2006 gold outlook

2006 GOLD OUTLOOK

COMMODITY FUTURES FORECAST WEEKLY REPORT


2006 GOLD OUTLOOK

Prepared by Altavest Worldwide Trading, Inc.

February Gold: Open= 540.8 High= 551.4 Low = 536.5 Close= 550.5 +9.3

(January 9, 2006) Going into the 2005 Christmas Holiday, the major news outlets seemed to give small bullish speculators a golden gift by relentlessly touting the yellow metal: Gold is the hottest item on the shelf -- get it while you can! Stories were pumped out for a few days straight about this "sudden" development and in a frenzy, prices rocketed up to $545 an ounce. Of course, many seasoned traders know that often times an overwhelming focus from the media on any particular volatile market is a signal that the move may be over. Therefore, they rolled their eyes, exited bullish positions and banked some profits. A week or so later, prices lost over $40, and the intern journalist who thought gold would make another great headline news story that week is back working at Starbucks.

While a few small greedy specs most likely got burned in that blow-off, the real gold bugs were licking their chops over this correction as the forecast for 2006 is a hot item. There are three main supporting factors which emerged in 2005 that will continue to provide underlying support throughout this new year. Look for physical demand and inflation worries to drive price higher.

The first factor is physical demand derived from jewelry and industrial production. With growing economies in Asia, China and India in particular, the need for more jewelry production is rapidly increasing with the accumulation of wealth. An 18% increase in jewelry demand was reported in China last year! Back in September '05 the buying power of the physical side, above $460, was seen as prices materially broke higher on upcoming demand for the New Year and Holiday season jewelry production. A strong global economy will indeed offer the necessary demand to support precious metal's prices.

Another factor emerged late in '05. The news story was buried for a day as the market fixated on the November FOMC meeting and the latest interest rate hike. Lost on that day were quotes from sources within the Russian, South African, and Indian central banks that interest was being taken to shore up their paltry gold reserves. These reserves hover around 5%. No impact can be made until one realizes that the United States and most of Western Europe hold 40% to 60% of their reserves in gold! Russia wants to double their reserves, up to 10%! This gold producing nation would have to not sell any of its gold over the next 3 to 4 years to achieve this goal, but that is an unreasonable expectation. These mid-level central banks must increase their gold holdings in the coming years to better protect against devaluation in currency reserves. It is unrealistic to say these banks will be snapping up gold straight for the next four years, as such a move would distort prices wildly, but there will be accumulation.

The third major support for gold is "flight to quality." The gold-dollar relationship has been severed fairly thoroughly, with gold now trading off its own fundamentals and technical outlooks. With good reason, too! There is reasonable concern about the long-term economic outlook for the United States and Europe. Western Europe must face the problems associated with high unemployment, an anemic birthrate, and universal benefits. The United States has solved its birthrate population by embracing immigration but has yet to master burgeoning deficit spending. Debt problems do not just plague the federal and state governments, as individual citizens carry high loads of credit debt, often financed from pulling equity out of home mortgages. Using homes as ATMs can only last so long, and eventually the US must produce goods of value.

Wrapping this all up is fairly straightforward. If one doesn't trust the European state of affairs, and the long term US economic outlook is a nagging worry, but developing economies are robust, where does one put their money? In the trusted storehouse of value of the centuries, gold.

Since mid 2005, the trend is clearly higher. However, prices rarely move straight up or down, and notice the large selloff that occurred immediately following the establishment of the high near $545. Gold bulls should always be light on their feet and ready to buy on such pullbacks, provided of course they have the financial wherewithal.

With today's daily trade action, the possibility of a double top formation is washed out, and it appears strongly that a third wave advance to 575 is well underway.

January 10, 2006

http://www.gold-eagle.com/gold_digest_05/consensus011006.html