Why Silver is a better investment than Gold?

Silver has all the same monetary properties of gold, and more!

The historic price ratio of silver to gold shows that about 10 ounce of silver would buy one ounce of gold, a 10:1 ratio. Recently, the ratio is about a 50:1 ratio (with silver at $13/oz., and gold at $650/oz.) As the silver to gold ratio returns to historic values, from 50:1 to 10:1, you may make over 5 times more money investing in silver, than gold!

Silver prices may rise to exceed the 10:1 ratio, for the following reasons:

More than all of the silver produced by the mines each year is consumed by industry, which leaves little to no room for substantial investment demand. The tiniest bit of investment demand will drive prices sky high.

Supply prices aren't going anywhere. Higher prices in silver may not cause increased supply (production). Why not? Because most silver is produced as a by-product of mining gold, copper, zinc, or lead. Thus, higher silver prices will not substantially increase the amount of silver mined each year. In 1980, when silver prices went up to $50/oz., less silver was mined than in 1979!

Demand prices aren't going anywhere either. Higher prices may not cause reduced demand (consumption). Why not? Because most silver consumed by industry is used in such tiny quantities in each application, such as in film or electrical contacts, that rising silver prices will not easily slow down the growing industrial demand.

Additionally, as paper money continues to fail, people will buy silver and gold without regard to price, or they will buy simply because prices are going up!

Each year, silver mines produce about 650 million ounces of silver, about 200 million ounces come from scrap recycling, and about 100 million ounces used to come from investor selling, or government selling. That's a total of about 950 million ounces. Of that, about 42% is consumed by industrial use, about 28% consumed by jewelry, 20% consumed by photography, 5% consumed in coins and medallions, and that's 95% of total available silver each year! This implies either a "surplus", or "investment demand", of about 5% of the total. Investment demand remains small, but is growing!

Due to silver use, or consumption, since the 1950's, silver may now be more rare than gold, in above ground, refined, deliverable, forms. It is estimated that there are about 200-300 million ounces of silver available to the market at the present time. There are about 125 million ounces of silver at the NYMEX, the big commodity exchange in New York.

Each silver contract at the NYMEX is a promise. There are too many contracts, too many promises to deliver silver that may not exist. Each contract is for 5000 ounces. There are often over 175,000 contracts for 5000 ounces, that's a total of 437 million ounces of silver, promised to be delivered. Yet the exchange has only about a third of that in real silver. How can they promise to deliver more silver than exists? If they fail to deliver silver, according to the promises and contracts that they have made, then confidence in the world's entire financial system may collapse. Industrial users of silver may have to shut down their factories. To prevent this, the users will bid silver prices much higher.

Due to the risk of default in the silver futures contracts, I suggest that you avoid buying futures contracts, avoid options, and avoid storing your silver with anyone else! Take delivery of your silver, and put your silver in your own safe!

Despite silver's intrinsic properties as money, silver began to lose its status as money starting in the late 1800's, as nations stopped using silver, and started using only gold as money. Over 100 years of this "demonetization" has caused a serious drop in silver's value, and this trend is about to be reversed as investors learn about silver's intrinsic properties (and market fundamentals) again.

In the end, as paper money fails completely, the neglect of silver's use as money will be over. Once again, silver will be valued based on other measures of value, such as a day's wage, or a ratio to gold. If silver exceeds its historic value, as I expect it will, due to the scarcity, from its importance in electronics and photography, then perhaps a silver dime, silver quarter, or silver dollar's worth of silver will be worth far more than a day's wage, as it once was.

How high will silver prices go? You do the math on what a day's wage should be, and you tell me!
Will people be hurt if silver and gold prices rise? Not you if you own some! But also, honest weights and measures used in commerce are supposed to produce prosperity for all of society, not poverty.

But you must act to benefit from this information.

Don't wait for silver to rise before buying it. Silver prices could rise by over $20/day to exceed $100/ounce at any time if large funds or billionaires buy with desperation.

Gold:A perfect Commodity for Futures Trading!!

• Gold is money, because of its fundamental nature.
• Gold is liquid and easily traded, with a narrow spread between the prices to buy and sell (about 1%).
• Gold is easily transportable, because it has a high value for its weight.
• Gold is money because it is divisible, you can divide it into coins, or re-melt it into bars, without destroying it.
• Also, gold is interchangeable. It can be substituted for another piece of gold with no hassle.
• Gold is also nearly impossible to counterfeit, as genuine gold is easily recognizable.
• When measured by weight, gold is easily countable, and verifiable.
• Gold is money because it is a great store of value. It is not subject to decay, rot, or rust.
• Gold has an intrinsic value, because it is rare, highly desired by the world over, and is a luxury item.

There is not a single other commodity with those attributes, except, perhaps, for silver. Since silver is less valuable than gold, and since gold is too valuable to be used for small transactions, there is potentially more monetary demand for silver. When gold becomes money again, silver will be desperately needed to make change. Platinum and palladium may come close to gold, but they are not so easily recognized by the masses, and are used mostly by industry.

Ethanol:No Sugar, No Oil

One tankful of the latest craze in alternative energy could feed one person for a year

The growing myth that corn is a cure-all for our energy woes is leading us toward a potentially dangerous global fight for food. While crop-based ethanol -the latest craze in alternative energy - promises a guilt-free way to keep our gas tanks full, the reality is that overuse of our agricultural resources could have consequences even more drastic than, say, being deprived of our SUVs. It could leave much of the world hungry.

We are facing an epic competition between the 800 million motorists who want to protect their mobility and the two billion poorest people in the world who simply want to survive. In effect, supermarkets and service stations are now competing for the same resources.

This year cars, not people, will claim most of the increase in world grain consumption. The problem is simple: It takes a whole lot of agricultural produce to create a modest amount of automotive fuel.

The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year. If today's entire U.S. grain harvest were converted into fuel for cars, it would still satisfy less than one-sixth of U.S. demand.

Worldwide increase in grain consumption

The U.S. Department of Agriculture reports that world grain consumption will increase by 20 million tons this year, roughly 1%. Of that, 14 million tons will be used to fuel cars in the U.S., leaving only six million tons to cover the world's growing food needs.

Already commodity prices are rising. Sugar prices have doubled over the past 18 months (driven in part by Brazil's use of sugar cane for fuel), and world corn and wheat prices are up one-fourth so far this year.

For the world's poorest people, many of whom spend half or more of their income on food, rising grain prices can quickly become life threatening.

Once stimulated solely by government subsidies, biofuel production is now being driven largely by the runaway price of oil. Many food commodities, including corn, wheat, rice, soybeans, and sugar cane, can be converted into fuel; thus the food and energy economies are beginning to merge.

The market is setting the price for farm commodities at their oil-equivalent value. As the price of oil climbs, so will the price of food.

