Market Update

Summer Doldrums Arrive While Gold's Uptrend Intact

5/16/06

Dollar and Bonds:

From the April 23th Update

"Finally, minutes from the Fed's latest monetary policy meeting have suggested that the pattern of tightening U.S interest rates may be ending soon. The news could be bearish for the dollar, as the incremental rate hikes that began June 2004 have provided the dollar with an attractive rate differential vs. the euro and yen, and helped fuel the dollar's rally in 2005."

"The Euro currently stands at $1.23 and is set to climb even higher. We see the euro possibly challenging it's old high of 1.35 by the end of the year."

The dollar index has lost more than 6% in the last 6 weeks. The euro is now approaching the 1.3 level. Given how fast the euro's rise and dollar's decline have been, a breather is due. The Euro could retest support of 1.25 before breaking out of 1.3. Any short term rally for the dollar will be of dead-cat bounce variety, which will not last past this summer. We don't envision the dollar index breaking below 80, which means the downside is fairly limited at this point. US long bonds have firmly broken down, look for higher long term (mortgage) rates to come.

Gold and Silver:

This is from the April 23rd update

"In the short term, Gold could re-test support of $580 - $600 before eventually breaking out of $650 range by the end of the year."

Since the update gold blast past our $650 target and went as high as $720/oz. The ferocity of the rise caught us by surprise and indicated a short term peak might be in place for the next 2-3 months. Summer is traditionally slow for gold, which allows it to gather steam for a final assault this fall. We have therefore raised our target price for gold from $650 to over $800/oz in 2006. Silver has been very volatile but we expect it remain above its 50 day-moving-average (currently at $12)

XAU:

From the April 23rd Update:

"The XAU reached a new high of 160 last week. It might take a few tries before XAU decisively breaks out of the 150-160 level. Again we don't see a premium in gold stocks yet, relative to the current price of gold."

The XAU staged a fake breakout above 160 last week. The worst scenario is for it to retest the 200DMA support of 125. We however see that the XAU will most likely stay above the 140 level while bottoming between 125-145 this summer.

CRB and Oil

From the April 23rd Update

"The CRB broke out of 350 resistance level and looks to advance further. The breakout by oil signals the start of a new commodity uptrend. Oil however might retest the $70 support before eventually peak at $80-$100 this year."

The CRB remains in a nice uptrend, while oil is struggling to break out of $70 convincingly. Both the CRB and Oil are comfortably in an uptrend.

S&P500, Nikkei, Shanghai

From the April 23rd Update:

"The Shanghai stock market has made healthy gains throughout this week. Although more volatile, the Nikkei also advanced. The S&P 500 seems to be forming a rising wedge which is technically bearish."

The S&P500 Stayed within the bearish rising wedge. Nikkei corrected with a rising yen, while Shanghai staged an emphatic breakout. The talk of a rising RMB has speculative money pouring in China.

Conclusion:

We concluded on April 23rd,

"the correction in gold and silver should end by the end of April. The last time when Newmont broke out of multi-year resistance of $28 in June 2003, it went to $50 in 6 months. This time the $50 multi-year resistance was overcome in December 05 and we think a reasonable target in the next 12 months for Newmont is $100."

We seem to have had a mini blow-off for gold and silver. The Euro is also due for a breather at the key 1.3 resistance level. This may mean we will have a slow summer before September when gold action starts to pick up again.