Gold Losing its Lustre?

November 19, 2007 | By | Reply More

That was the week that was! We anticipated a correction in the price of gold but were somewhat taken aback when the fall began on the first trading day after our warning and carried on throughout the week to record over a $47 drop.

Undoubtedly there has been much speculative activity in the yellow metal and astute stock and commodity traders are aware that after a sustained period of rising prices a correction is almost a certainty.

 A recent example is the price of uranium, which zoomed over three years to the heights of $135 a lb., dropped back well below $100 and now seems to be settling into a gradual recovery.

In the circumstances we are of the opinion that traders were tempted to bank profits helped in their decision by a slight strengthening of the dollar against the popular euro and pound as currency traders realized that all was not well with the outlook for the European and British economies and at the same time the much vaunted $100 oil did not come to pass – yet!

The current thinking is that gold may drop to its 50 day moving average of $767 or thereabouts. If it breaks through that support level then expect the next stop to be circa $750, a level that in our opinion should hold providing no dramatic change in world economies takes place.

Actually if any dramatic changes did take place it is a pretty safe bet that the price of gold would soar through the roof, unless, of course, hundred of tons were dumped on the market by the worlds banks.

It was particularly interesting to note that both silver and platinum for once did not follow the trend in gold with both metals recording a rise by the end of the week.

Whilst silver has historically been a favorite with speculators we think that because it only remained in the $12-13.50 an ounce range when gold was making its advances, attention was drawn from the metal to the more exciting activity in gold.

Interesting also that silver warehouse inventories were down for the week while gold inventories were up although we don’t set much store on this as an influence on price.

Platinum is a more esoteric market and appeals in the main to specialized traders and commercial users resulting in less inclination to short term trade. Also unlike gold, both are extensively used in industry and developing technology.

It looks to us that there will be some great buying opportunities presenting themselves in gold, maybe that’s already occurring. We reiterate our belief that gold is still in the early stage of a long term rally but as usual please be sure to do your own analysis and research and beware of biased opinions.

We like Gold and Silver ETFs as an easy way to play the two metals and the Philadelphia Gold and Silver Index (XAU) also gives exposure to the mining sector.

Our only reservation, which we understand if others think it is unreasonable, is that the XAU and other index plays have no asset bases, but call us old fashioned!

Finally keep your eye on the BHP Billiton offer for Rio Tinto (RTZ). $174 billion was rejected by Rio Tinto despite this representing a 25% rise on the share price at the time. Are these two mining giants likely to come to an arrangement or are their other suitors waiting in the wings.

To a dyed in the wool conspiracy theorist it would make sense that such a premium was refused because RTZ knew their other suitors were hovering stuffed with money and who else but the Chinese, so the rumors go.

A more mundane possibility is that RTZ think their company is undervalued in the current climate of supply and demand and the very positive likelihood of a long term bull run on the stuff they dig out of the ground.

Our conclusion is that there are likely to continue to be a spate of bids and mergers in the mining sector with promising juniors holding out the best risk – reward opportunities but have care, do your homework, watch out for the scams and cons, be very selective and over the next 1-2 years, mining could make you a lot of money.


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