In some U.S. Cornbelt states, ethanol distilleries are taking over the corn supply. In Iowa, 25 ethanol plants are operating, four are under construction, and another 26 are planned.

Iowa State University economist Bob Wisner observes that if all those plants are built, distilleries would use the entire Iowa corn harvest. In South Dakota, ethanol distilleries are already claiming over half that state's crop.

The key to lessening demand for grain is to commercialize ethanol production from cellulosic materials such as switchgrass or poplar trees, a prospect that is at least five years away.

Malaysia, the leading exporter of palm oil, is emerging as the biofuel leader in Asia. But after approving 32 biodiesel refineries within the past 15 months, it recently suspended further licensing while it assesses the adequacy of its palm oil supplies. Fast-rising global demand for palm oil for both food and biodiesel purposes, coupled with rising domestic needs, has the government concerned that there will not be enough to go around.

Less costly alternatives

There are truly guilt-free alternatives to using food-based fuels. The equivalent of the 3% of U.S. automotive fuel supplies coming from ethanol could be achieved several times over - and at a fraction of the cost - by raising auto fuel-efficiency standards by 20%. (Unfortunately Detroit has resisted this, preferring to produce flex-fuel vehicles that will burn either gasoline or ethanol.)

Or what if we shifted to gas-electric hybrid plug-in cars over the next decade, powering short-distance driving, such as the daily commute or grocery shopping, with electricity?

By investing not in hundreds of wind farms, as we now are, but rather in thousands of them to feed cheap electricity into the grid, the U.S. could have cars running primarily on wind energy, and at the gasoline equivalent of less than $1 a gallon.

Clearly, solutions exist. The world desperately needs a strategy to deal with the emerging food-fuel battle. As the world's leading grain producer and exporter, as well as its largest producer of ethanol, the U.S. is in the driver's seat.

Ethanol:No Sugar, No Oil

One tankful of the latest craze in alternative energy could feed one person for a year

The growing myth that corn is a cure-all for our energy woes is leading us toward a potentially dangerous global fight for food. While crop-based ethanol -the latest craze in alternative energy - promises a guilt-free way to keep our gas tanks full, the reality is that overuse of our agricultural resources could have consequences even more drastic than, say, being deprived of our SUVs. It could leave much of the world hungry.

We are facing an epic competition between the 800 million motorists who want to protect their mobility and the two billion poorest people in the world who simply want to survive. In effect, supermarkets and service stations are now competing for the same resources.

This year cars, not people, will claim most of the increase in world grain consumption. The problem is simple: It takes a whole lot of agricultural produce to create a modest amount of automotive fuel.

The grain required to fill a 25-gallon SUV gas tank with ethanol, for instance, could feed one person for a year. If today's entire U.S. grain harvest were converted into fuel for cars, it would still satisfy less than one-sixth of U.S. demand.

Worldwide increase in grain consumption

The U.S. Department of Agriculture reports that world grain consumption will increase by 20 million tons this year, roughly 1%. Of that, 14 million tons will be used to fuel cars in the U.S., leaving only six million tons to cover the world's growing food needs.

Already commodity prices are rising. Sugar prices have doubled over the past 18 months (driven in part by Brazil's use of sugar cane for fuel), and world corn and wheat prices are up one-fourth so far this year.

For the world's poorest people, many of whom spend half or more of their income on food, rising grain prices can quickly become life threatening.

Once stimulated solely by government subsidies, biofuel production is now being driven largely by the runaway price of oil. Many food commodities, including corn, wheat, rice, soybeans, and sugar cane, can be converted into fuel; thus the food and energy economies are beginning to merge.

The market is setting the price for farm commodities at their oil-equivalent value. As the price of oil climbs, so will the price of food.

In some U.S. Cornbelt states, ethanol distilleries are taking over the corn supply. In Iowa, 25 ethanol plants are operating, four are under construction, and another 26 are planned.

Iowa State University economist Bob Wisner observes that if all those plants are built, distilleries would use the entire Iowa corn harvest. In South Dakota, ethanol distilleries are already claiming over half that state's crop.

The key to lessening demand for grain is to commercialize ethanol production from cellulosic materials such as switchgrass or poplar trees, a prospect that is at least five years away.

Malaysia, the leading exporter of palm oil, is emerging as the biofuel leader in Asia. But after approving 32 biodiesel refineries within the past 15 months, it recently suspended further licensing while it assesses the adequacy of its palm oil supplies. Fast-rising global demand for palm oil for both food and biodiesel purposes, coupled with rising domestic needs, has the government concerned that there will not be enough to go around.

Less costly alternatives

There are truly guilt-free alternatives to using food-based fuels. The equivalent of the 3% of U.S. automotive fuel supplies coming from ethanol could be achieved several times over - and at a fraction of the cost - by raising auto fuel-efficiency standards by 20%. (Unfortunately Detroit has resisted this, preferring to produce flex-fuel vehicles that will burn either gasoline or ethanol.)

Or what if we shifted to gas-electric hybrid plug-in cars over the next decade, powering short-distance driving, such as the daily commute or grocery shopping, with electricity?

By investing not in hundreds of wind farms, as we now are, but rather in thousands of them to feed cheap electricity into the grid, the U.S. could have cars running primarily on wind energy, and at the gasoline equivalent of less than $1 a gallon.

Clearly, solutions exist. The world desperately needs a strategy to deal with the emerging food-fuel battle. As the world's leading grain producer and exporter, as well as its largest producer of ethanol, the U.S. is in the driver's seat.

Basics of Commodities Trading!!

Why Commodities

Investors looking for a fast-paced dynamic market with excellent liquidity can now trade in Commodity Futures Market.

Commodity is an asset class that is negatively correlated to equity markets & this feature helps in providing diversification to one’s portfolio.

Commodities tend to be less volatile than equities & the margins to be paid upfront are lower than in equity F & O Markets. This gives the trader/investor more Leverage & better risk-adjusted returns.

Hedging: Mitigate your risk of commodity price fluctuations.

Arbitrage Opportunities: Take the advantage of price spreads, calendar spreads.

Prices are pegged to International Markets of NYMEX, CBOT, CME, LME.

National Level Commodity Exchanges In India Offering Trading Facilities In Multiple Commodities.

National Commodity & Derivatives Exchange (www.ncdex.com)
Multi Commodity Exchange of India Ltd. (www.mcxindia.com)

Intra Day Fluctuations In Commodities Market

All major international commodity markets have an impact on the price fluctuations of Indian Commodities market. The timings of the same is as mentioned below.

Tokyo: 5:00am – 10:30am
Hong Kong: 6:30am – 12noon
Singapore: 8:00am – 1pm
London Metal Exchange: 1:50pm – 10:00pm
New York Mercantile Exchange: 5:50pm – 11:30pm
India (MCX & NCDEX – Metals& Energy): 10:00am – 11:30pm
India (MCX & NCDEX – AGRI): 10:00am – 5:00pm

How Is Commodity Derivatives Market Different From Equity Derivatives Market

Underlying Asset
Commodity Derivative : The underlying is a commodity
Equity Derivative :The underlying is equity.

