Metal Sector Outlook 2006

Gold and silver ended up making handsome gains during 2005, and the good news is that 2006 promises to be better still. Both took off during the last four months of the year, to such an extent that a reaction set in towards end of December, which has partially alleviated the short to medium-term overbought condition that had developed, although in a powerful bull market it should be noted that prices can run an overbought condition for a considerable time.

Gold and silver certainly look impressive on US$ charts, but it is when they are charted against a wide range of other important currencies that the potency of this bull market is unequivocally revealed. Even gold’s most vehement detractors have no choice, when confronted with these charts, but to grudgingly acknowledge that the precious metals are in a powerful bull market.

Looking at the 5-year STOCKS versus GOLD chart we can clearly see that stocks have just broken out of a 2-year downtrend against gold. We therefore appear to be entering a period in which stocks are set to outperform gold, and given the positive outlook for gold, this means that stocks are set to perform very well indeed. This certainly fits with the charts of many gold and silver stocks - large, medium and small, which are looking very bullish.

Wish u a happy new year

Regards
Kaushal Shah

silver is more promising considering the extensive use of this metal in several industries and considering several countries are going to mint lots and lots of coins which will use up the physical supply of the metal. prices have to shoot up. so hold on to silver and buy more. good luck. best regards, madhur

Hi-Ho Silver! Written by Justice Litle


Gold is not the only metal to stir the hearts of men with
feverish dreams. Its long-running companion, silver, also
possesses the power to enthrall...and we suspect it will
continue enthralling, if not dazzling, investors throughout
the rest of this decade.

Gold and silver have both functioned as money for roughly
98% of recorded financial history, dating back to the
Lydians in the seventh century B.C. But it was silver, not
gold, that backed the world's first reserve currency.
Before the almighty dollar, there was the almighty pound
sterling, medium of exchange for the British Empire. In
merry old England, silver was plentiful where gold was
scarce. So an eighth-century ruler named Offa took
advantage of this fact. Peter Bernstein recounts the
details in this excerpt from his excellent historical work
The Power of Gold: The History of an Obsession:

"When Offa took over Kent, he found three outstanding
designers and producers of silver coins, known as moneyers,
who had the delightful names of Eoba, Babba and Udd. They
sound like part of a Victorian poem for children, but the
combination would also have made a fine name for an eighth-
century London law firm. Eoba, Babba and Udd were master
moneyers in silver, and they inaugurated the longstanding
leadership of Englishmen in that role. England has minimal
local sources of gold, but Cornwall was rich in silver
deposits whose output was now fashioned into a growing
quantity of coins...

"The purity of the silver pennies produced by Eoba, Babba
and Udd was so well maintained that the coins were soon
circulating throughout Europe, even out to the Volga and
the Don. Smaller denominations were created when people cut
the pennies into halves or quarters. Later on, shillings
would come into being; the word means "a piece cut off."

"An abundant flow of Offa's pennies was soon coming out of
the mints. Offa was so busy issuing pennies that he had to
add 18 additional moneyers to his original three-man staff.
The production of Offa's fine silver pennies ran into the
millions — a powerful commentary on how rapidly the demand
for money would increase as countries groped their way out
of the Dark Ages."

Pound sterling aside, silver has played second fiddle to
gold for thousands of years. Even the title of Mr.
Bernstein's book — The Power of Gold, not silver — attests
to this. Yet silver has certainly had its moments, drawing
the spotlight on more than one occasion. Most notably, the
ill-fated attempt by Nelson Bunker and William Herbert Hunt
to corner the silver market during the late 1970s.

As the daring duo loaded up on silver, the price climbed
steadily higher, ultimately spiking to $50 an ounce in
1980. But the gambit to corner the market failed and the
silver price collapsed.

After the Hunt saga, silver languished for nearly two
decades — climbing into the teens a time or two, but
generally sliding lower. Over the course of the '90s, the
gap between silver supply and silver demand began to widen.
The Silver Institute notes that "Mine production of new
silver rose only 4% from 1990–1999, while total fabrication
demand increased by 22% during the same period." Yet, even
as the supply/ demand gap yawned, silver's price continued
snoozing...until 1997.

As the year progressed, it became apparent that someone was
buying silver in size. Massive size. Whispers of hoarding
began to circulate, growing louder as the price per ounce
moved higher. The dreaded words "short squeeze" were again
on traders' lips. Nothing like this had happened in nearly
20 years. Had the Hunt brothers returned?

If it had been the Hunts back for vengeance, the shorts
might have breathed a sigh of relief. They handled those
boys once, and they could handle them again. This one
turned out to be a much more dangerous and formidable foe:
Warren Buffett. Buffett tipped his hand in early 1998 after
Phibro, the broker handling Berkshire Hathaway's commodity
purchases, was forced to defend itself against manipulation
charges. The Oracle of Omaha revealed an accumulation of
129.7 million ounces of silver dating back to July 1997.
This was a real problem for the shorts. Against Buffett,
the standard dirty tricks would not work. For one thing,
the public relations playbook would prove useless.

Buffett's reputation was too rock solid to be smeared, and
there was no feasible way to portray him as stupid or
crazy. From a financial standpoint, Buffett was equally
unassailable: While the Hunts had gone out on a limb to
finance their silver corner, Buffett's entire position
represented less than 3% of the Berkshire Hathaway
portfolio. Apart from hope and prayer, the shorts were out
of options. Fortunately for them, things held together. But
for the first time in many years, the cracks were beginning
to show.

