Gold and the Protection Team

02/24/2006 12:00 am EST

Focus:

Harry Schultz

Editor, International Harry Schultz Letter

Harry Schultz is internationally known for his no-holds-barred approach to investment commentary. Here, he offers his market outlook, the prospects for gold, some favorite stocks, and the "conspiracy theory" known as "the plunge protection team."

"My 2006 outlook suggests that US interest rates stop rising in the first half and then resume rising in the fourth quarter. Oil will go to new highs and the US dollar will resume its bear market in the second half. Gold shoots past $600 en route to $900. US stocks will rise in the first half and fall in the second half. Japan will be the best market performer in 2006. Worldwide markets will inch higher but hit a double top on their charts in the second half, and then probably decline. The rally is now three years old, which is older than average for bull markets.

"Emotions aside, not a lot has really happened to the gold price since mid-January. Gold rose to new multi-decade highs, then fell sharply. But the mood and perception of gold changed, as a result of breaking new high ground—which caught the public’s attention. Was the price drop caused by being over-touted in the media and by the gold market being overbought? Yes. But we also believe that the price drop was due in part to price fixers.

"To understand this, one must be aware of the so-called Plunge Protection Team, or PPT, which subsidizes the US stock market when it sags to a major chart support area. This is done to keep the market from breaking important support areas, lest weakened public confidence cause a crash. In the case of gold, the PPT influences the price of the metal. They know when a market is technically oversold or overbought. So they know when to place their bets. They also know when gold has risen to an overbought level, so they sell it short.

"They usually make money on this type of maneuvering. For example, after supporting the S&P at a time when they want to protect against a market decline, they can soon sell the stock index that they subsidized. Why? Because the market carries stocks up from where they bought S&P futures, since others pile in when they see the bulk buying. They also usually make money on their gold shorts, by buying back after substantial falls.

"The bottom line is that markets are now controlled by speculators, including hedge funds, at the margin. They ascertain how far gold (or any such market) can rise before they decide it’s overbought and they sell it and short it. That action then carries on via momentum. That’s how professional speculators and hedge funds make their living. In addition, the government along with the PPT prevents markets from having healthy adjustments, which correct inefficiencies. It’s yet another reason why investors have to trade the markets today rather than holding and trusting markets to behave by rules of former times.

"Overall, we’re in a major gold bull market, thanks to excessive bank and government credit & money creation, as well as government deficits. Paper (fiat) money is in a systemic decline; hard assets/metals are in the ascendancy. This correction in gold prices, in my opinion, will be of no importance except to allow the market to work off its oversold condition. Could it fall further? Markets can do what they like, but there’s technical gold support at 540, 530, 500, 490, 480, and the ultimate support at 460.

"Further, there are people in the wings waiting to buy, along with bargain hunters who will try to second-guess the market. I think 530-540 is the most likely low. For gold, $600 is our next target, then $900, on the way to $2,000. But you won’t enjoy the ride via a buy & hold strategy. They will freak you out with their vicious mini crashes. Stop loss orders aren’t the answer either. Preemptive profit taking is the way to win, which calls for constant selling and buying back.

"Our model portfolio currently holds a number of junior metals and mining related recommendations in Canada including: Endeavour Silver (CA:EDR Toronto), with a stop at 2.05; Energy Metals (CA:EMC Vancouver), with a stop on a one day close under 3.08; Greystar Resources  (CA:GSL Toronto), with a stop at 5.98; UEX Corp. (CA:UEX Toronto), with a stop on a one day on a close under 3.48; Wealth Minerals (CA:WML Vancouver) with a stop at 1.26; and Western Prospector (CA:WNP Vancouver), with a stop at 3.80.

"Outside of the mining sector, our top picks of the month feature one long and one short idea. On the long side, Fording Canadian Coal (FDG NYSE) is forming a possible symmetrical triangle pattern. Technically, this makes the stock a buy on a one-day close over 42.35. We suggest a stop on a one-day close below 36.50. On the short-side, we like First Financial Bancorp (FFBC NASDAQ), in the finance and savings & loan sector. The stock broke below one-year head & shoulders top. Sell short at markets or if rallies to 17.20. Set a stop at 18.80.

"Among our other stock ideas, we like Openwave Systems (OPWV NASDAQ), which is involved in software and services for the telecom industry. The stock rose above a reverse head & shoulders base. Buy if it dips to 21.05 and/or 19.50; stop on a one-day close below 17.80. Standard Microsystems (SMSC NASDAQ) is involved in semiconductor manufacturing. The stock rose above a symmetrical triangle. Buy at market or on dips to 32.05. Set a stop on a one-day close below 29.10."

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