Research
Commodity Derivative : Research is global. It requires study of macroeconomics of world economies & demand supply situations. Etc.
Equity Derivative :Research requires study of Balance Sheets, P/E Ratios

Trading Hrs.
Commodity Derivative: 10am to 11:30pm
Equity Derivative:10am to 3:30pm

Settlement
Commodity Derivative:Cash or Delivery based settlement.
Equity Derivative:Cash Settled

Volatility
Commodity Derivative:Low
Equity Derivative:High

Leverage
Commodity Derivative:High
Equity Derivative:Low

Demat A/c
Commodity Derivative:Required only for deliveries.
Equity Derivative:Mandatory

Initial Margin
Commodity Derivative:5 to 10% of the contract value.
Equity Derivative:Approx. 25% of the contract value.

Price Movement
Commodity Derivative:Purely based on demand & supply.
Equity Derivative:Based on expectation of future performance.

Which Commodities Are Available For Trading

Precious Metals Gold, Silver
Base Metals Steel, Copper, Aluminum, Zinc.
Energy Crude Oil, Brent Crude Oil, Furnace Oil.
Cereals & Pulses Wheat, Rice, Chana, Urad, Tur, Guar, Guargum, Soyabean
Condiments Sugar
Cash Crops Cotton, Jute
Oil Complex Castor, Soya, Mustard, Mentha Oil
Spices Chili, Turmeric, Jeera, Pepper

Commodity Margins & Lot Sizes

The margin ranges between 5% to 10 % of the contract value.

However the change in value of commodity from the price at which you made the purchase/sale with reference to the daily settlement price reflecting a proportionate gain or loss. The loss, if any has to be paid up as Mark to Market Margin

Commodity Lot Size Margin (Rs.)
Gold 1Kg 70,000
Silver 30Kg 50,000
Gold Mini 100gms 25,000
Silver Mini 5Kg 25,000
Copper 1MT 40,000
Crude Oil 100 Barrels 25,000
Soyabean 10MT 10,000
Chana 10MT 20,000
Sugar 10MT 20,000
Jeera 3MT 25,000

Return on Investment

Commodity Average Intra Day Movement Return (Rs.)
Gold Rs. 60 – Rs. 100 Rs. 100 / 1 Rupee Movement
Silver Rs. 100 – Rs. 300 Rs. 30 / 1 Rupee Movement
Crude Oil Rs. 30 – Rs. 60 Rs.100 / 1 Rupee Movement
Urad / Chana Rs. 40 – Rs. 60 Rs. 100 / 1 Rupee Movement
Sugar Rs. 15 – Rs. 25 Rs. 100 / 1 Rupee Movement
Mentha Oil Rs. 10 – Rs. 30 Rs. 360 / 1 Rupee Movement
Copper Rs. 3 – Rs. 8 Rs. 1000 / 1 Rupee Movement
Zinc Rs. 2 – Rs. 5 Rs. 5000 / 1 Rupee Movement

Yes, It's Gold's Day!!

2007-09-13
By James West

You’ve been hearing it for years.

“Gold’s going to a thousand dollars an ounce!”

“Gold will outperform every other commodity this decade!”

“Gold could go to $5,000 an ounce!”

Well, it’s starting to happen. Gold hasn’t set any new records yet, but for the first time since the 1980s, gold is solidifying above $700 an ounce.

And everybody knows why. The house of cards that was easy credit, a massive trade deficit, and declining growth has all come crashing down. And as everybody keeps saying, it ain’t gonna end any time soon.

This index is made up of mortgage finance stocks, with some pretty big names in the industry heavily weighted. Fannie Mae is 11%, Freddie Mac is 9%, Washington Mutual is 8% and Countrywide Financial is 5%.

It is a bottom-line performance snapshot of home mortgages. Recently we saw mortgage default rates climb to a level in the third quarter that was 14% higher than the second quarter of 2007.

According to a report last week from the Mortgage Bankers Association:

“Delinquency and default rates on loans and personal bankruptcy rates are still at comparatively low levels--only 4.7% of all loans in the third quarter--but they have been rising rapidly over the course of this year. Other measures of financial distress are also pointing one way for American families--up. With all pieces of the trifecta staying in place, rising delinquency rates on mortgages may be the beginning of a trend toward more middle-class financial insecurity . . .

“The data on bankruptcy rates also show a worrisome trend over the course of 2006. Bankruptcy rates dropped precipitously in 2006 in the wake of large filings in 2005 just before the new bankruptcy law went into effect. However, from the first quarter of 2006 to the second quarter, the annualized personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew from 1.2 in 1,000 to 2.0 in 1,000--an increase of 33.7%. The bankruptcy rate in the third quarter stood at 2.2 in 1,000, an additional increase of 9.6% in that quarter alone.

“Middle-class families are caught between low income growth, a high debt burden, and rising interest rates--and for the moment, these ingredients are here to stay. The most recent third-quarter delinquency, default, and bankruptcy figures show that the dangers to middle-class economic security are not theoretical concepts. They are a harsh reality for a growing share of middle-class families.”

Countrywide announced Thursday that it had obtained another $12 billion in financing after borrowing $11.5 billion the week before and selling a stake to Bank of America for $2 billion.

You’ve got to ask yourself why an institution as blue chip as Bank of America would invest in the country’s largest home mortgage lender just when everybody else in the sector is running for the hills.

It seems quite apparent to me that the only way Bank of America is going to ensure a lower default rate on its inventory of ABCP is to make sure that the so called triple-A assets behind the deteriorating paper continue to be financed. So it logically the bank has decided it’s better to spend $2 billion than on an “investment” than to have an exponentially greater amount of debt go delinquent on its books.

Desperate times call for desperate measures, apparently.

Gold thus becomes more attractive. Crumbling credit availability means the oversupply of new housing and commercial real estate will curb demand, which will see prices drop. Larger institutional investors begin to see gold as a hedge against further US dollar drops and risk associated with credit.

Even Goldman Sachs has finally jumped on the gold bug bandwagon, publicly proclaiming that gold will reach $725 this year.

Meanwhile, central banks in the Middle East and Russia continue to add to their gold reserves, even while European and North American central banks keep selling. Many industry watchers think China is about to become a buyer of gold, as its massive reserves of U.S. dollars are looking like they could see pretty substantial devaluation in the months and years ahead.

Gold has doubled since 2002, even in the face of concerted central bank selling. When these banks start to run out of gold to sell, what will happen to the price-limiting effect of their selling? It’s not unimaginable that gold could then start on an even steeper upward trajectory with no ceiling visible.

