Predicting a "Severe Bull Market" for Gold

Source: The Gold Report  10/07/2008

Seeing beyond the blind curves of bailouts and meltdowns takes the keen vision of a veteran market observer, Roger Wiegand, Editor of Trader Tracks. In this exclusive interview with The Gold Report, Wiegand predicts a “severe bull market” for gold that will include both juniors and seniors. He advises selective buying and names several of his favorites.

The Gold Report: When we spoke in mid-July, at the height of the market, you predicted a major downward correction.

Roger Wiegand: The call was pretty accurate, although the oversell was surprisingly deep. The reason was the hedge funds had gotten into a position where they had to raise cash as crude oil was starting to sell with speed. Oil was a dominant part of their investment. When the price of crude oil fell swiftly, funds were forced to sell everything to cover investor redemptions. Now we’re at the bottom again, and prices are basing and moving up.

The bigger question is when will things turn around? When oil was being sold, it was sold in a basket of commodities, which in those funds all component markets were long only. As oil sold back to critical price levels, funds by their rules were forced to redeem millions of dollars after just five days’ notice. With several of these funds being in the same dilemma, selling was massive and quite fast. Keep in mind the commodity selling basket included, crude oil, natural gas, gold, silver, sugar, grains and other commodity markets. This hurt prices across the board in all of these sectors, including the CRB Commodities Index.

Gold and silver shares, along with physical metals, were wounded pretty badly in that down draft so it usually takes an extra 90-day quarter to get back on track. I believe shares will recover and some have already. The XAU and HUI look pretty good but aren’t nearly as high as they should be. Gold and silver shares should resume new rallies in January, February, and March.

One of the big problems hitting a lot of juniors today is the inability to raise cash. Some are going to go out of business. Those that have cash, are operating new mines, or hold reserves in locations near senior miners like Hecla Mining (HL) and Newmont Mining (NYSE: NEM) , can probably be acquired. The other shock is inflation, which is going to become much worse. Any miners operating costs are extremely high relative to where they were only one to three years ago. Many are producing at an operating cost of $400 to $600 per ounce. Not long ago, these higher costs were $75 to $200. With our gold price near $850 they can’t make much money.

Silver miners are under even more of a cost squeeze. Inflation will keep driving mining costs up. But I think the price of gold and silver will also rise. With global credit conditions and the stock markets in serious trouble, gold will not be denied. On October 6, we had a major markets’ selling day worldwide. Gold was the only rally sector on that day. Our technical analysis reveals a larger, major gold breakout is imminent. Will the Plunge Protection Team sell gold this week as they prop stock index shares? We think they could, although with gold near $850 support, we suggest gold will be let to run and rally until at least 1040 resistance. Should gold breakout above 1040 into new and higher territory, we should expect some deliberate bullion bank shorting to stop a runaway gold price. Correspondingly, the interventionists would be buying S&P’s to prop main stream shares.