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Monday, January 29, 2007

Monday Is Chart Day

Momentum for gold is bullish, setting up another push higher, perhaps after a brief pullback.

Then again, in a choppy market like we're seeing now, charts are not as reliable as we might hope. However, I point you to forces that are long-term bullish for gold...

First, production is falling. Despite soaring prices, gold mine production in 2006 fell by 2% to 2,467 metric tonnes, according to GFMS. South Africa, Australia and the United States all saw production go down — even though prices are going up!

Second, official sales are tumbling. Selling of gold by central banks dropped by half in 2006 to 330 metric tonnes. Market watchers expect those sales to keep falling.

Third, we have the next wave of gold ETFs. Recently, three companies rushed to launch gold ETFs or funds in India as the laws changed favorably in that country. So a billion people will suddenly have access to gold funds. Sounds bullish to me!

Fourth, producers are de-hedging like crazy. “Hedging” is when miners sell forward gold production to lock in prices. With gold prices strong and getting stronger, miners are buying back those forward sales. Net producer de-hedging in 2006 hit 400 metric tonnes — FOUR TIMES the volume of 2005.

If anyone knows where the price of gold is going, it should be gold miners. And they’re giving a big vote for “UP!” Gold should charge back to $732 this year on its way to $750 per ounce.

These are the points I made this weekend in Saturday's Money and Markets. You can read the whole thing by
CLICKING HERE. One note: My editors inserted the word "unholy" to describe the alliance between environmental groups and major corporations. I haven't received a satifactory explanation as to why that happened.

Now, let's look at oil ...

As I mentioned the last time I posted an oil chart (two weeks ago), crude oil was extremely oversold and set up for a bullish reversal. Simple momentum would likely carry it to 57.50, the 25% Fibonacci retracement of its big sell-off. If you’re more bullish, the 50% retracement (very common) is 64.47, or round off to 64.50.

Below-normal temperatures gripping the East Coast are expected to continue into at least the first week of February. Private forecaster Frontier Weather said temperatures from the Great Lakes to the Atlantic will likely average 12 to 16 degrees below normal through the first week of February, boosting heating-oil demand.

A couple other interesting energy stories (all from the Wall Street Journal)…

  1. President Alexander Lukashenko threatened to slap fresh duties on Russian oil sent through Belarus to Europe unless Moscow sells it oil at a cheaper price -- raising the specter of a repeat of this month's supply cutoff.
  2. India and Russia are in talks about giving Indian companies a greater stake in Russia's oil reserves, in exchange for Russian companies being allowed to do more refining and retailing in India.
  3. Russian President Vladimir Putin offered to build four new nuclear reactors for energy-starved India.

These three stories are emblematic of what I call Russia’s “Empire of Energy” – its bid to build a new empire on the ashes of the old Soviet Empire.

In other oil news …

Suncor Energy plans to expand its Canadian oil-sands operations to double its output to more than half-a-million barrels a day.

Finally, let's look at copper...

Copper is bouncing on news that inventories in Shanghai and London are shrinking. Is the worst over? The worst may not be over for all those hedge funds that have gone short copper. We’ll see how much of a bounce it gets.

Base metals aren’t out of the woods yet, though. China has gone into zinc surplus for the first time in three years. The hottest base metal is nickel (used for stainless steel). It’s in short supply, and the Chinese can’t get enough.

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