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Monday, May 22, 2006

 

Comments on Metals from Enrico Orlandini

Here's some excellent commentary on the different market sectors from an analyst with a great track record (bullish on metals, oil, Swiss Franc, bearish on U.S. stocks, bonds, dollar).

Here's an index of some of his past articles.

The whole document is a great read, but below are the metals-related comments:

I don't know how many times I've received an e-mail from a client saying that some self-proclaimed guru was just on CNBC proclaiming an end to the Bull Market in gold and only the less intelligent would remain invested. The client then asks me just what should be done. My standard reply is to turn the TV off! That usually frustrates the hell out of the client, but sometimes a little frustration is good for the soul. Besides, it was the correct response to the client's query. What the majority fail to realize is that 99% of the things we see and hear on financial news networks, things that often pass for news, do not merit our attention. News really isn't news anymore. Real news came to an end with the death of Edward R. Morrow and the subsequent retirement of Walter Cronkite. What we are given now is food for the masses, programmed by a government that thinks it knows more than the collective will of the people who elected them, and it goes against the best interest of the majority. How many times have I read the headline that "gold rallied due to a decline in the dollar"? Hundreds at least! Completely overlooked is the fact that throughout 2005, gold rallied with a rising dollar. I've never read that in any headline.



Gold/Silver - What can I say? I gave you a price target of 728.60 on February 9th, expecting to see it hit by late summer. So much for late summer! We hit the target of 728.00 intraday on Thursday, May 11th, and then exceeded it intraday, reaching 732.00 the next day. The question is, where does the price of gold (and silver) go from here? Is the rally over? Will the long awaited correction finally make an appearance? And if so, how low is low? All good questions and, in my opinion, all quite premature! I am going to tell you the same thing here that I told you on February 9th, unless gold has undergone some here-to-fore unperceived change in character, we have not yet seen the top. It is also worth remembering that neither have we seen a close above strong resistance at 728.60! We've seen a test and we still have another test or two coming in my opinion. In the meantime, a 5% to 8% correction over a period of three to four days would be nothing out of the ordinary! That translates to a drop of +/- 60.75 and a test of good support at 671.25 in the JUNE GOLD futures contract. Such a test could easily occur without doing any technical damage to the current bullish gold picture.

Please take a look at the following Daily Chart of Gold and tell me what word comes to mind? Relentless maybe? For months now, it has consistently ground up every attempt to turn the price down:




Is gold overbought? Yes! And it can stay overbought for a lot longer than you can stay solvent trying to sell it short. The current target of 728.60 is the resistance of last resort before we go after the all-time high of 887.50. Given what I have seen to date, I suspect that we will keep right on going and not stop to correct at 728.60. You can give me all the reasons you want for a correction, but the price action of gold is saying something different, and has been saying something different for months. It's just that very few people are listening and that is the biggest point in gold's favor at this point in time: everyone doubts the rise! Even my own clients doubt more often than not.

From a technical point of view, a one-day decline of $20.00 or $30.00 seems like a big deal, but at this altitude it really isn't. Right now, if gold were to decline all the way down to 650.60, nothing would change except for the pulse, heart rate, and perception of many investors. Strong support is at 644.70 and should hold under just about any foreseeable circumstance. As far as the upside is concerned, two consecutive closes above 728.60 would indicate an attack of the all-time high of 887.50 would become the order of the day. With respect to gold's orphaned cousin silver, I expect silver to follow gold to the upside for the time being. We are currently trying to deal with resistance at 14.81, and although we managed one close above it, it wasn't quite enough. Over the long run, silver will attack good resistance at 20.73 and maybe even go after 26.11 before the year is out. By the end of this decade I expect to see gold trading at US $3,000 and silver at US 164.00. The volatility to be encountered on this long and bumpy road will be too much for the average investor and very few will actually reap the rewards from such a spectacular Bull Market. Those that do manage to stick it out will be rewarded with a better life.

Outside Commentary

Here is another article [May 15, 2006 - Commodity Bubble] by Morgan Stanley's Stephen Roach and it deals with a subject near and dear to my heart... commodities. Lately, he has come out with a series of articles that tend to take an optimistic view of the world economy. He's done so when it now appears that most of the world's leading stock markets (the Nikkei, FTSE 110, the DJIA, Australia's All Ords) all appear to have topped. Very difficult to understand his timing and, personally, I see some flaws in his analysis but maybe that's because I want to. In this business, one must take great pains not to run with emotional blinders on. Easy to say, but very hard to do! In any event, his view is opposed to mine but in the interest of fairness I would like you to read it carefully.

Footnote

1I did not comment on the Swiss Franc because I just sent out an article devoted to the Franc less than a week ago. Needless to say, I am extremely bullish the CHF. I am also bullish the Euro, CAD$, and the AU$.

14 May, 2006
-Enrico Orlandini

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