Hitler gets a margin call

Sorry all, busy buying a house in NZ. In the interim check this out.

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Andrew Sheldon www.sheldonthinks.com

Oil prices appear fallen back to almost $60/barrel, which is support based on the long term uptrend that started life in early 1999. Since that time oil prices rose 1400%. Having gone from oversold to overbought, you might wonder whether they are going back to oversold. Well I would suggest they are, but not in any currency measure you will fathom. The goal posts will keep shifting.

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Andrew Sheldon www.sheldonthinks.com

Gold-oil ratio suggests gold prices going to double

Another historic indicator of gold and oil prices is the gold-oil ratio. Basically this ratio measures the amount of gold that one could buy with a barrel of oil, or vice versa.
We can see that the ratio is currently 10, though in the past its been on a trend which would see it valued at 20 at least. This chart is interesting because it poses more questions than it answers. Note that it extends back 170 years, back to the time when they started producing oil. If we accept that the ratio is going to 20 (and that is conservative), then we are looking at oil prices of $30/barrel or gold prices of around $1500/oz. Of course there could be some comprise on both commodities, or the central banks can play with their funny money more, so that in nominal terms both commodities rise. It will not change anything, gold will out-perform energy by a factor of 2:1 for this trend to stay true. I don't see oil prices weakening any further, but I will take a look at oil prices to convince myself.

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Andrew Sheldon www.sheldonthinks.com

Latest gold price outlook - Oct 2008

This is my latest revised price forecast for the gold price in $US terms based on the historically important Dow-gold price ratio. This index has a history extending back 110 years, and it shows a nice correlation with the Dow Jones Index.




There is of course a reason why the gold price has an inverse correlation with the Dow Jones. Gold is a real asset, and the Dow Jones is an index of real assets (i.e. companies) measures in terms of paper currency. The price of those assets in terms of paper depends ultimately on how much paper is created to support nominal asset prices. Asset prices are currently falling. I believe that the Dow Jones will find support aroung 7500 points, from which point it is likely to recover. Looking at the chart, its apparent that the Dow-gold ratio is repeating a cycle that occurred in the 1920s, the 1960s and now the 2000s. On the last 2 occasions, periods of excess money creating were followed by events which saw the Dow-gold price ratio fall to a value of 4. Assuming that the Dow finds support at 7500, we are looking at a gold price of $1875/oz. But of course the USD will have little value in future, so expect real assets like the Dow index to far exceed these values in USD terms. Its not so much that these asset prices are going down, but that the USD is going to be debased out of existence. The implication is that the Dow and gold price could go far higher still.
This story looks like a conspiracy theory, but on reflection it makes a lot of sense. The naive might believe that this market crisis was sudden and unexpected, but if you had been reading about the role of gold and money in the economy for the last decade, you would know that we have been looking at a crisis for some time. I learned this about a decade ago, though it took me some time to appreciate what would ultimately cause the crisis. If a great many investors knew, you can be sure the US government knows. Afterall they wanted to benefit from it. It might actually be more sordid than you think. Its possible than the US government intentionally borrowed and funded the US deficit with debasing USD with the intent of defaulting or paying them back in worthless paper. Financially cunning to be sure, but not the best policy in global diplomacy. Maybe the US government wants a war with China before they get to powerful. Anyway read up on this claim that the USA is already minting a new USD. To my mind China is involved in this policy because it has benefited from 2 decades of unprecedented industrial expansion. It has brought them closer to the USA, not further apart. Its 2 fascist states looking themselves in the mirror. See http://video.google.com/videoplay?docid=1954933468700958565&hl=es. The story seems far-fetched, but consider that if you were going to debase a current (USD) as the government has been doing, then you would have a plan for overcoming the problem. It makes you wonder why George didn't have a plan for Osama or Katrina. Maybe those issues were not the real issues. When it comes to politics, you have to question everything. These smart-arses really twist perceptions. Its enough to make one turn to conspiracy theories for ones daily news.

