Precious Metals Investor

Sunday, September 24, 2006

Bull Market in Precious Metals

As predicted, 2005 brought a change from the mini-bull market in precious metals that began in January 2001 to a major bull market. The key indicator in this regard was an appreciation of precious metals against all currencies, not just the U.S. dollar. In fact, the precious metals outpaced a U.S. dollar that was itself surging against the euro and the Swiss franc (more on that in a moment).
In 2006, I see a continuation of appreciation as the major bull market matures. In my estimation, precious metals are appreciating because, fundamentally, they should. Let’s look at precious metals gold and silver...and what to expect from investing in them in 2006.
Gold
After hovering near the cost of production for years, the effect on supplies is being felt. With insufficient revenue, many mines were forced to close down or consolidate, and mining companies had to curtail new exploration. The funds just were not available. The pipeline slowed.
Typically, when there is a shortfall in supply, the demand is met by institutional metal from Central Banks. However, in recognition of the trend, Central Banks are now opting to increase (not decrease) their gold reserves.
Further, several important demand-side factors are putting upward pressure on the price of gold. The advent of Exchange-Traded Funds (ETFs) has pulled a large volume of gold off the market and has increased the public’s awareness of gold, an effective alternative to dollar-based investments with a proven track record dating back 6,000 years.
The opening of the Shanghai Gold Exchange in China, and the emergence of middle classes in countries with an affinity for gold (China, India) are building up pressure in the form of increased demand for gold.
Expect gold to build off its 2005 gains. The downside continues to be limited, and the upside is wide open as the furor builds. With the right convergence of factors and events in the coming year, we may well test new high ground. Whether we do or not will play out before our eyes, but I am confident that higher prices are in store.
Silver
Silver continues to be my strongest candidate for investing growth. In fact, based upon recent news, I am even more bullish on the “poor-man’s gold.”
Sixteen straight years of supply deficits have caused above-ground
silver mining supplies to dwindle to alarming levels. This idea of supply shortage has been played down over the past few years even as my firm and others have tried to raise awareness.
COMEX warehouse stocks continue to rest at uncomfortably low levels. The U.S. government continues to buy silver on the open market to meet demand of more than 8 million ounces per year for the Silver American Eagle program. Supplies of silver coming out of China have dramatically dwindled over this past year, and (whether it can be believed or not) Chinese government officials are publicly acknowledging the fact that they have exhausted their aboveground supplies. If true, China is now in the same boat as the U.S. government to meet silver needs.
Lastly, if successful, Barclays will launch an ETF for silver that would immediately require it to purchase 130 million ounces of the white metal. In a supply-strapped environment, the effect on silver prices could be astronomical.
Look for silver to continue, and even accelerate, its price appreciation in 2006. A range of $12 to $15 per ounce by year’s end is entirely possible.

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