January 1, 2006

Gold Forecast -- 2006
by Michael J. Kosares (1/1/06; 13:38:01MT - usagold.com msg#: 139921)
Centennial Precious Metals, Denver

2006 could be a breakout year. My $525 2005 forecast hinged on G-8 programmed dollar weakness. Instead we had the dollar and gold going in the same direction for most of the year. The obvious question is "If gold managed to rise over 25% with the dollar appreciating, what might it do should the dollar resume its bear market?"

2005 brought us many surprises -- two of which I allude to below in my Man of the Year and Event of the Year choices, but none larger than gold's breaking its shackles with the dollar.

Another big surprise for me was the changeover in the mainstream press from anti-gold to pro-gold. In the last two months of the year, many gold market articles on the finance pages started with "Gold pushed higher on the prospect of central bank buying. . ." How many of us would have guessed at that change??

Much of this was signaled early in the Financial Times as I brought up here in a previous post. It all culminated December 21st in a full page opinion section article headlined: "Precious mettle - Why the world is daring to get a grip on gold." (The "mettle" instead of "metal" is deliberate.) I cannot recall in all my years of reading FT a full page article in the opinion section on gold's prospects -- and a largely positive one at that. To me it signals acceptance of gold's new role in personal, institutional and official portfolios - a major crossover.

One wonders what all of this might mean for the mining companies that have sold a goodly portion of their production forward at much lower prices and the bullion banks which have sponsored them. We could see a major Ashanti-style meltdown in 2006. I wouldn't surprised if we did. Although those who have acted against the gold price in the past have been humbled, I do not believe they have been taken out of the picture completely -- so we will still have bouts of price weakness as they attempt to assert their authority. There may yet be a battle between the commercial bullion banks and the international accumulators. Short-covering is likely come into play at any sign of weakness, and by the end of the year, we might be able to claim final victory in the long battle between the bulls and the bears.

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In the background, rising oil is consistently and constantly pushing the inflation rate in countries all over the world. High oil prices are here to stay and the reality will wreak havoc from end of the globe to the other. As a result, big-time investor gold demand has become global in scope. All investors -- large and small -- no matter where they live must hedge or lose to currency depreciation versus goods and services.

Simultaneously, mine production has gone into a long term decline that might not right itself for a decade or more, and central banks are backing off their previous liberal policies with respect to their gold reserves. I don't think any of us can fully comprehend what central bank gold demand might do to the price particularly in light of the huge dollar reserves building up in the petro-states as well as the export-based economies.

And then on top of it all, we have the "Big X-Factor" for 2006 -- the ascendancy of Ben Bernanke to head of the table at the Federal Reserve. Who knows what that might mean for the economy and gold? I have always wondered if Alan Greenspan acted directly against gold all these years through the New York Fed trading desk, but how can anyone really know? We might learn more on that score as 2006 and the Bernanke chairmanship takes on a character of its own.

All in all, I agree with several commentators who have said:

"Gold may have entered a new era."

When you combine all of the above with the fact that none of the disturbing trends (the twin deficits, etc) driving gold demand has been addressed, it all adds up to what could be a breakout year for gold.

Rather than a semi-objective specific dollar forecast like I made last year, I will just say that gold could experience a break out year in 2006. As is the case in any breakout, the top will be difficult to call. If I were to make a wild guess though, I would look for an interim top in the $760 range.

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As with any forecast published here, those trading on these opinions and forecasts take full responsibility themselves. Anything can happen and a down year in gold is not out of the realm of possibility.


MK (1/1/06; 10:38:08MT - usagold.com msg#: 139915)
My Man of the Year - Bundesbank President Axel Weber
When incoming Christian Democratic Union finance minister Peer Steinbrueck publicly pressured Bundesbank to sell 120 tonnes of gold in Novermber of this year, president Axel Weber had an answer for him. Weber went public himself to say that the central bank would not cave-in to political pressure from the Angela Merkel government. "I assume," he replied angrily, "that we can agree to respect each other's responsibilities." One month later senior conservative lawmakers within the CDU fell in line with Bundesbank stating their continued opposition to gold sales. By taking this position, Bundesbank sent a loud and clear message that resounded in the gold market and bullion bank trading rooms around the world. Central banks can no longer be relied upon as a ready source of metal to support gold lending schemes. In early November gold traded in the $450 range. By December, it had pushed over the $500 mark and briefly nudged $540 per ounce. Weber's courage in the face of political pressure earns him our Man of the Year award.

MK (1/1/06; 10:43:21MT - usagold.com msg#: 139917)
My Event of the Year - Russia's announcement that it would purchase gold in the open market to bolster its reserves
This announcement touched off a string of similar announcements from other central banks including South Africa's. An article appearing in China's Peoples' Daily called for the Chinese central bank to increase its gold reserves from 600 tonnes to 2500 tonnes as a means of diversifying out of its huge dollar position. Government policy in China is often presaged with articles in the People's Daily, and the thought of China being in the market for that amount of physical metal is likely to loom large in the gold market in the months (if not years) to come.