Gold consolidating

In the coming weeks I suspect gold will consolidate in USD terms, but expect the signs of a weaker global economy to feed into lower currencies for commodity producing currencies like the AUD, CAN, BZL, etc. The implication is that precious metal (gold, silver, platinum) prices will be strong in local currency terms. So I am expecting stronger gold stocks despite some consolidation in gold prices. I also this this week gold stocks will loose ground because of general weakness in the overall market.
In the chart below I am suggesting the gold price is in the formative stages of a 'flag structure', the implication of which is - when the wedge is closed, we are going to see a $80/oz increase in gold prices. For the unhedged gold producer, tha equates to around 10-20% increase in earnings. So I'm looking for $US940-950/oz gold price in the next 6 months, and likely $A1100-1150/oz in Australian dollar terms.

Copper prices break support

Copper prices have fallen to $3.12/lb, breaking an important support at $3.20/lb. The positive news is that we have a Fed meeting on Thursday, and if there is a Fed rate cut, that might be enough to support the market. So we might see a recovery. Spot prices will under or overshoot, so it would be worth waiting for that confirmation of market direction.

Gold plummets 4.6% overnight

Last night we were reminded of the small size of the gold market is, as it was dumped by financial institutions. The gold price fell $US37/oz or 4.6% to $US792/oz, having just risen short of $US850/oz. I guess no one is more surprised than Frank McGhee, head precious metals trader at Integrated Brokerage Services in Chicago. He told Reuters "I would be very surprised to see it penetrate much below the $800 level". I am too Frank....I am too.

The reason why I am surprised is that tensions in the Middle East are still high, but then there are a number of negatives:

1. Carry trade being unwound by rising USD

2. The gold price was retracing from a major resistance of $US850

3. Gold is a very small market traded by institutions

4. Falling oil price - it fall $2.70/barrel overnight to $93.62. Not so significant.

5. The rise in gold price was quiet rapid so any retracement was going to be as well

But like Frank I was surprised that gold fell below $US800/oz, and I'd be surprised if it falls back further given the Iran situation. Mind you I dont see the Iran issue flaring beyond a few bunker-busting missile hits on nuclear installations in Iran. However the risk upside should lift gold. In the short term, maybe there wasn't enough concern there to lift gold, and it was just technical trading.

Looking at the charts its not so surprising that gold fell off from a major support, and perhaps its more the fact that equity markets were coming under pressure at the same time and were sold into to cover losses elsewhere. Market liquidation hurts all markets. For this reason, without any solid support for gold (Middle East tensions and an interest rate cut), I think gold will continue to fall as long as the larger equity markets are being sold. More importantly, the sell off may in fact be a symptom of forthcoming hedge fund losses. This is the biggest sell-off of precious metals since June 2006 when futures fell 7.6%.
At some point equity markets are going to price in some inflation into their earnings multiples (PERs). When this occurs we can expect a significant fall in equities and, and I think it will flow through to gold until that inflationary expctation becomes a market reality. At that point we will see a stellar performance from gold.

Technical Analysis

The chart of the Dow Jones below shows that gold is close to the major 12800 point support that it fell to in Aug-07 sub-prime related sell-down. On Thursday we are due for another interest rate setting by the Federal Reserve. It seems more than likely that there will be another Fed cut at that meeting. This will prove negative for the USD, but you would think positive for gold and equity markets. It should keep the Dow above the 12800-point support a little longer. But after a big fall in gold, I dont see a rapid recovery in gold. More likely a more gradual decline to the major $740 support, then I think we are in for a more significant rally than the last.

In the chart below we can see that gold was sold off within a fraction of the $850/oz resistance reached in Jan 1980. That last red candle is an engulfing candle, suggesting that gold has parred back all the gains of the previous week, and is a sign of further weakness. I dont see any significant support until the $740/oz level, suggesting there are significant falls in gold coming. I think that support will prove to be a very solid one, and I dont see a fall to $US700/oz.

So we might be looking at a post-Xmas rally in gold stocks, but until then I suggest growth-related stocks look more promising as equity markets go for another rally. But at some point inflation and risk premiums will be priced into markets.

Gold vulnerable for short term sell off

Gold has rallied to $845/oz overnight, but was sold back to $833/oz. This of course reflects the fact that gold is a relatively small market, and for that reason institutions were short-term selling before gold reached the $850/oz peak (resistance) reached in Jan 1980.
Well of late I lost a HDD due to a computer virus, so I've not made posts, but just to backtrack a bit. Gold is going to offer a stella performance for several reasons:
1. Strong Rand - South Africa produces most of the world's gold. the problem is, as gold prices go up, so does the Rand, and significantly so because of the huge reliance they have on precious metals (gold & platinoid metals).
2. Subdued growth in gold
3. Growing inflationary expectations - there is a fallacy that you can avoid inflation by suppressing demand. This is nonsense. Inflation is a monetary phenomena, not a demand issue.
4. Tensions in the Middle East - Iran will push the US to military action then back down
5. Outlook of low yields - real interest rates since we have a Fed cutting rates when inflation is stronger

It never ceases to amaze me the lack of appreciation people have for the speculative demand for gold. They look at Indian jewellery demand and think its significant. Basically what drives the gold market is speculation - at least in the times when it warants interest. Of course if there is no monetary concern, then gold is subdued. In those instances it trades as a 'physical commodity'. But when the value of money is being eroded or the asset bubble is in question, people and institutions flock to gold....a market the size of 2 Microsoft's. Its minute compared to the markets from which people are divesting, giving gold alot of upside. So though gold was sold off, dont expect it to stop. I suspect even gold shares might be bouyed by the outlook despite the late sell-off.



Finally a comment about Iran.
The reason that the Iran situation is good for gold is because there are signs that Iran is escalating the conflict over nuclear weapons. Ali Larijani, the chief negotiator for Iran's nuclear project, has resigned after 2 years. Larijani was a close friend of Ali Khamenei, the supreme leader of Iran, though he appears to be at odds with the ayatollah and President Mahmoud Ahmadinejad. I think these 2 idiots are hoping to milk the US conflict for all they can get. Think about it – they are oil exporters and they probably have a stock of gold. President Ahmadinejad is very unpopular on economic policy, so clearly he has learned from the Bush-Blair-Howard team on how to win votes. President Ahmadinejad displaced the reform-minded candidate in the 2005 election. Polls suggest Ahmadinejad has lost half his support base. The president's term ends in 2009.
The replacement as chief of the National Security Council is Saeed Jalili, who supports the president. Interesting 183 of the 290 member parliament praised Larijani, suggesting most of the parliament is against this policy.
The president's term ends in 2009. Perhaps they hope to get greater concessions by pushing the US to war, as well as gaining more support in Iran (‘read anti-US sentiment’), or are they trying to ensure the president is replaced by another hardliner? I think they will continue to push until the US does drop bombs because they want to fuel US resentment. A few Iran lives means nothing to them.