And then there’s the gold “carry” trade. Gold is “borrowed” at a rate that is typically very low. The borrower sells the gold and invests the money in an asset that performs better than gold over time, then sells that asset and buys the gold back, supposedly at a profit.

This formula depends on a relatively stable gold price, because if the price of gold were to increase at a higher rate than the asset performance rate, a loss would be realized by the time the gold had to be returned.

So in this environment, nobody is going to want to lend or borrow gold, as its enhanced volatility represents elevated risk. Gold broke out of the year’s trading range to resume a bull market, moving quickly from $670 to $721 in just eight trading days. A 7.6% gain in such a short time certainly got the attention of anyone in the carry trade business. So that business, and its net downward effect on the price of gold, is over.

Some analysts from otherwise conservative institutions think gold will see $850 by the end of 2007 as a result of desperate covers on short positions as the rate of gold price increase intensifies.

Meanwhile, Gold Fields Mineral Services, a global metals consultancy based in London, forecasts that total world gold-mining production will slip in the second half of this year. Gold sales by central banks, it says, rose by a modest 4% between January and July compared with the same period last year. Sales of so-called “scrap” gold--mostly recycled jewelry--fell by more than one quarter, despite spot gold prices trading at their highest six-monthly average in history.

Gold jewelry owners worldwide, in other words, want to hold on to the metal as its price continues to rise.

I, for one, am making regular trips to my local bullion bank to empty my wallet of paper currency for gold coins and bars. Somehow, it just seems to make sense.

Buy Gold or Else!!

Buying Gold is no Longer Advisable, it's a Must-2007-09-19
Courtsey:Goldworld

As the fundamentals driving gold straight north continue to gain intensity, the bottom line for those of us with capital tied up in other investments is that some gold in the portfolio is not merely advisable--it’s a must.

If you are a student of economic history, you will understand that in spite of the world’s abandonment of gold as the peg by which all currencies are measured, all currencies can still be measured in gold. That fact alone should amplify gold’s unassailable position as history’s value vault of last resort.

Alan Greenspan’s new book, which comes out tomorrow, points the blame directly at the Bush administration for abandoning “rigorous fiscal policy” in favor of misguided “easy money.”

Many commentators, however, blame Alan Greenspan for the current morass.

Their arguments suggest that if Greenspan hadn’t lowered rates so drastically in response to the dot-com meltdown, the current real-estate bubble bust and accompanying credit crunch would never have materialized.

That makes no difference now, though.

Countries who participated in the U.S. style of mortgages front-loaded with low interest rates are now having to devalue their currencies by pumping in paper to replace the even more nebulous ABCP which represented imaginary credit dollars. Those dollars are frozen in time as creditors wait with teeth clenched to see what rate of default falls out of raised rates of interest.

Admittedly, the assets backing even the sub-prime caliber of debt are not utterly worthless. But they’re surely not worth the value of the loans they’ve backed.

The yet-to-unfold problem here is that in the past, properties that were foreclosed upon found a ready market for the assets. Now, in the new tighter credit environment, that market is largely dried up, while supply is going up and will go through the roof in the months to come.

So government is having to inject more money into the system, which ultimately increases supply while lowering demand for those currencies.

Which means, in a roundabout way, the price of gold relative to those currencies is going to go up. The more money central banks have to pump back into their economies to alleviate liquidity crises, the more upward pressure will develop under the price of gold.

Presently gold is trading around its 16-month high, and looks strong at these levels.

If the Fed cuts interest rates by 25 basis points tomorrow, that will almost certainly send gold higher, as it will send a strong signal to foreign holders of U.S. currency that their rate of return on U.S. dollar holdings will fall victim to the Fed’s monetary policy.

That could see those U.S. dollars move increasingly into gold as huge government investors run from the greenback.

Northern Rock PLC, the U.K. mortgage lender that was the recipient of an emergency bailout package by the Bank of England, is now effectively in play as a takeover target because of is huge drop in share price. Northern Rock has shed over 35% of its market capitalization since the announcement last week.

Customers who were lined up outside the Newcastle branch burst into laughter when an employee came out to inquire if anyone was there to deposit funds as opposed to withdrawing them.

That grass roots panic could grip some U.S. banks, and if it does, the price of gold will go through the roof in short order.

The price of gold is already going through the roof, albeit as fast as cold molasses. But this credit problem is much like the onset of a bad case of flesh-eating bacteria. One minute the patient seems healthy, and then within months there’s no patient left.

A little drastic, perhaps, but it would be foolish to underestimate the scale of what is happening right now.

Gold is increasingly being snapped up by Asian and Middle Eastern customers.

Gold sales in Dubai could increase 40 per cent in September compared to last year’s figures, said the managing director of the Dubai Gold and Jewellery Group in a Qatar newspaper.

The Peninsula reported that Tawhid Abdullah, who is also the chairman of international jewelry retailer Damas, said that he expects that gold sales will increase in the fourth quarter of 2007 as customers make more purchases during the Dubai Shopping Festival and the Islamic month of Ramadan.

“The market is not affected by the current prices of gold and we have a better economy in Dubai and strong consumer confidence,” he said.

Gold sales in August were up 26 per cent compared to the same month in 2006.

All Signs Point to Buy Gold!!

Source:Goldworld

Mortgage Meltdown and Falling US Dollar Add Strong Bullish Sentiment to Buy Gold

DENVER, CO--Continued turmoil in the mortgage finance system led to an 8.3% drop in the sales of new single-family homes for the month of August. Meanwhile, builders in the US began work on the fewest homes in twelve years and new building permits dropped 5.9% to their lowest levels since 1995.

Yuck!

Robert Toll, chairman and CEO of Toll Brothers Inc., summed up the current housing market and credit crunch nicely two weeks ago while speaking at the Credit Suisse Homebuilder Conference ......

Deep doodoo indeed

Home builders are now launching new promotional price reductions as well as other incentives to attract homebuyers and move standing inventory off their books.

It's an act of desperation that I doubt will have much positive effect for them.

Potential buyers are being constantly inundated with negative media commentary on the housing market, which is further exacerbating residential housing woes.

There are about twice the numbers of homes on the market for sale compared to a year ago. Buyers have more choices, leading to higher competition among sellers and lower prices.

Furthermore, lending standards across the country are tightening. Folks who want to put no money down on a home are being subjected to more scrutiny when they apply for a mortgage loan. As a result, they are being turned down more often than they were last year.

The consequence is that houses are sitting longer on the market, and once again no one benefits. Homeowners get anxious when waiting to sell their houses and often react by lowering prices and accepting lower offers.

In an effort to help the housing market the Fed stepped in two weeks ago and cut interest rates by a half-percentage point, the first rate cut in the past four years.

It was the old band-aid on the broken leg.

