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Gold Outlook for 2006

Following are the excerpts from Peter Grandich's Outlook for 2006
Gold
• Physical and investment demand –
According to the World Gold Council (WGC), demand for gold coins, bars and bullion-backed shares rose 56 percent in the third quarter of 2005. Investors and jewelers bought $12.5 billion worth in gold, or 838 metric tons in the third quarter, up 7.6 percent from a year earlier. (Jewelry demand accounts for 73 percent of gold consumption). The rapidly growing economies in China and India have been key and while soft patches are likely going forward, the enormous wealth creation on-going there appears to assure strong demand for gold for the foreseeable future.
Debt, deficits and the #1 crisis in America
I believe the debt and deficit crisis has been one of the least talked about, but one of the major reasons why gold has performed so well. I’ve spoken to many sophisticated foreign investors and one of their core concerns is the out-of-control fiscal house of our government and many of our citizens. By 1980, U.S. public debt reached one trillion dollars--191 years after we first started keeping records (note that 1980 witnessed the last great run-up in gold prices). Now, just 25 years later, it’s on the threshold of $8 trillion. In 1980, each American’s share of the debt was $4,405. It’s now $26,700.
Bottomline –
Taking in all the above and throw in the belief the U.S. dollar can renew its long-term downtrend and eventually break below 80 on the U.S. Dollar Index (more below), I believe gold has all the underpinnings to make former multi-decade resistance around $500 the new floor and a test of at least $600 in 2006 is quite possible.

U.S. Dollar Index -
While an argument can be made that the U.S. Dollar Index has made a bottom technically, my interpretation is it must get above 95 in order to reverse its downtrend from the 120 area. This time last year, people were tripping over themselves to declare the dollar dead. In addition, the U.S. government for 2005 only, allowed U.S. corporations to repatriate dollars that were overseas and this combined with the Fed’s raising of interest rates allowed IMHO a counter-trend rally to occur. I’m looking for the neckline above 92 to hold and a resumption of the downtrend in the second half of 2006 to take place.

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