So what did Buffett see to get involved with silver in the
first place? Two immediate things come to mind. First, he
saw that silver was a compelling value — a Buffett
essential. Second, he saw a virtually risk-free hedge for
the rest of the Berkshire Hathaway portfolio. The value
argument was based on a simple understanding of supply and
demand: Silver demand had been covered by drawdowns from
existing stockpiles for many years, and supply was simply
not catching up. And as a hedge for Berkshire's equity
holdings, silver's utility was obvious: The same conditions
that could produce a massive selloff in stocks and bonds
could also produce a massive rally in silver.

When Buffett's buying hit the newswires in February 1998,
the media took an extremely short-term perspective. After
noting that he was up 50% in a short time, The Economist
wondered aloud whether Buffett would be able to sell out as
secretly as he bought in. But chances are Buffett doesn't
care about exiting secretly, and almost certainly doesn't
care about a meager 50% return. It is more likely that his
129.7 million ounces will resurface when they can fetch a
5,000% return, at which point the shorts will be
frantically scrambling for every available ounce of silver
on the planet.

Silver is showing definite signs of life these days, but
has not yet broken loose. Will we have to wait years more
before the real fireworks take hold? Perhaps not. There is
a new Wall Street abbreviation, just three letters long,
that has put fear and loathing in the hearts of the silver
short-sellers.

Those three letters are ETF — short for exchange-traded
fund.

The streetTRACKS Gold ETF (GLD: NYSE), introduced in
November 2004, has turned out to be a smash hit. Prior to
the introduction of GLD, U.S.-based investors could only
get exposure to gold through the purchase of futures
contracts, which are volatile and expensive, or via the
purchase of physical metal, which can be cumbersome. The
gold ETF gives investors flexible exposure to the price of
gold through plain vanilla stock accounts. This innovation
has made it possible for millions to own gold more cheaply
and easily than before, which in turn has significantly
increased the demand for the physical metal. (When
investors increase their purchases of GLD, the managers of
the ETF have to make corresponding purchases of physical
bullion.) As the chart below illustrates, the streetTRACKS
Gold ETF has amassed more than 8.4 million ounces of gold –
worth more than $4 billion at today's prices. In other
words, GLD has already pulled 8.4 million ounces of gold
off the market. This investor demand will contribute to
rising gold prices.

Given the success of the gold ETF, the natural next step is
a silver ETF. But when Barclays Global Investors sought
regulatory approval to launch a silver ETF, the Silver
Users Association (aka mouthpiece of the shorts) loudly
objected. The following excerpt is from an official
statement on the SUA Web site
(www.silverusersassociation.org ):

"The Silver Users Association opposes the creation of a
silver ETF because of the concerns that doing so will
require the holding of physical silver be held in allocated
accounts, thus removing large amounts of silver from the
market. By doing so, the ETF will cause a shortage of
silver in the marketplace. If this happens, it will
ultimately be the economy that suffers due to the negative
impact taking large amounts of silver out of the market
will have on industry."

Well, cry me a river. For years, the shorts have been
claiming that the price of silver is low because it
deserves to be low. They have implied that silver is
plentiful, as well as cheap. They have falsely portrayed
the digital camera as an industrial death knell. They have
discounted any shortfall between supply and demand. And now
that their bluff is close to being called, they complain
about a shortage. This tactic smacks of fear and
desperation. As far as the silver bulls are concerned, the
SUA's mealy-mouthed warning is a bit like waving a steak in
front of a pit bull.

Could this be the spark? If a silver ETF is approved,
public demand for silver could explode. Millions of
investors would see the wisdom of putting at least a small
percentage of their investment portfolio in silver as well
as gold. Some will see the wisdom of investing a large
percentage and recognize the potential for silver to
ultimately soar past gold in terms of total return. On the
other hand, if the introduction of a silver ETF is stalled
by backroom tactics, eager investors will demand to know
why — and the bullish pressure will only increase.

Either way, silver will not fail to enthrall and dazzle.

GOLD market view: The latest rally in gold's five-year bull-run may run out of steam once the metal approaches US$570 an ounce. With the spot price reaching US$564.40, its highest since early 1980. With Tuesday's gains, (564)the price of gold has risen 15%, or US$74, in less than a month as investors seek to hedge against a weakening U.S dollar, inflation concerns built around high energy prices and emerging financial imbalances in general.

Adding fuel to the current steep run-up are growing concerns over Iran's nuclear ambitions and possible bird flu pandemic given gold's traditional safe haven status. All this has been happening at a time when commodities are evolving into a mainstream asset class amid rumors that several central banks are buying bullion to diversify foreign reserves. There have also been concerns that the U.S Federal Reserve won't raise interest rates as much as previously thought, making the U.S dollar a less attractive investment option. Other precious metals have also soared to cyclical highs on gold's coattails, with silver hitting an 18-year high US$9.30 this week. Platinum is in all-time high overnight of US$1,051.50. While there is little sign of a change in the investment climate supporting precious metals, some analysts warn the dizzying trajectory of gold's recent run-up and its chart patterns suggest the market is approaching a short-term peak. Resistance Likely Around $565-$570/Oz.

The fundamental arguments are still quite persuasive for gold but from a technical point of view, as we get up toward US$565-570, we might see a situation where the market pauses for breath.

BUT that’s not that easy….There are more BULLS in the market than BEARS. “Gold's ability to puncture the major Fibonacci retracement at US$562.75 on Comex is a positive sign and means gold will probably test the monthly channel resistance line near US$569 before any decent sized fall gets underway

A break of US$569 could spark rapid gains toward the former major pivot area of US$600-612, but more likely would see a few months of consolidation above the former monthly channel resistance line at US$503.80. The strategy should be to buy the dips when those corrections occur.

STRATEGY: International gold: Buy Gold at 547 levels, with a stop loss of 532 and targeting $570 / oz
: MCX gold BUY (FEB’06) at 7885 levels, with a target of 8030

Pradeep Unni
9867722279