A Melman Minute — December 31, 2010
| By | Leonard Melman |
|---|---|
| Date | December 31, 2010 |
ANNUAL FORECAST for 2011
In a few hours, the New Year of 2011 will be upon us and it is time to take our annual look forward and estimate where prices for the world's monetary precious metals, gold and silver, might be headed. Since many also regard platinum as a de facto monetary precious metal, we will also include that valuable item in our forecast as well.
First, it might be appropriate to review our forecast for 2010, issued in our "Melman Minute" of December 30, 2009 and see how things worked out. Here are the salient points we made:
"Accordingly, the question we must ask when looking forward into 2010 and beyond is whether the future economic outlook would justify the expectation that the public's faith in Keynesian remedies will at long last be shattered. Looking forward then, what we anticipate is a modest economic recovery during the first half of 2010, accompanied by a small reduction in unemployment. This recovery does not appear to us to be long-lasting and, in our opinion, we see a much weaker economic performance in the second half of 2010, which will then bring about another increase in government programs to stimulate economic activity, finally leading to growing pressures on inflation, interest rate increases and additional U.S. Dollar weakness.
Having learned to proceed with some skepticism regarding the public's interpretation of events, we offer the following forecasts for the coming year:
Gold - $1,500 per ounce reached late in the year,
Silver - $27.50 per ounce, also late in the year,
Platinum - $1,800 per ounce driven primarily by first half economic strength."
Overall, we are well pleased with the outcome of that forecast. In point of fact, gold has made a recent high near $1,435, silver's recent peak is about $30.70 and platinum's high during 2010 has been $1,811!
When we look forward into 2011, it seems that while continuing economic problems such as housing and unemployment, growing inflationary threats and the possibility of major interest rate increases will indeed be important considerations, it appears to us that the dominant force will be two sides of the same coin.
The first side of that coin we believe will be an accelerating loss of faith by the general public in the ability of governments to manage the world's economies. This we believe will include a growing consensus that Keynesian remedies (direct and sometimes aggressive intervention by government into economic structures) will no longer work, if they ever truly did.
The second side of that coin, we believe, is that increasing numbers of people, having lost faith in government remedies to protect currency values and economic structures, will turn to the monetary precious metals and other tangible items in order to preserve asset values. As noted in our recent "Melman Minutes" of December 28 and 29, we believe the fires of both tangible and food inflation are glowing ever-stronger, but in our opinion, it is this anticipation of loss of faith in government's ability to manage monetary matters that will provide the major stimulus for the precious metals
Accordingly, we come up with these predictions for the high prices of all three metals during the coming year, with their peaks all arriving late in 2011:
Gold - $1,850
Silver - $40.00
Platinum - $2,300
As we noted last year, "we shall see."
(We also note that this forecast is offered for information purposes only. Investment decisions should only be made following prior consultation with registered investment professionals.)
As long-term readers know, we rely heavily on charts in our analyses here at "The Melman Report." The reason for that reliance is simple. Charts tell us what investors and analysts are actually doing with their funds while public statements from government leaders, banks, mutual fund promoters and so forth are only words. We would much rather rely on deeds than words, and therefore chart activity indeed serves as an important guideline for those analyses.
One of our favorite charts is for "Dr. Copper", so named because copper is a vital component of many major manufactured items and therefore it frequently reflects physical demand/supply trends with a high degree of accuracy. What Dr. Copper is showing us in the present time frame can easily be interpreted as growing demand pressures.
The 20-year chart clearly shows that copper is now breaking out into historic high areas and this morning's price peak near $4.43 per pound is the highest quote ever recorded. The rally from the late-2008 low near $1.20 has been powerful and the great question remains where copper's price will head going forward.
In our opinion, the strong rally since late 2008 has had two components. First, there is continued industrial growth in several major economies, including Brazil, Russia, India, and China ("BRIC"), thereby increasing the physical demand for copper. Second, we also believe there is a growing demand stemming from the desire to convert depreciable fiat currencies into "things" which can be stored and base metals, particularly including copper, fall into that category.
Reliable figures which would be able to distinguish between the two differing demand sources are difficult to come by, so we must categorize the above considerations as "assumptions", but in our opinion they appear valid and likely to increase in importance with the passage of time as monetary crises such as the possible failure of several European national economies continue to make headlines.
As of 9:15 AM PST, metals prices are advancing across the board. Gold is up to near $1,420 and silver had just made a 3-decade high just under $31.00 per ounce. Platinum and palladium are rising as well and in the base metals copper, nickel, aluminum, lead and zinc are all stronger. Not surprisingly, mining share indexes are also gaining, as if the price of the petroleum complex, with crude oil rebounding smartly from recent selling. The US Dollar is dropping in currency markets while long-term interest rates have also fallen sharply. Financial markets in Canada and the USA are marginally higher.
All quotes US$ unless otherwise noted.
Next Melman Minute scheduled for Monday, January 2, 2011.