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Andrew Sheldon www.sheldonthinks.com

The gold price has fallen back to support levels, though can expect equities to fall further. This however does provide an opportunity for an entry into gold options and bullion.
We can see from the chart that gold has reached the $690/oz support and recovered to the $730s.
Gold in Euro terms is also near support.

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Andrew Sheldon www.sheldonthinks.com

Silver prices reach support

Remember in the 1980s when gold rallied by 800%. Well before it did, the gold price halved. We have seen the same thing happen in silver of late. Silver has fallen back to important support levels, so its set to rally. All that money the Fed has created to re-capitalise the banks is going to prove inflationary in time. The implication then is that we want to hold asset classes which are not over-priced, like gold, silver, rural property, etc.
Silver is currently trading at $9.75/oz, up 33c overnight after halving in last 6 months. This is the time when you should be accumulating silver. You might ask me whether you should be trading Contracts for Difference (CFDs) in these commodities. I see no reason why you shouldn't because if these companies are exposed, your exposure is limited to the money on the table, and that's only 10% of your exposure if you are moderately geared to silver. You can actually gear silver as much as 20x as far as I'm aware, though it will depend on your CFD platform.

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Andrew Sheldon www.sheldonthinks.com

Gold close to support $730-770/oz

I am expecting gold to find support around these levels of $730-770/oz. The price has fallen to a long-term support. There is probably no better time to buy gold than now, though its possible that gold might consolidate in its current trading range for another 4-6 months. The policy of the Obama government will play an important role. I actually don't expect any change from Obama on monetary policy. I think he will be a social reformer intent on increasing taxes on the rich, as well as energy. No surprises there.

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Andrew Sheldon www.sheldonthinks.com

Platinum prices reach a low?

Platinum is of course a precious metal, so its in the same category as gold when it comes to the 'safe havens' of investment. It does have some interesting differences compared to gold though. These are:

1. Small stockpile compared to the vast hoards of gold
2. The greater industrial utility of platinum (arguably)
3. Greater volatility, smaller market, greater liquidity

We need to remember that platinum has performed far better than gold, and as a speculative instrument platinum was bound to be sold off. Car manufacturers would be cutting back of their needs for catalyst materials, so precipitating the price fall. The asset collapse is scaring people. But I suspect we are very close to a turn-around in this metal, and therefore platinum stocks. This metal might even do better than gold. The metal is already back to $950/oz. It has broken its uptrend, so we would be looking for a support. It might be $650/oz. Hard to believe many producers in South Africa could be profitable at those prices given the escalation in mining costs.
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Andrew Sheldon www.sheldonthinks.com

Silver price up 16% overnight, gold up 14%

Gold is looking good. Silver is looking even more spectacular. Silver is trading in a different trend pattern to gold, but equally as promising. Using technical analysis we can see that silver has been very volatile. It pulled back to $10.50/oz, but it has since recovered to $12/oz, up 16% overnight. The reason is clearly due to the debasement of the USD and inflation.
The chart pattern shows that silver has previously made a succession of new higher highs, whilst basing out around the $10.50 support. The next move of course is for silver to rally to a new high.

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Andrew Sheldon www.sheldonthinks.com

Gold going to $US1400/oz in the short term

Wow, I just picked up on something. I was looking for the gold price to fall back to $700-750/oz levels and is did that, but its since recovered to $US864/oz, thats a 11% increase overnight. Seldom do we see such volatility in the gold market, but its actually more significant than that because its actually preserving a certain chart structure that is very bullish for gold.
There appears to be a 'flag' structure developing between $800-1000 levels. The significance of this is that when flags are terminated on the upside, they tend to advance by the same amount as the flag pole. In this case the flag pole is between $400-800 levels, so I am expecting in the next gold rally for gold to break out above $1000/oz and to rally up to around the $1400/oz level. I am expecting it to do that very quickly before pausing. The 11% move I think signals its going to keep going unless we see a pull back overnight. The concern of course is that the USD is being debased at a time when the US will not have the confidence to raise interest rates to fight inflation.

