Don’t Miss the January Metals Rally

01/09/2012 12:20 pm EST

Focus: COMMODITIES

Andy Waldock

Founder, Commodity & Derivative Advisors

Political and economic factors coupled with a decidedly bullish sentiment shift among commercial traders could propel gold and silver out of their recent ranges and as much as 5% higher in very short order.

The turn of the calendar leads to reflections and predictions for the coming year. Economists and investment advisors typically use this as an opportunity for “shock and awe” in order to gain media attention and increase their capital base through the selling of fear and greed.

Fortunately, there are some fairly impartial and anonymous surveys that take place within our industry, and this year, there appears to be some merit, as well as some action supporting the general thesis of higher precious metal prices through 2012.

We all know about the European Union fears and general deficit issues both domestically and abroad. We’ve written about it extensively, and the general actions and conclusions suggest that much of the debt that has been taken on will be repaid with freshly minted currency and each currency unit printed will be worth slightly less than the preceding one.

The global race to devalue domestic currencies to repay sovereign debt has renewed the purchases of precious metals as a store of monetary value.

A recent Bloomberg survey of 143 analysts forecasts an average gain of 27% in precious metals for 2012. The Professional Numismatists Guild (PNG) survey is far more bullish. Numismatists are coin collectors who trade the bulk metal as bullion. The average of their range of predictions forecasts a 2012 ending price of $48 per ounce for silver and $1,976 for gold.

Market internals heading into the New Year were also supportive of higher prices in the near term. The Commitment of Traders (COT) report shows some significant imbalances and actions being taken in both the gold and silver futures markets.

NEXT: Major Sentiment Shift Among Commercial Traders

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The quantifiable actions of the reported positions and the adjustments they’ve made to start the year carry far more weight than the conjecture of the talking heads on TV. Commercial traders have set a new bull record in silver futures, and central bank purchases of gold have soared.

Commercial trader purchases of silver futures totaled 32,950,000 ounces since mid-December. Meanwhile, the recently published report by the World Gold Council shows that the world’s central banks have been buying gold hand over fist. Their gold purchases totaled 148.4 metric tons, which equals 5.234 million ounces of gold.

This is more than the combined annual production of the world’s top five gold mining companies. Total purchases of commercial traders and central banks equals a mind-boggling investment of $8.37 billion worth of gold by central banks and just shy of $100 million worth of silver by commercial traders.

These purchases reflect diversification away from the US dollar and US Treasuries and tie in directly with the shift towards precious metals in 2012 as a hard store of value.

The political wild cards in play make it nearly impossible to trade such volatile markets on an annual time horizon. However, some statistical analysis backs up the projected near-term strength.

Returning to the COT report, we can see that both large and small traders have taken the short side of both the gold and silver trades. The recent and decisive shift towards a bullish stance by the commercial hedgers has most likely set the springs on a bear trap, as projections point to higher gold and silver prices by approximately 5% by the end of January.

This would certainly be enough to force small traders out of their positions, and most large traders as well. Their short covering may provide the lift to get these markets off the ground and out of the sideways channels they’ve been trading in since mid-September. 

By Andy Waldock of Commodity & Derivative Advisors

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