dollars. At the end of March of 2002, gold broke above $300, which was then the equivalent of €342. When the spot price of gold reached $800, that was the equivalent of just €553 at the current exchange rate. So while purchasing gold now requires 167% more dollars than five years ago, only 61% more euros are needed.
This means that right now, gold’s primary function in the dollar economy is to hedge against inflation.
The Fed has indicated that it’s less worried about inflation than an economic slowdown. Let’s hope the Fed doesn’t believe the Consumer Price Index. The CPI has increased 14.7% since 2002, but “core inflation” calculation doesn’t include the cost of food and energy, the two most relevant factors to average Americans. According to the Energy Information Administration of the US Department of Energy, the average gallon of gasoline cost $1.15 as 2002 dawned; last week it was $2.92, more than double. Crude has more than quadrupled, from $22 to $94. Oil drives the price for many of the goods and services in the US economy. Any commodity that will hold its value — like gold (and silver, platinum, and palladium) — will be sought out by any individual who has wealth to preserve, perhaps at any price.
So what does $800 gold mean?
If you bought gold five years ago, it means you have been able to preserve your wealth. And if you hadn’t bought gold five years ago, as long as inflation looks like it’s going to be the watchword, gold at any price will still retain its buying power versus the dollar — and you have the advantage of knowing that.
Gold at $800 means that the dollar is out of control and neither institutional investors nor the general public are convinced that the Fed can stop it. While some warn of fiat-currency Armageddon, more realistically double-digit inflation is drawing nearer. The universal and historic acceptance of gold — mixed in with its commercial properties — will continue make gold worth holding. And that’s why the folks who for years had mocked the yellow metal as just another commodity are now hedging their bets with gold.
Ross B. Hansen
CEO, Northwest Territorial Mint
Ross Hansen is the founder and CEO of Northwest Territorial Mint and has more than 30 years of experience as a precious metals trader and broker.
Targets in Gold and Silver
by Joe Nicholson
Now that the Federal Reserve has cut the target Fed funds rate to 4.5%, the timing is perfect to pause and evaluate where we are in gold and silver, having come so far so fast. Indeed, owners of precious metals are probably smiling a lot these days, having seen their gold assets appreciate over 20% in the last six months and their silver about 11%. And, since fortunes are so good at present, let’s begin with the more conservative side, the support levels, and what might take us there.
Last month we discussed the possibility of the rally in gold being part of a corrective move from the May 2006 highs. With the recent action after the Fed cut, this pattern has been stretched to its limits. If invalidated, the prospect of a dramatic plunge back towards $550 in gold and $9.50 in silver would disappear. These levels roughly correspond with the 200-week moving averages in the front month futures contracts for these metals and would be extremely strong support.
But, as mentioned, the likelihood of ever seeing such discount prices again are closing on nil. Essentially, to end the bull market in precious metals, it would take extremely tight monetary policy from the Fed that somehow didn’t also sink the domestic economy, and a massive 100% rally in the dollar– clearly an outlier scenario in any foreseeable future.
Instead, a more serious possibility lies at the 50-week moving average which, as shown in the gold chart above, has been white-knuckle support for this bull market at its most dire moments. This would also require a dramatic reversal in economic trends that, while unlikely in the near term, is probably inevitable in the very long run. Currently, a return to the 50-week moving average in gold at about $675 would represent a serious decline, but not the end of the bull market. In fact, buying gold at the 50-week moving average has proved an immensely lucrative strategy over the past three years. Still, the opportunity cost of waiting for such a discount could be equally immense.
The chart below shows the 50-week moving average has been much more active in silver lately, which has not benefited from the weak dollar trade as much as the yellow metal. Strong support at about $13.25 in the futures over the past few months was an early clue to the potential of the current rally, but as this level is now increasing with recent gains, getting another chance to buy so cheaply is becoming less and less likely.
But the first major support level for both silver and gold is the 5-week moving average, a level that fluctuates daily with the volatility of these commodities. Generally, the metals can be seen to be rallying strongly while they trade above the 5-week moving average, as gold and silver both do at the time of this publication. The 5-week moving average tends to be tested fairly regularly, though, and was in fact last tested in gold the week before the Halloween Fed meeting.
Still, at the time of publication, this level was more than $40 below the current futures price and getting further. If conditions or seasonality shift in such a way as to encourage traders to retest the strength of the metals’ bull markets, the 5-week moving average is an excellent proving ground. As the metals rally, however, this level rises as well so that a future retest could actually occur at levels higher than today. In other words, even the inevitability of a 5-week or 50-week SMA retest is no guarantee gold will ever trade below $700 again.