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Andrew Sheldon www.sheldonthinks.com

West Texas Crude Oil price outlook

Well we have been told for a long time that there is no oil shortage; that its speculative trading that is driving oil prices higher. The flipside is that given the current weakness on the (economic) demand side, there is very little to hold oil prices up except the promise of a resurging oil price. Crude prices have for a long time been a very volatile commodity. So where are prices going?
I point will be reached when traders say - it must be time to buy again. Some wind has been taken out of the market, but oil is still the most important commodity on the earth. So when might we expect oil prices to bottom. Well its still a little time off. Certainly we are not returning to the bad old days of the 1990s when commodities were under-appreciated. Oil will trade in a new, higher range. We will not see oil prices return to $9/barrel when there are large emerging markets like China and India around, and a large number of SUVs with a useful life of 15 years.
Oil prices are going back to around $US77.50s, though I would argue traders could take it as low as $70/barrel in volatile intra-day trading. I do however think there will be some resistance on the downside around $97-100/barrel. There are 2 reasons for this:
1. A weaker oil price is likely to give equity markets encouragement
2. People's standard of living expectations will adjust, resulting in an improvement in consumer confidence. Not everyone went out and bought a 2nd house, and speculated on US property. But some people did, and some people did buy at the top, fearing they were going to miss out.
3. Lower oil prices will give consumers more money to go out and spend
Nevertheless I don't see the market fully recovering for a while yet, but I do think the next 6 months will yield some stock bargains, particularly with property foreclosures and commodities. I think the nickel market will be the first to recover, followed by gold. The other metals will likely take a bit more convincing.
So the target price is $US77 level for a bottom in oil prices. This is a strong support having been resistance, though I have some suspicion that oil might fall to $70/barrel in the short term, so there is some reason to be cautious trading that position in order to get the best entry.
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Andrew Sheldon www.sheldonthinks.com

Tin prices remain strong

Tin prices have remained one of the stronger commodities in the market. The reason of course are the solid fundamentals for tin. Supplies of tin are relatively tight, and there is evidently some success by the Indonesian government to rein in illegal mines. But as a traded commodity tin is likely benefiting more from a delayed rally in prices. Being one of the most volatile and illiquid markets, it seems destined to have a correction at some point. I don't see tin prices benefiting from a proposed substitution of lead for tin in ammunition on environmental grounds. Realistically, I don't see this as a huge market, since the dispersion of lead in the soil is small. Also the damage tends to be inflicted on other countries, so I don't see a great deal of support for this proposal, least of all when tin prices are 9x higher than lead.

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Andrew Sheldon www.sheldonthinks.com

Zinc prices support at $1450/tonne

Zinc prices have fallen from a peak of over $4500/tonne to around $1800/tonne. You might wonder whether they have any further to fall. I believe they will at some point fall back to the $1450/tonne support. This level was an important resistance during the ascension of zince prices. The weaker economic outlook paints an unattractive outlook for zinc, but there will be a recovery in zinc demand with a resumption of building demand in the medium to long term.

Expect demand mainly from developing countries, plus Australia in short term, other Western nations in the long term. Australia will come out of this economic weakness faster than any other Western nation because of strong iron and coal prices, and a recovery in food prices. Of course it will also benefit from stronger base metals and gold in the medium term. Nickel and gold will do the best in the short-medium term.
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Andrew Sheldon www.sheldonthinks.com

Copper prices close to support

It will be interesting to see if copper prices hold their current levels in the coming weeks. I have less confidence of that than I do in nickel. Nickel prices have fallen far more, and I think the outlook for building construction and consumer items would have to be more secure than copper use. The dynamics for copper supply are a little tighter though, however I would not be surprised to sell a short term sell off to $5,1oo/tonne. Its a huge fall, so its not a position I would trade. It might well stay above $7,000/tonne. I dont have any empirical evidence to suggest this market will fall, just that its vulnerable. The other reason for caution is the extent of trading in copper as a financial instrument.

