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Note: For readers not familiar with the concept of our “Melmania” section,
this is where your editor can take any subject and develop arguments regarding
some ultimate conclusions. Since some of those conclusions might sound
extremely radical, the name of “Melmania” seems appropriate.
“Once again, we are relatively pleased with the way our annual forecast
regarding the precious metals has turned out. As long-term readers may recall,
our forecast highs for the year 2006 for the major precious metals were:
Gold - - - - $750
Silver - - - $15.00
Platinum- - $1,400
The actual highs respectively were $730, $15.10 and $1,380. However, we must
note that while our price predictions were close to spot on, our timing was off
as we expected the metals to peak late in the year, rather than the month of May
when those highs were actually achieved.
When we look forward to 2007, we find indications of potentially serious
troubles in several directions as noted below, but no topic concerns us as
greatly as the international scene. We believe that many areas of the globe are
moving toward rising levels of potential or real instability. Recently
developments would appear to confirm our deep concerns.
INTERNATIONAL
IRAQ - The situation appears to be unraveling, virtually day by day. Reports of
massacres involving dozens or even hundreds of victims assail us regularly.
Iraq’s new national assembly has proven itself to be ineffective in quelling
violence between Sunni and Shiite Muslim sects and in one recent day, over 200
Iraqis died in car-bomb incidents. And, while sectarian violence seems to be on
the increase, America gives every indication of pulling out, leaving that
troubled nation to its fate.
LEBANON - Sunni vs. Shiite violence has erupted in once-peaceful Lebanon at the
Shiite-led Hezbollah movement continues its efforts to overthrown the Sunni-led
government of Prime Minister Siniora. Hundreds of thousands of Hezbollah
supporters have flooded Beirut’s streets and gunfire between the two factions
has broken out. Siniora, openly fearful of assassination, has ordered the
government offices to be encircled by heavily-armed troops.
MEXICO - Despite the fact that Mexico’s election took place many weeks ago and
Felipe Calderon’s National Action Party (PAN) won a close victory, the leftist
side, led by Presidential candidate Manuel Lopez Abrador, refuses to concede.
During Calderon’s swearing-in ceremony, Obrador supporters surrounded the
legislative buildings and Calderon had to sneak in through a back door for the
ceremony to take place. Obrador’s supporters vow to continue resistance and, in
addition, Oaxaca State in southern Mexico has become virtually ungovernable
thanks to mammoth demonstrations by public service unions.
ECUADOR and VENEZUELA - Both nations now have sworn enemies of capitalism and
the United States as their leaders. Venezuela’s Hugo Chavez won re-election by a
huge margin and immediately began to contemplate putting forward a measure to
allow him to be elected President for life (it is already illegal to criticize
the President) and, in his victory statement, the L. A. Times reported that he
pledged to, “...deepen his efforts to transform Venezuela into a socialist
society.” In Ecuador, the Wall Street Journal reported newly-elected President
Rafael Correa promised to, “...remake his oil-rich Andean nation by repudiating
debt, dissolving (Ecuadorian) Congress and rewriting the (Ecuadorian)
constitution.”
And so it goes, with each of these nations providing troubling signs looking
forward, not to mention civil unrest in Nigeria and growing nuclear threats in
Iran and North Korea.
US DOLLAR
One of the signal events of the past month was an indication by China that they
were considering diversifying some of their trillion-dollar greenback holdings
away from the American currency. This news was added to growing concerns about
the build up of staggering numbers of greenbacks in foreign hands thanks to huge
balance of trade deficits, budgetary deficits and the cost of importing enormous
quantities of petroleum into America.
The U.S. Dollar Index fell sharply between late October and early December from
near 87 to 82 before rallying slightly. Commenting to the Wall Street Journal
regarding recent economic data, John McCarthy, Director of foreign exchange for
ING Capital Markets noted, “...The data haven’t been very good for the dollar.
You get the sense that anybody who was long the dollar was saying ‘get me out.’”
Other analysts noted that the U.S. government may be forced to cut interest
rates to stimulate the faltering economy while Asian and European nations were
raising theirs.
Former Fed Chairman Alan Greenspan, addressing an international financial
gathering in Tel Aviv by satellite from Washington, expressed concern that
several OPEC nations were beginning to switch their holdings out of dollar and
into both euros and yen and he also forecast that the dollar would remain in
trouble until the US solved its balance of trade deficit problems.
CHINA and INDIA
Those who have been forecasting imminent slowdown in either or both of these
emerging giant nations continue to be proven wrong. Economic growth in both
nations continues at a high level and their demand for raw materials of all
sorts appears to be virtually insatiable, providing strong support for base and
precious metals.
India has been reporting exceptional economic numbers of late with their third
quarter GDP advancing by 9.2% over the previous year, up from a rate of 8.9% the
previous quarter. As a result of this economic activity, an array of
international financial service firms are racing to participate in India’s
rising securities markets and Bombay’s stock index, the “Sensex 30” has soared
from near 3,000 in 2003 to almost 14,000 in late 2006.
China continues to amaze observers with their own relentless expansion. As their
international assets exceed one trillion dollars and their markets absorb
ever-escalating increments of many nations natural resource production, China’s
political influence is also growing apace and many Chinese scholars are now
openly talking about the day when China’s influence will equal or exceed that of
the United States. China has advanced from the world’s eleventh largest economy
in 1990 to the sixth largest in 2000 to the fourth largest by 2005 - and the
trend continues upward.
FORECAST
Putting this information together, we conclude that the coming year of 2007
could hold explosive growth for the precious metals as the probability of an
international ‘accident’ rises, as the dollar comes under increasing pressure
and as the fundamental demand for resources of all types from India and China
plus other developing nations grows relentlessly. Accordingly, we offer the
following forecasts, knowing only too well that markets are fully capable of
making us all eat our words from time to time.
We see gold rising during the first quarter to challenge the 2006 high near
$730, some sideways trading in that area, and then a move sharply higher late in
the year as events combine to send financial markets into a high level of
concern for both economic and political stability. Our specific forecast is for
gold to reach a price of $900 per ounce before year-end 2007.
For similar reasons, we call for silver to reach the $18.00 level and for
platinum to trade close to $1,500 by the end of the coming year.
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