And now for the good news! Upside targets for gold vary widely, particularly depending on time frame, but the general consensus is that metals can go much, much higher from current levels. One of my personal favorite targets for gold is based on a real, or constant, dollar. This projection attempts to account for inflation and level the playing field by pricing value in year 2000 dollars, which puts the all-time nominal high from 1980 at $1,207. Given the dramatic decline of the dollar since 2000 — some 50% — just matching the all-time high according to this method wouldn’t occur until gold’s price reaches approximately $1,800 in today’s dollars! Now that’s some upside!
Unfortunately, gold is unlikely to move that high in a straight line — that is, without corrections and consolidations. And, there’s nothing that makes year 2000 dollars particularly special or that accounts for investor sentiment, speculation and fundamentals in constant-dollar comparisons. However, Elliott Wave* analysis is predicated on patterns in human trading, and I believe can give a more reliable target. Should a corrective pattern materialize, the decline could be deep, perhaps to $600-650 (roughly the 50-week moving average). If the corrective pattern from 2006 is discarded (the drop from the May 2006 high to the mid-June low), Elliott Wave analysis can provide the context for further gains in gold through an extended Fifth Wave. While this could still trigger a Fourth Wave consolidation to almost $700, this bullish count would virtually guarantee new highs above $800, as high as $1,000 by the end of next year, and ultimately of almost limitless potential.
Silver, not having yet topped its May 2006 highs, does not share the same count as gold, but has as equally bright a future. Some resistance at or near those lofty last-year levels seems highly likely, but if gold is set to take the high road, silver is bound to follow. And, as stated last week, this still means silver can potentially have more upside on a percentage basis than gold in the short-to-intermediate term. Having more industrial exposure than gold, a resurgence in global growth and base metals would undoubtedly give silver a boost.
But, with the Fed asserting a little independence from the markets at its last meeting, the future of domestic monetary policy is uncertain. In fact, it probably depends on economic data that is yet to be observed, particularly related to housing, consumer spending and employment. Still, with a range of targets acting as a veritable road map, news and events become less and less necessary as we can navigate uncertainty by trading the charts!
* Elliott Wave analysis, which tracks price movements in terms of predictable patterns made of waves, is a particularly powerful tool for discerning favorable entry opportunities. Movements in the direction of a trend are called “impulses,” and these alternate with counter-trend waves said to be “corrective.”
Joe Nicholson is an independent analyst and the resident metals specialist at www.TradingTheCharts.com. His work regularly appears at Safehaven.com, Financial Sense University, Gold-Eagle.com, Market Oracle, Trader's Log, and Der Invest Informant, and was recently featured on the cover of Futures magazine.
Precious Metals Worldwide
News & Trends from Around the Globe
Platinum Supply May Not Meet Demand
Platinum production may fall 156,000 ounces short of demand in 2007 according to Barclays Capital in a story reported by Bloomberg News. Supply issues are not merely a result of additional industrial demand — platinum is a key ingredient in automobile anti-pollution devices — but problems in mines in South Africa are contributing as well. Three-quarters of the world’s platinum is mined there, where output in 2007 has been compromised by power outages and labor conflicts over wages. Most recently, the National Union of Mineworkers announced that it would strike for the first time during the first half of November. Safety concerns are the reason.
Major Gold Producers See Higher Prices, Act to Reduce Hedge Exposure
AngloGold Ashanti, the world’s third-largest gold producer, said in its third-quarter 2007 presentation that it was considering eliminating all of its hedges against a fall in the price of gold, according to a Resource Investor story. AngloGold would become the fifth major gold producer this year to bet on the increasing price of the yellow metal. Australia’s Newcrest Mining Ltd. closed out its hedge book in September; Newmont closed out its hedge book in June, Barrick in May, and Gold Fields has been closing out hedge books of its interests.
Gold Price Won’t Lessen Demand in World’s Largest Market
The World Gold Council (WGC) released an assessment that gold demand in India should not be affected by the rising price of the yellow metal. India is the world’s largest market for gold jewelry. WGC made note of the rising price of crude oil and the resultant inflation, but referred to the traditional use of gold in India as a gift with the Indian festival of Diwali. In fact, according to the WGC release, “More Indians are subscribing to the belief of gold being the ideal valuable gift.”