And that's because for the sub-prime mortgage borrowers who are already on the brink of foreclosure, the Fed cut is of little consequence. At this point in the game, the Fed simply cannot help them. The Fed cannot help them!

Moreover, the Fed cannot fix the overall broken house market. It can only work to delay the inevitable.

The world's financial policy technicians will be hard pressed to solve the housing issue. And for now we can't get around the problem. We have to just go through it.

The piper must be paid.

Meanwhile the USD continues to erode in value.

The dollar extended its recorded-setting lows against the euro this morning. The once mighty greenback fell to $1.43 per euro, its lowest level since the 13-nation currency's debut in 1999.

The USD Index, a basket of six weighted world currencies, has also been steadily trending lower. At last look, the USD Index was at 77.86.

Further dollar weakness is probably still in the cards. And an unpleasant thought lingers in the back of everyone's minds: Recession.

Let's face it . . . Americans are spending junkies. We've borrowed trillions of dollars to remodel our homes, take vacations to Tahiti, and buy 60" plasma HDTVs and giant gas-guzzling SUVs.

There are consequences to this lifestyle. And we'll reap what we've sown.

We're living financial history here, ladies and gentlemen. And the best way to hedge yourself against personal fiscal catastrophe is by doing what I've been urging--practically begging--people to do for the past ten years: BUYING GOLD!

With the USD on the back foot and the economy on the verge of recession, precious metals will see continued support.

Gold has recently breached the $750/oz. level as the reality of economic disaster is finally beginning to sink in.

The yellow metal is now at a 28-year high after rising some 10% last month. And the fundamentals for gold have never looked stronger.

Besides the weakness in the USD and the credit crisis, September and October are typically a period when jewelers increase their holdings. Gold ETFs have also been buying aggressively in recent months and central bank selling has cooled off.

Please, do yourself and your family a favor: Hedge the coming financial economic crisis with gold.

Commodities as an Asset Class!!

In a low-return world, high-yielding commodities have become the siren song of the asset-liability mismatch. Well supported by seemingly powerful fundamentals on both the demand (i.e., globalization) and the supply sides (i.e., capacity shortages) of the macro equation, investors have stampeded into commodity-related assets in recent years. Once a pure play as a physical asset, commodities have now increasingly taken on the trappings of financial assets. That leaves them just as prone to excesses as stocks, bonds, and currencies. This is one of those times.

Previously, It was argued that Chinese and US demand were both likely to surprise on the downside - outcomes that would challenge the optimistic fundamentals still embedded in commodity markets. It’s also hinted that the asset play could well reinforce this development - largely because commodities have now come of age as a legitimate asset class in world financial markets. The same is true of foreign exchange reserve managers and corporate treasury departments of multinational corporations. A former commodity executive now runs one major Wall Street firm and another has turned over management of its global bond division to the architect of its thriving commodity business.

Like all such trends, the expansion of the commodity culture is rooted in performance. It's not just the physical commodities themselves - most commodity-related assets in cash and futures markets have also delivered outstanding relative returns. For several years, the so-called commodity currencies of Australia and Canada have been on a tear, and big commodity producers like Russia and Brazil have led the recent charge in high-flying emerging markets. Within the global equity universe, the materials sector has been the number-one ranked performer over the past year - up 14%, or double the 7% returns of second-ranked financials. And, of course, there is the growing profusion of commodity-related ETFs. Meanwhile, Commodity Trading Advisors (CTAs) now collectively manage over $70 billion in assets - more than three times the total three years ago - and the IMF reports inflows of approximately $35 billion into commodity futures last year alone.

Significantly, the consultants are now urging institutional investors to implement a major increase in their asset allocation weightings to commodities. A recent Ibbotson Associates study recommends that commodity weightings in a multi-asset balanced portfolio could be increased, under conservative return and risk-appetite assumptions, to a high of nearly 30%. That would be more than three times current weightings and greater than seven times the estimated $2 trillion value of current annual commodity production (see T.M. Idzorek, "Strategic Asset Allocation and Commodities," March 2006, available on www.ibottson.com).

The Ibbotson analysis endorses commodities for their consistent outperformance and negative correlations with other major asset classes - going so far as to praise commodities for actually providing the protection of "portfolio insurance." It concludes by stressing "...there is little risk that commodities will dramatically underperform the other asset classes on a risk-adjusted basis over any reasonably long time period." Laboring under the constant pressure of the asset-liability mismatch, yield-starved investors can hardly afford to ignore this enthusiastic advice. As a result, with multi-asset portfolios likely to have ever-greater representation from commodities, the financial-market dimensions of the commodity trade should become increasingly important.

This transformation from a physical to a financial asset alters the character of commodity investments. Among other things, it subjects the asset to the same cycles of fear and greed that have long been a part of financial market history. From tulips to dot-com and now probably US residential property as well, the boom all too often begets the bust. Yale Professor Robert Shiller puts it best, arguing that asset bubbles arise when perfectly plausible fundamental stories are exaggerated by powerful "amplification mechanisms”. That appears to have been the case in commodities. In this instance, the amplification is largely an outgrowth of the China mania that is now sweeping the world - the belief that hyper-growth in commodity-intensive China is here to stay. That's why I blew the whistle on this one: Not only do we believe that the Chinese authorities will make good on their efforts to cool off an over-heated economy, but we also suspect they will succeed in engineering a well-publicized shift toward more efficient usage of energy and other commodities.

The potential for post-housing bubble adjustments of the American consumer could well be the icing on this cake - not only lowering US commodity demand through reductions in residential construction activity but also by reducing end-market demand in China's biggest export market. The recent data flow hints that such adjustments are now just getting under way - underscored by reports of a meaningful slowing of Chinese investment and industrial output growth in August and a continuing stream of bad news from the US housing market.

Meanwhile, the performance of commodity-based financial assets is starting to fray around the edges. That's true of energy funds as well as those asset pools with more balanced portfolios of energy, metals, and other industrial materials. While most of these investment vehicles have outstanding 3- and 5-year performance records, the one-year return comparisons are now solidly in negative territory for many of the biggest commodity funds. And this is occurring at the same time that the MSCI All-Country World index has delivered a 14% return for global equities over the past year. Underperformance for a few months is hardly cause for concern, but for both relative- and absolute-return investors, negative comparisons over a 12-month period are raising more than the proverbial eyebrow. As usual, the "hot money" has been the first to head for the exits, but more patient investors may not be too far behind. Shiller-like amplification mechanisms could well compound the problem. Just as they led to near parabolic increases of many commodity prices in March and April, there could be cumulative selling pressure on the downside - taking commodity prices down much more sharply than fundamentals might otherwise suggest.

