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Slowly but SurelyTroy Schwensen GOLD MARKET UPDATE Let me start by wishing everyone a happy new year for 2007. It has been a while since I have written a market update: (Are we there yet?: Oct 5, 2006) Not a great deal has happened in the mean time as the Gold market continues its healthy consolidation which commenced in May 2006. A look at the XAU index below sees the XAU Gold ratio dropping into the accumulate region again as the Gold shares continue to under- perform the Gold price. The volatility index (100 day Moving average) has continued to drop to more acceptable levels in line with previous consolidation periods. All in all I would say things are looking pretty good for a strong 2007.  XAU XAU/GOLD RATIO  I think the recent underperformance of the Gold shares versus the Gold price is signaling one last pull back in the Gold sector, which I am expecting to be the last call before we embark on the next significant rally. OUTLOOK There are three potential short term scenarios as I see it over the coming weeks and months: Scenario 1: The Gold price continues to rally and we get an unusual situation where the Gold price leads the Gold shares and the XAU breaks the intermediate term resistance trend line at about the 140 -145 mark to embark on a new significant rally. Given the past I see this scenario as unlikely. Scenario 2: The Gold price continues to run into resistance at around the US$650 - US$660 mark and embarks on another pullback which will initially see the precious metals shares sell off sharply, but then steady very quickly to a point where they will outperform the Gold price (Value for money will start to prevail). This will signal the beginning of a new significant rally. I have two downside targets for the XAU including the 125-127 mark and in a worse case scenario 115. If this consolidation pattern follows in a similar vein to the previous ones (2002/03 and 2004/05), I would be leaning towards this scenario 2 outlook. Scenario 3: The precious metals market gets caught up in a broad commodity sell off and/or a correction in the stock market, resulting in the XAU falling all the way down to the long term support line at around 95. I see this scenario as unlikely at the present time. Intermediate Term Outlook Over the intermediate term my next target for the XAU is around 230 towards the latter half of 2007 and early 2008 depending on how long it takes this consolidation to run its course. SILVER MARKET UPDATE A look at the Silver market reveals an interesting difference to that of the Gold market. The following chart is an index of 6 established North American Silver companies. We like to use this chart in a similar way to the XAU index as a barometer for the silver sector. If we look at the index performance against the Silver price (Top section) we can see that the silver shares on a whole have been outperforming the physical metal since about June last year and continues to do so. This is potentially very bullish for both the Silver price and the Silver shares going forward. Over the last three years or so we can see that the Silver index of shares largely underperformed the Silver price (See the downward sloping trend line). A break of this trend line could see a very strong period for the Silver miners in the coming year, potentially similar to the explosive period of 2003/04. NASI (NORTH AMERICAN SILVER INDEX)  A look at the earnings of some of the larger players including Pan American Silver and Silver Wheaton show strong growth which I expect will continue during 2007 and over the coming years. In 2003/04 the Silver producers were largely unprofitable and the rally that occurred was based solely on expectations and speculative hype surrounding the Silver price. The following two to three years has seen the Silver price catch up whilst the index has consolidated. In my opinion, we are now bracing for another significant rally in the index. This time around there is not just earnings, but substantial earnings growth to fuel and justify a significant rally for the Silver sector over the coming year. OUTLOOK The three scenarios I see as a possibility are as follows: Scenario 1: A break of the resistance trend line at around the 7,500 mark in conjunction with the XAU breaking its resistance at the 140 - 145 mark which will signal the beginning of the next major rally in precious metals stocks. Scenario 2: If the XAU experiences short term weakness as the underperformance of the metal shares versus the Gold price is suggesting, we may see this index pull back to the support at 6,500 and continue to consolidate before a successful break out in the coming weeks or months. This is the scenario I am presently leaning towards. Scenario 3: If the Gold and Silver price get caught up in the sharp fall of the other commodity prices and/or a sharp sell off in the Stock market, we could see a worse case scenario of a break down of the present consolidation pattern and a move of the index back to the long term support line at around 4,200. Whilst always a possibility, I don't support this scenario. Intermediate Term Outlook Over the intermediate term my next target for the NASI is around the 11,000 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends. CLOSING COMMENTS Patience remains the order of the day during these times. The vital signs of this precious metals bull market remain incredibly strong in my opinion and this should translate into better times ahead in the not too distant future. For the time being, there is a lot of positive sentiment among analysts and this, coupled with the fact that Gold shares continue to underperform the metal, indicates there may be some more pain to endure in the immediate future. In a recent Reuters survey only 2 out of 42 analysts predicted the Gold price would average less than 2006's average of US$604.42. The consensus was US$656.78 an oz. As a contrarian, I can't help but feel a little nervous when I see mainstream analysts bullish on the outlook for Gold. I read this in a 4 page special section dedicated to Gold in one of Australia's leading newspapers. It was no doubt inspired by the recent price surge we have experienced. I'll take this opportunity to introduce you to a new website my brother Jan and I have spent the last 6 months developing. The website is designed as an educational tool to assist precious metals investors in negotiating this rather complicated and sometimes hazardous sector from a fundamental and technical perspective. In addition, I write a free monthly precious metals newsletter which you can sign up for on the website. Troy Schwensen CPA Troy Schwensen
is a full time investor/Trader who spent 8 years in the Accounting
and Finance industry which included roles with blue chip Australian
companies such as Goodman Fielder and Fosters where he spent three
years as a Senior Business Analyst. He made a decision to leave
this industry in 2002 after discovering a long term opportunity
to invest and trade in the precious metals market where he has
since used his analytical skills to build a sound working knowledge
of the sector and its comprising companies. 321gold Inc |
