-- Posted Wednesday, 19 February 2003 | Digg This Article

February 19: Gold to $390 and back -- Why?

Inside this in-depth gold market update:

Gold surges to $390, falls back to $342, and firms up to $350. Why?
U.S. gold coin prices explode in January
Buy the dips!
Platinum over $675 -- SELL!
Our conservative recommendations

Gold at $350 but as high as $390

In our AGE Alert of January 16, when gold was $358 per ounce, we told you to expect $370 to $390 as the upside range for gold in the near term. On February 5, gold hit a 6-year high of $390!

The gains in this major bull rally have been solid and steady. In early December, when gold was at $325, we warned of an immanent breakout in the gold price. Within a week gold passed through the resistance level of $336 and entered full breakout mode. Our next Alert anticipated new resistance at $355, and that’s exactly where gold stalled for a breather before advancing even higher. When the gold price moved to $358, we predicted a surge to between $370 and $390; gold brushed $390 on February 5.

The past two weeks have seen a strong -- but, we believe, temporary -- pullback in the gold price. Markets often experience retracements after unusually rapid gains. In a solid bull market, dips like this create outstanding buying opportunities that should not be passed up.

We believe this pullback is attributable to the following three factors:

1. Profit taking
2. Reduction in the “war premium”
3. Long liquidations by speculators & increased COMEX margin requirements

We’d like to explain these factors, and why we see this pullback as short-lived.

1. Profit taking

Anytime a market makes a strong advance in price, some market participants are naturally going to sell and take profits. When gold broke into the $380 range, a fair number of speculators locked in their 60-day, $50 per ounce profit and walked away very pleased. These same investors should consider buying back in at today’s $350 price point. As we say, buy the dips! The current (and perhaps short-lived) lull in the gold price has created an excellent buying opportunity in a market that has already demonstrated an ability to go substantially higher!

2. Reduction in the war premium

While the gold price was surging from $330 to $390, approximately $15 to $20 of the gold price was attributable to what we call the “war premium,” which is the increased valuation based on the uncertainty caused by pending war. Over the course of the last two weeks, several of our major NATO allies have been publicly reluctant to endorse the Bush administration’s desire to invade Iraq. This political maneuvering, heavily covered in the world press, has reduced the likelihood of invasion in the minds of some speculators, and therefore the uncertainty that comes with any warfare. Although the driving fundamentals of the gold market remain unchanged (the US economy still languishes in recession, the dollar is weakening, stocks remain weak, debt levels are astronomical), the pervasive uncertainty and risk that comes with war seems to have diminished. Beyond all else, investors dislike uncertainty.

We expect, however, that George Bush will approve an attack on Iraq in the near future, perhaps as early as March 3, when the new moon phase begins. The darkness of the new moon is favorable to our troops in nighttime warfare.

3. Long liquidations by speculators, increased COMEX margin requirements

One of the fundamental strengths of the gold price rally has been the fact that, according to the COMEX exchange commitment of traders reports, there has been an unusually large number of speculators who were betting that the gold price was going to rise. These bets were placed by buying 100 ounce contracts for future delivery of gold on the COMEX exchange. This is the preferred method of speculation by major New York and international fund managers. When any market is showing signs of considerable strength or weakness, speculators tend to pile on and follow the trend, thereby increasing the volatility of the market in the process. As the gold price continued to rise, speculators continued to buy into the rising trend, as evidenced by the increase in speculative long positions reported by COMEX’s commitment of trader’s report. Once the gold price peaked at $390, and subsequently began to show signs of weakness, speculators began to sell their long gold positions, anywhere from $330 to $350 an ounce. This selling naturally caused the price of gold to fall.

Furthermore, this selling was coupled with an increased margin requirement by the COMEX exchange itself on February 7th. When you buy a gold 100 ounce futures contract you are required to have either $1000 or $1,350 in an escrow account depending upon whether you are an exchange member or speculator. The COMEX exchange increased their margin requirement, to $1,500 from $1,000 for members, member firms, and hedgers; and to $2,025 from $1,350 for speculative customers.

