GOLD TO SHINE BRIGHTEST IN 2007

12/19/06

The dollar has been trading in the mid 80s since it broke down in November. This was not unexpected as the latest current account deficit sits at a near record level of $225 billion a quarter.

The fundamentals for the dollar remain very bearish. We believe, however, that over the next twelve months the downside for the U.S dollar index will likely be capped at 80. This is because the U.S runs most of its current account deficit against the Asian trading bloc and the Asian currencies are not included in the US dollar index (except the Yen).

The Euro has emphatically broken out of the 130 resistance level which should now act as strong support. Most attribute the breakout to the recent interest rate hike by the European Central Bank to 3.5%.

The Euro showing so much strength points to the abysmal shape of the dollar. We don’t see much room for European interest rates to move up further and see the Euro meandering between 130 and 137 for at least the next 6 months.

US bonds have been surging since July all while the Dow and S&P markets were making new five year highs. This is a rare phenomenon and it demonstrates the excessive liquidity in the market.

Bonds are being actively supported by the government to keep interest rates low. In our opinion bonds have lost their role as a barometer of inflation.

As we stated in our last article (http://www.goldmau.com/goldvscurrencies.htm) gold broke out against all the major currencies in November. We view this as a significant event and the precious metals run should continue into early 2007.

Currently gold is safely above its 200 DMA (red). December is usually marked by volatility and thinning volume. Therefore we wouldn’t read too deeply into the volatile price action over the last 2 weeks.

Silver has performed very strong vs gold and the base metals. Consequently the downside may be greater than gold at this time. Once silver takes out $15/oz, it has the potential to quickly run up to $20+/oz.

The XAU has been stuck in a trading range between 120 and 150 for most of 2006. We believe the trading range has recently narrowed between 150 and the 200 DMA of 140. Gold already staged a breakout in November and the XAU should take out 150 and try for 170 by Q1 of 2007.

The XAU over gold ratio established a bottom in November which affirmed a bottom in gold AND gold equities. With the ratio now seemingly in a rising trend, at this time it would be wiser to invest in gold equities over gold.

We are quite simply dismayed looking at the S&P chart. With U.S. GDP growth slowing to a halt and the housing market in decline the market has no fundamental reason to be showing such strength. Nonetheless, we wouldn’t dare short the S&P in the face of the sea of liquidity available.

The Shanghai has been a stellar performer in 2006, putting an end to the China naysayers. The central government had imposed various measures The Shanghai has been a stellar performer in 2006, putting an end to the China naysayers. The central government had imposed various measures to slow down the market in 2005 and early 06 and now we are seeing the pent up demand being reflected in higher prices. A pull back to 1800, however, could be in order.o slow down the market in 2005 and early 06 and now we are seeing the pent up demand being reflected in higher prices. A pull back to 1800, however, could be in order.

The CRB and oil are lagging. We believe the CRB will be capped by its 200 DMA in the next 6 months.

Conclusion:

The end of the year is a time for reflection on the year that has past and anticipation of the year to come. The past year was a volatile one for the precious metals. New multi-year highs were reached and dramatic declines were witnessed. Many new grey hairs were grown.

Over the last two months’ gold has exhibited exceptional strength vs oil, the base metals, and the world’s major currencies.

We believe that the recent strength in the market is only a sign of things to come. At this time, we expect the precious metals to outperform the other commodities in 2007.

We are looking forward to the year to come.