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Andrew Sheldon www.sheldonthinks.com

Nickel prices have reached support

Thje nickel market is one of the better commodity exposures you can take, and best of all the market price for nickel has reached low levels. This makes a great period to buy nickel as a commodity exposure, though I would not be surprised if the metal pulls back again to test its support once again, particularly as other metals are still yet to bottom. I would caution that nickel miners will also take some time to shine, even if nickel prices are the first to recover among the base metals.

I don't see downside below the red line on the chart because its a very firm support. There is a number of reasons nickel is good:
1. There are a number of attractive projects to invest in WA
2. The market is set for a good rally
3. Nickel is used in stainless steel, and a recent development is the use of stainless steel in the external and internal facades of most buildings. Buildings being BIG, mean that the intensity of consumption in most countries, but particularly developing countries like China, is really taking off. Of course there is a lot of nickel around as well, but there are supply constraints as well.
4. Its a volatile commodity. Once it falls back to support once more I can see it rallying to $25,000/tonne, previous support acting as resistance. It will reach $33,000/tonne in 2009, and I suggest a few years later it will reach that previous high around $54,500/tonne. I don't see this commodities boom over by any means.
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Andrew Sheldon www.sheldonthinks.com

Gold going to $US720/oz

I have taken a rest from commodities reporting of late. Understandable given the falls. That is no obstacle however if you want to play with put options or futures. I prefer to use CFDs, and its otherwise given me an opportunity to focus on my property activities, the focus of which has been my latest report on the Philippines property market. The more I looked at the Philippines property market, the more I like it. Refer to my 300-page report, the free book chapter or check out the foreclosures.
Back to commodities! Gold has been weak of lately, having falllen from $980/oz to $780/oz. The market gained some confidence at that point and rallied to $840/oz. I think at this point the market is going back down. Weaker commodity markets are of course due to rising interest rates and weaker demand. Appreciate that commodities are not down for good, nor has there been adequate time for us to see the addition of significant capacity. It will be another 7-10 years before the demand is satisfied for a lot of commodities. This has to auger well for the Australian economy particularly. So why are commodities falling? The reason is (i) rising inflation, prompting higher interest rates, (ii) stronger $US, and (iii) weaker global economic outlook,. This all contributes to a weaker speculative appeal of all metals. Commodities are not going back to their 2000 lows. Rather they will establish support at lower highs. For gold that support is $US720/oz for an entry point, however in a volatile market it could go as low as $694. Its not that I have become bearish about gold, its that I think gold is not going to fly until we see the benefits of the next credit expansion. I have thus deferred my prediction for a $2400/oz gold price. The implication of that is that gold is going far higher. The longer things are delayed will just mean a higher gold price.
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Andrew Sheldon www.sheldonthinks.com

Gold consolidating in $900-1000/oz range

Looking at the gold chart its apparent that the gold price is consolidating in the $900-1000/0z range. One can likely expect a base in the next few weeks before moving higher. A move to $1000/oz would suggest a new leg, a convincing break above $1034/oz would confirm it. Regardless its only a matter of time.

Bank bailouts, Iran missile issues, rising inflation will help gold, plus the likely weakness in gold. You might expect some attraction to gold in times of uncertainty, but in this case, I suggest the burden of another 'open-ended' commitment to war in the Middle East might actually shake the USD somewhat.

What will Obama mean to a US conflict with Iran? I dare say that it will mean an extra 1-2 months of appeasement. But Obama will have better fortune getting NATO members on-board. So how far do I think this will go? Iran is engaging in self-righteous chest beating. I think any US action will involve missile attacks on Iran's nuclear infrastructure as well as a takeover of its oil infrastructure. I expect the surprising support for this would come from countries like Japan, which depend on Iran oil, though of course they would never say publicly. The timing for this conflict is interesting. Will Bush commit the US to military action in Iran before a presidential election. I'm not sure of the emergence power provisions in the USA, but I guess the President can suspend any scheduled election in the case of war. One would not expect however Iran to prompt that, but I really don't expect them to be so strategic. But its possible. I think the Democrats would love the Republicans to start the conflict. The US would of course act decisively to gain control of the oil infrastructure. Which means knocking out Iranian air support. I guess Russia has made a lot of money in recent years equipping Iran. Kind of interesting how Russia is no longer the enemy, but its supplies enemies of the USA. Russia gains either way - from weapons supplies or a rebuff to US influence in the region.
If the USA were about to invade Iran you would expect them to encourage Saudi, Russia and other OPEC states to increase oil supplies. We have seen this already. The good news is that a conflict would surely decrease consumer confidence, which would reduce global oil demand. That will not happen overnight, but most countries can store a maximum of 90-days of oil supplies.

