The Gold Rush Is On!

February 29, 2008

Name: Dennis Smith

Company: Archer Financial Services

Years Trading: 21

Favorite Movie: Bull Durham

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An old fashion gold rush is currently taking place as investors snap up gold contracts mostly as a hedge against inflation. Yet it is interesting to note that many investors and analysts are debating the inflation issue with many unconcerned about inflation. Indeed, when all traders and investors agree that inflation is a problem, the highs will likely be established. It appears it will be a considerable length of time before a high level of consensus is reached.

FIRST

The first real, measured signs of inflation are finally bubbling to the surface with the government reporting the January PPI index up substantially more than expected. Indeed, the ripple effect of sky-high crude oil prices is still making its way through our economy. Food price inflation is for real with several major food companies issuing warnings regarding higher prices coming down the pipe for various food products.

SECOND

Second on my list is the idea that we’re not entering into a recession at all. In fact, a slow down in growth, but not negative growth is likely all we’ll experience during the first half of 2008 with lower interest rates kicking in by the second half of the year. Keep in mind that a recession is defined by two consecutive quarters of negative GDP. Other than a soft housing sector, which the lower interest rates will help to correct, most other sectors of the economy remain healthy. Another area of concern is tightness of credit slowing down business investment. Credit conditions, over time, should begin to ease up when confidence returns to lending institutions.

THIRD

The behavior of various economic sensitive commodities does not indicate a sharp down turn in economic activity. For example, copper prices are powerful strong and approaching record highs. Other industrial metals are strong and even lumber, obviously tied to the very weak housing market is showing signs of a broad double bottom formation. Finally, crude oil prices continue to soar to all time high levels with no signs that high prices are hurting demand. Indeed, sources indicate that there is no shortage of crude oil available to the world market. Strong demand is driving prices upward. This does not appear to be the type of demand typical of recession.

FOURTH

The U.S. dollar continues to decline into new lows against several major currencies including the Euro Currency. This is inflationary, period.

FIFTH

The Federal Reserve can’t have it both ways. Regardless of what they say, they have decided to manage with a short-term focus with a nearly complete disregard for the long-term consequences. The Fed continues to manage the stock market and the investor world by reacting to short term developments. The problem, however, is the Fed tinkering has long-term consequences. The Fed appears willing to fan the flame of long-term inflation for the sake of near term financial stability. Such tinkering is risky and nearsighted and could set off a long-term bout with inflation. Good luck to the Federal Reserve when they decide the dollar has declined far enough. Turning the tide on the currency market can be a very difficult, very expensive task.

SIXTH

The U.S. is now approaching year number five in our campaign in Iraq. The war has been costly in many ways but financially it has forced the U.S. government to borrow billions of dollars. This is inflationary. The U.S. has experienced a bout with inflation following every major war. The current campaign is already exceeding the length of WWII.

WHAT TYPICALLY HAPPENS WHEN A COMMODITY MOVES INTO ALL TIME HIGHS?

Besides gold, numerous commodities have rallied into all-time highs. These include several of the industrial metals such as platinum, crude oil, wheat, soybeans, corn, rice, soybean oil, palm oil, and rapeseed oil. What typically happens when a commodity trades into new all time highs? It continues and moves to a whole new trading level for a fairly long period of time. The fundamentals that drove prices through the roof simply don’t disappear in a short period. The rally typically continues to levels deemed unheard of.

I anticipate the same for the gold market. Look for major upside follow-throughs, as the bullish fundamentals that drove prices to current lofty levels simply aren’t going to go away in the short term. Using the long-term weekly chart for a guide, I measure the next upside target in the front month gold at $1040. I recommend that traders utilize the CBOT mini size gold contract, which is extremely liquid and represents one-third the size of the 100 oz gold contract, traded in New York. The current margin to hold one of these contracts is $1,120. A move from $960 to $1040 represents about $2,600 per contract. On the other side, if a stop were used at $920, a decline to this level would result in a loss in the neighborhood of $1,400 per contract.

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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

Dennis Smith
Senior Account Executive
Archer Financial Services, Inc.
dennis.smith@archerfinancials.com

Call or email for a 30-day trial to daily precious metals
research published by Archer Financials Services Inc.

About the Author

Dennis Smith has been a full service commodity broker specializing in grain and livestock trading for over 20 years. Dennis has a wide range of customers, many of whom are grain and livestock producers. Dennis develops and helps execute hedging and speculative strategies in his Daily Livestock Wire which is prepared each afternoon exclusively for his customers. Dennis grew up in Central Illinois before launching his brokerage career.