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Tuesday, September 12, 2006

7 Reasons For Gold To Move Higher & A Trading Opportunity Based On History

By Yaser Anwar, CSC of Equity Investment Ideas

1. Supply /Demand Conundrum

Global mine production of new gold decreased by more than 5% (the largest decrease in over 60 years), while gold demand rose by more than 7%. As the world of paper money suddenly realizes how vulnerable it is and decides to seek shelter in gold, their simply won't be enough metal to go around at current prices to meet such a demand. In my opinion this one factor alone could propel gold well over $1,000 an ounce in the next 12 months.

2. Unsustainable Debt Structure of the U.S. Government

Over the past five years, the level of trade and government debt has soared. The debt now exceeds the accumulated debt of the previous 220 years of American History. This scenario will continue to worsen and only put further pressure on the dollar which will in turn convince more and more people to move into gold to protect their savings and hard work of a lifetime.

3. Growing Uncertainty about the World's Geopolitical Situation

The current wars and rumors of wars scenario that are in unfolding worldwide appears to be getting much worse. This in turn is driving more safe haven buying. A look down the list of current geopolitical uncertainty is one daunting list. How long can America last without being tainted by its affects? Again, more and more people are starting to move into gold for protection against such risk. It would be hard to imagine that things will suddenly get better on this front, especially now that it looks like countries are scrambling to secure oil interests.

4. Increased Central Bank Buying

Central banks of the world have been net sellers of the noble metal for literally two decades. This has recently changed and we have switched to a net buying situation amongst the world's central banks. This will put a lot of pressure on the physical metal price this fall and into the next few years. Look for major new buyers to come into the market in force this fall and early 2007.

** As I reported last week, "Chinese economists want to quadruple the country's gold reserves! Economists want to increase China's gold reserves so those reserves account for 3% to 5% of the foreign exchange reserves, that translates to about 2,500 tons!"

5. Increased Retail Buying

The 1.3 billion Chinese citizens that can now own physical precious metals are also starting to buy as a result of their government educating them about the risks of fiat currencies, particularly the dollar, which looks like it is in for a major devaluation. This amount of retail buying from China and elsewhere could really be a big factor moving forward.

6. The Pathetic Outlook for the U.S. dollar

Growing concern about the dollar in financial markets and among smart money investors is increasing dramatically. This concern stems mostly from the debt, trade imbalances and foreigners not wanting to purchase any more U.S. paper. The biggest supporters of our debt the past twenty years have recently begun to fade. They see the writing on the wall for the U.S. dollar and simply want to diversify away from dollar risk. Could the U.S. lose it benchmark currency status? Most definitely. And again this is very good for gold.

**As I mentioned last week, "The central banks continue to tighten policy, so their absorption of U.S. Treasuries is slowing. When foreign investors fail to absorb the Treasury securities needed to finance U.S. government deficits, those Treasuries are forced into the hands of U.S. investors instead."

7. Gold is Moving Higher Against all Major Currencies

While gold is priced in U.S. dollar terms, a real bullish signal is that gold is now moving higher against all major currencies. So if people thought that they would switch out of the dollar and into another currency, it looks like they will only be frustrated. It now appears that gold is becoming money once again and offering investors protection as the safest money known to mankind. This trend is growing amongst the sophisticated investor class and the average Joe on the street.

** This diversification will undoubtedly put a severe downward pressure on the U.S. dollar and cause gold prices to increase.

This report by Greg McCoach resembles my last Friday's post + some additional points.

Based on Gold's trading history I found that:

In 71% of the occasions since 1975 gold increased during September, posting increases of 2.2% (median) and 3.4% (mean) during the month.

Interestingly, September's median performance was greater than the median increased between September and the end of the year (2.2% and 1.7% respectively) while the mean performance for September to December of 4.7% was not much larger than the mean performance of September.

There may be a further seasonal buying opportunity later in the year in late Nov / early Dec ahead of a strong rally into the year-end, perhaps due to window dressing.

I always like to trade the gold futures due to its volatility, however, you can also benefit by trading the exchange-traded funds GLD & IAU.

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