Looking at the continuous charts of silver and gold futures, we see nice upward trends right now taking place in both markets, and I'm bullish these metals from technical and fundamental standpoints as we head into 2007. Gold and silver prices climbed Monday, December 11, 2006, gaining support from a weak dollar ahead of the Federal Reserve's policy meeting taking place today. Market participants widely expect the Federal funds rate to stay steady at 5.25 percent, but we'll have to see what the Fed has to say about the economy and interest rates this afternoon. Commentary from the Fed could impact these and other markets--so stay tuned.

But for now, we see the metals markets have been gaining steam. At the New York Mercantile Exchange Monday, February gold settled up $3.80 at $634.80 an ounce, while March silver gained 13 cents to just over $14 an ounce.

This year has been an historic one for the metals. Remember back in May we saw gold at $732, and silver above $15. Headlines screamed new highs nearly every day. Last spring was an exciting time for these markets, and I think there will be more to come.

Ever since the year's highs were established, these markets have been experiencing a bit of a doldrum period, with some major sell-offs but also prolonged trading ranges. While these markets have been a bit hard to trade, I see a more defined upward trend right now taking place, and I think we should see significant rallies in the near future. Silver in particular is leading the way and showing a stronger trend than gold, in rally mode since about October 4, 2006.

Bullish Factors for Metals

From a technical standpoint, I see a clear trendline in silver, as this market has established a base from early October. The market has hugged its 21-day moving average on its way higher, and likewise, the gold market has hugged its 21-day moving average. On weekly charts, the 50-day moving average is holding in gold, while silver is trading above its 50-day moving average. Both markets look sound technically to me.

From a fundamental standpoint, we've seen weakness in the U.S. dollar due to further anticipation of interest rate differentials between the US and Europe. The U.S. Dollar Index futures broke major support areas as the dollar slumped to a 20-month low against the euro in recent days. The dollar tends to have an inverse relationship with gold and silver; there is a fairly high correlation between the dollar and previous metals and I see the dollar's weakness likely to further the advance in metals that began this fall.

The euro took out major resistance at 1.3000 on November 24, 2006, after struggling for months in a range. There were a significant number of stops that helped fuel the rally further, and that old resistance level is now acting as support traders are watching. It's currently trading around 1.3300. As the dollar trades typically inverse to the euro, on November 24, we saw the U.S. Dollar Index futures break down. Part of the reason for this action has been tied to interest rate differentials between the U.S. and Europe-the European Central Bank is raising its interest rate while the U.S. stands pat, and talk even is circulating about possible cuts next year.

Former Fed Chairman Alan Greenspan made some public comments about the dollar Monday, spurring a dollar decline. He said he expects the U.S. dollar to decline even further, perhaps for years. When Greenspan talks, apparently, the markets still listen. Foreign countries, including the oil producing nations, are also reportedly shifting away from the dollar and into the yen and euro.

As investors shift away from the dollar, they tend to gravitate toward other safe-haven investments such as gold and silver. I do think metals traders should be watching the dollar and euro, as well as crude oil, as rally in crude can also trigger the metals.

I can see silver fairly easily back up to $15 in the first quarter 2007, which isn't far from its current level. Gold is lagging a bit to silver, but my target for the yellow metal is back up to $700.

Trade Ideas

Right now, I'm recommending buying call options in gold and silver. In particular, the April gold calls and vertical bull call spreads in the silver are viable strategies. The reason I am recommending vertical bull call spreads in silver is because silver options can be very expensive, they have a lot of premium due to their high degree of volatility. Silver can be a little dicey to trade given its volatile nature, so please employ the proper risk management techniques, and work with a professional if you need extra advice.

I also think investors can participate via futures, whether it's in the full-size or the mini contracts, based on your account size and risk tolerance. Silver offers more bang for your buck, I believe, but both are great markets. The timing is right now for metals to shine.

Please feel free to call me at 800-355-5757 or contact me via email at bkim@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.

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