For the money, there is far too much talk about the globalization-led commodity super-cycle. It gives the false impression of a one-way market, where every dip is buying opportunity. Yet commodities as a financial asset are as bubble-prone as any other investment. As is always the case in every bubble we have lived through, denial is deepest when asset values go to excess. That's very much the case today. After three years of extraordinary out performance, denial over the possibility of a sustained downside adjustment in commodity prices is very much in evidence - underscoring the time-honored sociology of an asset class that has gone to excess. Meanwhile, China and US-housing-related fundamentals are going the other way - setting up increasingly tender commodity markets for unpleasant downside surprises on the demand side of the global economy. The herding instincts of institutional investors could well magnify the price declines - when, and if, they emerge. All this suggests there is still plenty of life left in the time-honored commodity cycle.

Crude best clue to buy or sell gold!!

If you want to follow trends in gold prices, better study the crude oil market. Both gold and crude prices have been going in tandem in the last eight months. Going by the price movement of both commodities, it is clear that when crude price surges, so does the gold price. And vice versa. Based on this trend, bullion traders and investors have started tracking crude prices before buying and selling gold in a large quantity.

"As there seems to be a co-relation between these two commodities, we have started taking crude price into account before placing buy or sell order for gold," Monal Thakkar of Amraplai Industries, a leading bullion company, said. Crude prices, of course, have also started influencing the Indian bourses, albeit in an inverse manner. Whenever crude goes up, it adversely affects the market sentiments.

"The inverse relationship between crude prices and the stock market has been established in the past few months. But one reason for gold price to move in tandem with crude price could be inflation. Upward movement of crude price leads inflationary pressure in the economy and investment in gold is traditionally considered as hedge against inflation," C Jayaram, executive director, Kotak Mahindra Bank, said. Another reason can be the US dollar movement. Increasing crude price makes the US dollar weaker and a weakening dollar leads to higher exposure in gold.

So crude prices make an impact on gold via the dollar price movement. It may be pointed out that there was no direct correlation between crude and gold prices in the previous years. "The fact that this year gold price is moving in tandem with crude is prompting investors to take long positions in gold, on the assumption that crude prices are bound to rise further," Anupam Kaushik, vice-president, Anagram Comtrade, said.

Is the commodity run over??????

The drop in oil, gold and other raw materials since May is signaling an end to the five-year bull market in commodities as global growth slows and demand falls.

``The mega-run for commodities has run its course,'' says Stephen Roach, the New York-based chief global economist at Morgan Stanley, the world's biggest securities firm. Roach in May said the surge in oil and metals was a bubble about to pop.

Since then, the Reuters/Jefferies CRB Futures Price Index has fallen 12 percent from a record, more than enough to qualify as the first so-called correction since the rally began in 2001. The Goldman Sachs Commodity Index, after gaining for four years, has lost investors 5.1 percent in 2006. Gold and sugar already are in a bear market, defined as a price drop of 20 percent.

Commodities are plunging because of reduced growth in some of the world's largest economies. The U.S. Federal Reserve's report on economic conditions in each of its 12 districts last week indicated consumer spending rose ``slowly.''

Expansion in China, where growth of 9 percent in the past four years caused raw-material orders to surge, may be curtailed as the central bank raises interest rates and curbs lending. Some strategists remain bullish. James Gutman, senior commodities economist in London at Goldman Sachs Group Inc., the world's second-largest securities firm by market value, says the commodities losses are nothing more than ``cyclical fluctuations.

``We're certainly not at the end of the long-term bull market,'' says Gutman. ``If there are any near-term corrections, I'd view them as a buying opportunity.''

Prices Tumble
Sugar on the New York Board of Trade is down 40 percent from its February peak. Gold dropped below $600 an ounce today, its lowest in 10 weeks. Soybeans are 15 percent below their July high, and crude has lost 15 percent from its record level.

Frederic Lasserre, director of commodities research at Societe Generale SA in Paris, said a 50 percent plunge in metals prices is ``likely.'' Investor Marc Faber, managing director of Hong Kong-based Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, agreed that a slowdown in the world economy means lower prices are ahead.

``Some industrial commodities may have peaked out for good,'' said Faber, who told investors to bail out of U.S. stocks a week before the 1987 so-called Black Monday crash. ``Grains and precious metals may continue to rise as they aren't tied to the economic cycle,'' he said in an e-mail.

Declines Accelerate
The drop in commodities gained momentum Sept. 8 with oil, gasoline, gold and copper falling. The pace of the declines may slow over the next 12 months.

That's because the global economy will expand about 5 percent in 2006, and growth next year will be ``robust,'' Masood Ahmed, a spokesman for the International Monetary Fund in Washington, said on Sept. 7.

IMF Managing Director Rodrigo de Rato said Europe and Japan will help power the economy, while the U.S. slows because of a cooling housing market and higher interest rates.

``You can certainly see the paws, but not a whole bear'' in commodities markets, said Joachim Klement, asset-allocation strategist at Zurich-based UBS AG's wealth management unit. ``We are not in a bear market yet. The long-term uptrend in commodities is still intact.''

$40 Oil Forecast
Crude oil should be at $50 a barrel now, rather than at $66, because investments by fund managers have pushed prices too high, according to Ben Dell, an analyst at Sanford C. Bernstein & Co. in New York. Standard Chartered economist Steve Brice in Dubai last week wrote that $40 crude oil is possible.

Commodities prices may slide for another nine months, said Tony Dolphin, who helps manage $125 billion at Henderson Global Investors Ltd. in London.

``A bubble scenario in commodities is still there but I expect a more controlled decline in prices,'' he said. ``The global economy hasn't built in any grave imbalances, such as the run-up in inflation in the late 1980s or the overinvestment in technology during the late 1990s, so I think the downturn will be limited.''

Optimistic Investors
Michael Lewis, head of commodity research at Deutsche Bank AG in London, points to falling world stock markets as a sign that the commodity bull market has further to go.

``If equities were posting double-digit growth, then money would fly out of commodities,'' Lewis said. ``That hasn't been the case. Commodities can still compete for capital. There's still room for prices to run.''

Morgan Stanley Capital International Inc.'s World Index, a measure for global stocks, has fallen 4 percent from its 2006 peak reached on May 9. Investments in the Goldman Sachs Commodity Index and the Dow Jones AIG Commodity Index may rise 50 percent to $150 billion by 2007 as pension funds and other money managers diversify from stocks and bonds, Sanford C. Bernstein said in an Aug. 21 report.

Some hedge fund managers say they can't take any more losses.
Ospraie Management LLC, run by Dwight Anderson, liquidated the $250 million Ospraie Point Fund that fell 29 percent in the first five months of the year, in part because of wrong-way bets against commodity prices.

MotherRock LP, the hedge fund run by former New York Mercantile Exchange President Robert ``Bo'' Collins, told investors last month he planned to shut down because of a ``terrible performance'' as natural gas prices sank. Collins didn't return messages left at his office and on his mobile telephone for comment.