But what if this is all chest beating? The Iranian president is among the most unpopular presidents in history. He isn't getting much support for his presidency, mostly because of his poor efforts to improve the Iranian economy. Do Iranians want a fight with the USA. Hardly. In fact they are probably looking more favourably on US efforts in neighbouring countries. Iranian intellectuals are likely wondering whether US intervention will deliver democracy to them. Well good luck with that. Democracy is just a tool for delivering control to diplomatic fascists, which is what they have now. Though one must concede the US-style is so much more palitable, and of course consonant with the Western-lead paradigm. What a pity Iran could not mount an intellectual argument for its opposition to the USA. It would be great if there were such a country. Unfortunately there are only rogue collectivist states. Fascists opposing fascists.

I recall when the Iranian president was elected he was labelled a 'pragmatic reformer'. The reality has been quite the contrary. I guess its all relative. One might ask - if he is pragmatic - might he engage in war-mongering to encourage US intervention. There is no question they hate the USA, but its just possible they hate the controls of the Iranian religious clerics more. Iran needs a revolution since the clerics have authority to override the parliament.

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Andrew Sheldon www.sheldonthinks.com

Gold testing $910/oz

The gold price is testing the $910/0z level. Gold punters will be looking to see if it holds its current uptrend, which despite breaking the previous high, might still remain in a channel. The weekly and monthly chart suggest that gold could fall back as low as $900/oz and still remain in its uptrend.
On the upside we are looking for gold to break convincingly above $950/oz before we might expect it to rally. These decisions usually hang on the wire...all the more reason before the general market sentiment is poor, so I do expect gold will test that $900/oz level, and tread water for a litlte time before it has another rally.

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Andrew Sheldon www.sheldonthinks.com

The outlook for oil - $140/barrel and beyond

People might be interested in my thoughts on oil. Some time ago I forecast that oil would go to $140-150/barrel. Well, now that we are there I am thinking abour what is install now for markets. There are some compelling facts about oil:
1. OPEC member states control more than 50% of supply
2. Russia is actually the largest producer, but it consumes more than Saudi Arabia so it exports less
3. Iraq has the largest 2nd largest oil reserves after Saudi Arabia
4. There is considerable controversy over whether Arab oil reserves are really as large as stated since OPEC discloses very little.
5. Among the fastest growing users of oils are countries like China and India which actually subsidise supplies. I understand that China recently reduces subsidies causing oil prices to rise 10%(?), but this is still far from market pricing
6. Some prospective oil provinces are locked up, preventing oil exploration, eg. Alaska

When I made my forecast of oil I was using a very simple financial model to determine its price outlook. At this point, I want to perform some more detailed analysis. I will offer some advice about where I think the world is going:
1. China and India will be forced to reduce their subsidies, though the slow pace at which they do it will push oil prices higher. The cost to the country is likely to be the compelling reason for lowering them.