So in essence, any speculator who held an already established futures contract on the COMEX exchange had to increase the amount of money that they had held in escrow in order to continue to hold their contracts. (Remember what happened to the Hunt brothers and the price of silver in 1980?) Instead, many speculators chose to sell their contracts rather than increase their margin funds. This unique technical pressure to sell was added to a market that had already become frothy on top.

Buy the Dips!

We repeat (and this is important): None of the market fundamentals that have driven gold to $390 have changed.

 Our economy continues to flounder.

 We remain at war with terrorists.

 The U.S. dollar is in a major downtrend; gold has risen in almost direct proportion to the decline in the U.S. dollar.

 The Bush administration remains intent on ridding Saddam Hussein of weapons of mass destruction.

 Oil is rising, now around $35 a barrel.

 Debt levels in the United States remain at record levels.

Yes, gold has fallen $40 an ounce -- temporarily. Our advice? Buy the dips! In effect, gold is temporarily on sale!

Platinum over $675 -- SELL!

Platinum is currently trading in the $675 range, historically very high. We believe the platinum market is overvalued by about 20% right now and that platinum is more fairly priced in the $550 range. Sell your platinum now!

Consider palladium, currently at $260 an ounce.

We look at palladium as a good buy at up to$350 an ounce. The sister metal to platinum, palladium has been as high as $1,000 an ounce in the last 3 years, but that all-time high was unsustainable. Still, palladium could easily move over $400 in the next 12 to 24 months, so consider a palladium speculation. At the current spot price of about $260, palladium has about a $50 downside risk and a $200 to $300 upside from here.

Classic U.S. gold coin prices explode in January

Our Alert in late October warned that the supply of classic U.S. gold coins was drying up. We said: “Now is the time to buy classic U.S. $20 Liberties, $20 Saint-Gaudens and $10 Liberties and $10 Indians, in Mint State 62 to 66 condition. Buy the highest quality coins you can afford. Supplies are tiny, demand is good. Any event that further increases demand for these coins, like an upward spike in the gold price, continued world tension, falling stocks, or falling U.S. dollar values (all of which are likely), will affect prices more quickly than has been the case for the last year or so. This sector of the market is ripe for a strong price increase.”

In the last 30 days, trading prices for these coins (for example our Power Pair #1 and Power Pair #2) have increased dramatically and faster than the gold price. Congratulations to all who bought on our advice prior to this run! You are now comfortably in profit positions. But we are not calling a sell signal yet. This market has yet to ripen fully, and we expect these coins to appreciate even more in upcoming weeks and months.

Our conservative recommendations

1. Buy gold aggressively under $375 an ounce! We recommend American 1 Ounce gold Eagles and classic European gold British Sovereign “Kings” as well as Swiss and French gold 20 francs.

2. Continue to buy classic U.S. gold coins, primarily $10 Liberty, $10 Indian, and $20 Liberty gold coins in Mint State 63, Mint State 64, and Mint State 65 condition. Buy the highest quality coins you can afford! Dealers across the country are now actively competing with each other to buy coins for inventory. Demand for classic U.S. coins has already outstripped supply. There are simply not enough of these coins to go around! Despite the recent pullback in the spot price of gold, most classic U.S. gold coins have not dropped at all in price! When gold bumps back up after this temporary lull, we expect these coins to rise even higher again.

Unfortunately we are selling classic U.S. gold coins faster than we can load them onto our web site. It is best to call Daniel Dinneen at 1-800-613-9323 to see what we may have available on any given day.

We have posted a new and very informative special report by our friends the Aden Sisters. It can be viewed here: http://www.amergold.com/library/Gold_High.shtml

Sincerely,

Dana Samuelson
Owner
American Gold Exchange

1-800-613-9323            Toll Free
1-512-323-0194            Fax
dana@amergold.com   Email

-- Posted Wednesday, 19 February 2003 | Digg This Article