Correlation between Gold and U.S. Interest Rates!!

Every time the Fed announces a decision on the US interest rates, gold prices also react. If interest rates are increased, gold prices go down, and vice-versa, indicating a negative correlation. The explanation offered is that when interest rates rise, the higher returns attract foreign capital and demand for dollars. The higher demand for dollars raises the US dollar-exchange rate. This increased return on the dollar makes gold less attractive and, hence, the gold price falls.

This theory is what is put forward by television channels and economics courses around the world. For lack of a better phrase, one may refer to the above as the "Maggi Theory of Gold", that is, the theory is valid for the first two minutes of trading after announcement of an interest rate decision. Beyond that initial speculative sentiment, the historical evidence has been quite contrary to what is suggested by the above theory.

The Evidence
1971 was when the US went off the gold standard and thus, that would be a good starting point for this analysis. In January 1971, gold prices averaged $37/ounce and interest rates were 6.24 per cent. For the next 12 years, both increased gradually. Gold averaged $673 by September 1980, while interest rates peaked a year later, at 15.32 per cent.

For the next two decades, there was a bear market in the precious metal, in conjunction with declining interest rates. Gold prices bottomed by April 2001, at $260, and interest rates bottomed out by June 2003, at 3.33 per cent. From the bottom, both have been increasing steadily and, by June 2006, gold averaged $600, and the interest rate was 5.11 per cent.

Indeed, barring very short-term time-frames, the correlation is actually a strongly positive one - higher interest rates mean higher gold prices. But why is this so?

"Real" Theory of Gold
For one, gold is not an interest-bearing instrument. So "other things being equal", any interest-bearing instrument should be preferable. It does not matter whether the interest rate is 0.5 per cent or 50 per cent - one would be worse off holding gold. So it is not the interest rate that influences gold prices, but the "other things" that is assumed to be equal.

So what are the "other things"? Let us get to the basics of investing to answer that. According to Benjamin Graham, "an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return". Most people would agree that it should at least be equal to the risk-free interest rate and a risk premium for holding a risky asset class.

But what happens when real rates of interest are negative? Then, an investment operation, even when it fits in with the above definition, would fail to maintain the purchasing power. So a more appropriate definition would be as follows: "An investment operation is one which, upon thorough analysis, promises safety of principal and a return that at least ensures maintenance of purchasing power over the period invested". Consequently, when expectations of inflation are high, investors prefer gold as a mechanism for protecting their purchasing power. Thus, when confidence in a currency is high (low inflation), then gold prices would be low and, for the same reason, interest rates also would be low. The best explanation for the gold standard was, ironically, given by the former US Fed chief, Alan Greenspan, in his speech "Gold and Economic Freedom" in 1966:

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which the banks accept in place of tangible assets and treat as if they were an actual deposit, that is, as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."

Of course, the Maestro managed to unlearn this virtue by the time he reached the Fed, where he began the biggest money printing exercise ever witnessed. He did exactly what he had said would happen in the absence of a gold standard.

The effects of that can be observed in the Graph that shows how chocolate prices moved before and after the era of easy money. Chocolate is just an example, but it's true of almost every other consumer good. The Fed-doctored CPI or core rate will never tell you the true story.

Gold as leading indicator
While the positive correlation between gold and interest rates is obvious, the peaks and troughs do not exactly coincide. If we plot gold vs 18-month future interest rates (that is, gold of January 1970, matched with the interest rate of July 1971), then the lines coincide almost exactly as shown in the Graph.

What this means is that the yellow metal has been a very good indicator of interest rates. Given the fact that gold has been going up sharply in the recent past, one can expect the interest rates to follow soon. In an earlier article titled "The Inflation Game" (Business Line, July 21, 2006), this writer had explained why interest rates are set to increase. The current surge in gold just goes to confirm that.

The Golden Future
An interesting exercise would be to estimate how high the precious metal would go up in the next decade of rising interest rates. In the previous interest rate cycle of 1970 to 1983, prices went from $35 to about $675 (it touched $850 for one minute) - an increase of nearly 20 times. This time around, we started from $260, so will we exceed $5,000?

One could argue that the gold price, as fixed by the US Government in 1970 at $35, was artificially low and, hence, the move appears exaggerated.

On the other hand, one could make a case that in every economic aspect - fiscal deficit, consumer debt, trade deficit, debt-to-GDP, etc - the US is much worse than it was during the 1970s and so gold could be headed for an even greater move.

A more fundamental reasoning would be that the 35-year experiment with the loose-monetary system has to end "eventually".

Subsequently, when we go back to Bretton Woods, gold would have to be priced at $30,000 to account for the dollars in circulation today. Thus, using a gold standard to define the intrinsic value of the metal, $5000 would indeed be cheap.

Whatever happened to Gold?

Crude Oil is by far, today's most essential and indispensable commodity. The world would literally come to a halt if trucks, ships and airplanes powered by oil, could not deliver essential goods.

Gold on the other hand has been, since early times, a trusted measure of currency and a safe haven for traditional investors. We are by no means "gold bugs". We are reporting facts as would relate to any other investment. For our purposes, this article will look at how these markets move relative to one another.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

What is the Gold/Oil Ratio: The Gold/Oil ratio measures the number of barrels of oil that equate to one ounce of gold. It is calculated by dividing the price of Gold by the price of a barrel of Crude. According to researcher Adam Hamilton of the Zeal Intelligence newsletter, the Gold/Oil ratio stood at an average of 15.3:1 for the 40 year period from 1965 to 2005. The range was as high as 33 with a historical low of 6.6. Looking at the December contracts for Gold and Crude Oil as of the close on 10/9/06 that ratio stood at 9.48 ($582.80/$61.49). Again this simply means that the price of Gold is 9.48 times the price of Oil.

With growing worldwide demand for Crude Oil, prices have gone above the $75.00/barrel mark and are currently trading below $60.00. Is the price of Gold riding this wave? By understanding the gold/oil ratio we can determine how to position ourselves in the markets.

This suggests that prices will eventually realign to a "fair mean". In this instance Gold should move higher unless, of course gigantic new deposits of oil are discovered and find their way to the marketplace rapidly - which is quite unlikely - causing the price of Crude Oil to drop.

In the late 1970s, Gold lagged oil eventually rallying up with to hit its all time highs of $850. Today, the scenario appears poised to repeat itself, however keep in mind that past performance is not indicative of future results. Even when Dec. Crude oil moved up to $76.90 on May 12, 2006, Dec. Gold went to $753.00 bringing the ratio to approximately 9.79:1. Based on the historical average of 15:1, Gold still appears undervalued relative to crude oil. Another factor affecting the price of Gold is the fact that the US Dollar has been trending higher as of late and the correlation between these two markets is negative, meaning that they have a tendency to go in opposite directions.

