Sterling Weekly for December 12th, 2005

The Federal Reserve Board raised short term interest rates again 1/4% yesterday to bring the Fed Funds rate to 4.25%. By all indications the overall economy remains strong, despite the gloom & doom bantered about by various pessimists who seek opportunity by greater fear in other. A recent article by Brian S. Wesbury in the Wall Street Journal on Friday December 2nd titled "Pouting Pundits of Pessimism." page A10 of my copy of the paper addressed this sentiment. A copy of which can be read (here.) Well this has relevance because I was lucky enough to go to the Falcon's game Monday night and see them play the New Orleans' Saints. During which there were 2 interesting conversations.

The first was with one of the members of our group, Chris, who has his own money management firm. We were discussing where the Dow would go over the course of the next year or so. Well Chris took the pessimistic view and assured me that the Dow was headed towards 8,000 and I being the optimist that I am said it was going to 12,000. Ultimately a bet was offered up, and I thinking it was easy money took it. Here is our bet, I say the Dow is going to 12,000 in 2006 give or take a few months; Chris says it is going to 8,000 before it reaches 12,000. The looser buys the winner dinner at New York Prime in Buckhead. That's Atlanta for those of you who don't live in town. We shall see how it turns out, but personally I haven't lost a bet in a long time and don't plan on doing so anytime soon.

The second conversation of note was with my friend Erich about the direction of the economy and what is going to happen in November of 2006. Once again, hanging with a pessimist. So here is the short and sweet of my prediction. The economy is going to continue to grow at a strong pace and perform well, the Dow Jones Industrial Average will cross the 11,000 mark during the first quarter of the year; and in the late 1st quarter or early 2nd quarter we will see the President hit the road and get back on the political offensive and try to drive the Republicans to victory in 2006. Oh, and the situation in Iraq will continue to improve.

Recently the price of gold has been setting new multi-year trading highs. The current price of gold can be found (here.) The Philadelphia Gold/Silver Index 'XAU' is one of the older sector indices created to track the movement of the price of gold through underlying companies within the gold/silver industry. More specifically; The PHLX Gold&Silver SectorSM (XAU) is a capitalization-weighted index composed of 13 companies involved in the gold and silver mining industry. XAU was set to an initial value of 100 in January 1979; options commenced trading on December 19, 1983. The following companies are components of the index Barrick Gold 'ABX', Agnico Eagle Mines 'AEM', AngloGold Ashanti 'AU', Freeport McMoran Copper 'FCX', Gold Fields 'GFI', Goldcorp. 'GG', Glamis Gold 'GLG', Harmony Gold Mining 'HMY', Kinross Gold 'KGC', Meridian Gold 'MDG', Newmont Mining Corp. 'NEM', Pan American Silver 'PAAS', and Placer Dome 'PDG'. The chart pattern of nearly every company within this index is a near mirror of the chart of the 'XAU' posted below. I've actually posted a 3 day, longer term chart in order to show the long term cup pattern that has formed. Measuring the size of the pattern leads me to forecast a continuing movement upwards to the 145-150 level for the XAU, or about a gain of 20% from the current levels. So what does that mean for the price of gold and the components of the index. Well we will probably see gold somewhere north of $600 an ounce, but $700 might be a little out of reach.