What will it take for Gold to get back to its historical ratio of 15:1?
Let's examine world events that could contribute to higher Gold prices:

• OPEC announced a 1 million barrels/day cut with the intention of maintaining Crude prices above $55.00/barrel; Demand for Crude oil prices is still growing due to expanding economies in Asia, notably China and India; Alternative fuels, though readily available, are years away from mass distribution; Energy efficiency has improved however demand continues to grow;
• N. Korea successfully accomplished a nuclear test and could potentially become a threat to peace in the region; Slowing real estate markets in the US along with growing consumer debt (up $4.99 billion in August according to the Federal Reserve) may cause the consumer-driven US economy to take a hit;
• China's central bank announced its intention to double its Gold reserves after already doubling them to 600 tons. If China were to increase its reserves to only 5% of its foreign exchange holdings, it would have to purchase an additional 1900 tons of Gold making it the 5th largest holder behind the U.S., Germany, the International Monetary Fund and France;
• The Financial Times reported that Germany's Bundesbank will halt its sale of gold reserves for the third year and other central banks worldwide have followed suit while others have beefed-up purchases;
• FT also reports that Italy and Ireland have not sold any gold in the past two years;
• Worldwide concerns over the US Dollar has many central banks alarmed over the currency risk associated with holding the Greenback;
• Russia, Argentina, South Africa, the UAE and several others are adding Gold to their portfolio as a way to offset their risk exposure in the US Dollar;
• The growing national debt in the US (the largest in the history of the world) is sending a message of unease to world economies who are fully aware that their economical welfare is highly dependent on a healthy US economy;

What To Do?
Looking at the chart above, we can see that Gold is clearly not in a bullish stance. Each time Gold has tried to go back up, it's made lower highs followed by lower lows; far from a bullish sign. We can see that since it made its high in May 2006, Gold has retraced back nearly 25%. Short term resistance is at $600 with longer-term is at $630. Support is at $555 and if broken could signal an extended down-trend. Although I am long term bullish on Gold for all the reasons listed above and more,

I believe that we'll see Gold trading in a range well into November at which time, growing demand should push prices back to the highs made in May of this year. In my opinion for the time being, it would be wise to be patient, look for an entry point once prices have established a clear uptrend and proceed cautiously when that time comes. This market carries a lot of risk and daily swings can be gut-wrenching.

Gold:On the move again By Chad Butler

After a brief hiatus, Gold is returning to my radar screen. With downside momentum in check and a successful hold of previous support, Gold may make that push to make a strong finish to this year. How can a trader take advantage of this market?

I find that a longer term focus using a trend following methodology works best for me. Ultimately, I use the 9 day simple moving average to tell me what the short term money pressure is on the market, and I look at the 50 day moving average to tell me what the long term money pressure is. If the 9MA is above the 50MA, the market is in a bullish stance, and I would look for buy entries. If the 9MA is below the 50MA, the market is bearish and I would be looking for an opportunity to sell.

Currently in Gold, the 9MA is about to move above the 50MA, indicating that we should be looking for buy entries. This is reinforced by the MACD. I use a 9/50 compression on the MACD to complement my use of the 9MA and the 50MA. In late October, we saw a MACD cross, indicating a shift of momentum to the upside.

The conservative trader should wait for a day in which the 9MA settles above the 50MA prior to entering the market. A more aggressive trader could be looking for entries now. But what are the possible trades?

When using the trend following methods that I use, I caution not to use the technical indicators (the moving averages or the MACD) as both a screening tool AND an entry tool. Rather, I prefer to use price action to determine specific entries and exits. The most conservative entry is to buy a breakout of resistance. In the case of Gold, round numbers are key psychological barriers and therefore make good points to watch for breakouts - 620, 630, 640 will be key. Also, a breakout above previous resistance is a good entry. The market is breaking out today, the next preciously tested resistance level would be the 648.50 level. I find 620 to be significant as well as it has been a previous area of support.

For more precision, one could wait for a setup using the 20 day exponential moving average. This trade setup occurs when the market pulls back and settles below the 20 day exponential moving average, then makes an attempt to regain the high of the day that settled below that level. The textbook trade is to buy the open of the following day. However, traders employing this technique are cautioned to wait for confirmation that we are in an uptrending market ( i.e. the 9MA has crossed the 50MA).

Alternatively, more conservative traders could employ option spreads in Gold. An option spread, such as a bull call spread, gives a trader the opportunity to participate in the market with a limited risk position (the risk on a bull call spread is limited to the cost of the position). The advantage to using a spread like this, as opposed to buying a call option outright, is that for similar cost, a trader can often get a position that is closer to the actual market price. The tradeoff in this trade is that the upside potential is capped at a maximum amount (the difference between the strikes).

Here is an example. A trader would purchase a 640 call February 2007 gold while simultaneously selling the 680 call. The 640 call currently has a theoretical value of approximately $1800. The 680 has a theoretical value of about $880. To construct a bull call spread, the trader buys the 640 call for $1800 and sells the 680 call for $880. The difference is $920. That is the net cost of the position and the maximum that the trader can lose on the trade.

But how much can he make? If Gold is trading at or above 680 at expiration (85 days from now), the position would be worth the difference between the strike prices. This is $4000. Take away the $920 that the position cost and the maximum net possible gain would be $3080. This is approximately a 1:3 net risk:reward ratio (1:4 gross). When constructing option spreads, I find this to be a reasonable number and I seek out trades that are at least 1:3 risk versus reward.

But what about the outright call positions? Well, for the same money as our spread trader, a trader would have to go to the 675 call in February 2007. The current theoretical value is approximately $966. But for that to be a better trade, Gold would need to be trading above 684.66 at expiration just for us to break even (675 strike + 9.66 paid for the call). To beat the call spread, we would need to be at $715.46. Now, if we were expecting gold to be trading well above that, the outright call would be our preference. But the call spread gives us a good look at the upside while keeping us in a limited risk position.

Certainly, for the trader willing to take the risk, the outright futures are trade to take. You get a 1:1 look at the market, while the market will have to make significant strides for the outright call or the call spread to benefit. But risk has to be considered with that. Traders looking to get long on either a breakout move, or on a 20EMA setup, a stop at key support would be necessary. For me, this is the 565 area. I would want my stop to be somewhere outside of that area, looking at 560. If the market clears and settles above the previously outlined resistance areas, the stop could be trailed behind accordingly.

I have outlined some broad trading examples here to take advantage of a building uptrend in Gold. But there are some caveats. First, if you do not understand the risks of any of these trades (or any trade for that matter), you are advised to do nothing until you fully understand and are comfortable with the risks. Second, these are some broad examples. They are geared to more intermediate to advanced traders that can work them into an already sound trading plan. If you lack a sound plan and the discipline to execute it, you would be wise to discuss a plan with a market professional prior to taking any action.