2. The United States and other countries will increase their tax on petroleum. The rationale will be 'resource security' and 'environmental', but more than that it will be a compelling taxation scheme. The US government will need a new tax to replace the 'hole' left by Bush as the economy slows. He has adopted 2 tax cuts to stimulate the economy. There is no fat left on the carcass, so rather than raise income taxes again, I think Obama will adopt higher fuel taxes. We must remember that fuel in the USA is relatively cheap. I expect this will stimulate more use of trains, sale of SUVs, but importantly it will be a discretionary tax to some extent, and the gun-totting SUV user is more likely to be a Republican anyway :)

It goes without saying that oil prices are going a lot higher and that the government will want a piece of the price action. There is no question that the price incentives are already there for oil exploration, so I think the US and other governments will take the opportunity to carve a share out of the oil pie. The proceeds will in many countries be used for nuclear, solar, wind, geothermal (hot rocks), fuel cells, battery (load shaving) power schemes, energy saving subsidies /initiatives, and electric train-based transport systems.

More on my oil price forecast later.
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Andrew Sheldon www.sheldonthinks.com

Schroders forecasting $5000/oz gold price

I guess if you were launching a gold fund you would want to drum up some excitement about gold right? Well Schroder Investment Management has launched its Schroder Alternative Solutions Gold and Metals Fund, and therefore it feels inclined to forecast prices going to $5000/oz. I wonder which decision came first. :). Read the story here.

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Andrew Sheldon www.sheldonthinks.com

Base metals fall, gold/silver also

Gold, silver and base metal prices fell significantly overnight in the US. The fall in base metals was anticipated because the inflationary outlook inevitably was going to result in a tightening in interest rates, crimping global economic activity. The Fed is behind the rest of the world in that respect.

Gold and silver fell too, but less significantly, just losing their gains from the past week. I actually expect gold & silver to hold these levels. Gold can be expected to hold around $US875/oz, with some scope for weakness to $850, but thats likely to be temporary. Silver is well supported around $16.80/oz, though its industrial applications might similarly see a fall in this metal back to $15.00/oz, its just I dont see this happening. I think silver's spec appeal will see it hold with gold. During a period of speculative demand, the industrial side of supply/demand loses all significance. So basically I see gold and silver holding these levels.

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Andrew Sheldon
www.sheldonthinks.com

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Andrew Sheldon www.sheldonthinks.com

Profiting from the next gold boom

You might be asking yourself how high is the gold price going to go. I recall years ago (around the year 2000) people saying that gold would never recover from $290/oz, that there was just no use for the metal. Since the gold standard had been abandoned, what were all the central banks to do with gold. I think there are a number of problems with this argument:
1. Gold has been a monetary unit for 5000 years
2. Just because governments have abandoned gold, it does not mean people have. In fact I would suggest any attempt by the central banks to abandon gold just makes it more valuable.
3. No other commodity shares gold's characteristics - silver comes close, but gold 'shines' because any years production or consumption is a fraction of total inventories, making pricing of the metal more stable. The speculative demand for gold today is really just because central bankers dont play homage to gold.
I produced this report to provide an analysis of where I think gold prices are heading, and the timetable for the gold boom. I have used several indicators to outline where I think gold is heading. Further details here.
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Andrew Sheldon www.sheldonthinks.com

Gold needs to break $885/oz

While I remain bullish on gold, I would not be surprised to see it to it drift back to $850/oz before advancing. Looking at the candles shows some trepidation, so it might pull back to make a new base before advancing. I would be watching the price action over the rest of the week. Anything less than a significant move up is a negative. After $885, the next significant resistance level is $950/oz.

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Andrew Sheldon www.sheldonthinks.com

Silver $16.00, support at $15.50/oz

If you are interested trading silver then there are few suitable silver stocks in Australia. Macmin is one candidate, but the lack of resource upside makes them a poor candidate. Others tend to be explorers with alot of work to do. It makes more sense to look at US or Canadian stocks. Alternatively you can invest in silver through a CFD trading platform such as www.cmc-markets.com.
As we speak gold has fallen to $850/oz and silver has fallen with it back to $16.00/oz. This is not a support level, and since the US market has yet to close, I would not be surprised to see further weakness and a close either today or tomorrow around $15.50/oz. This is a strong support, and I dont see silver falling back to the $14.70 level. I expect silver prices to recover quickly, so $15.50 is a good entry level.

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Andrew Sheldon www.sheldonthinks.com

Gold reaches $850/oz support

Checking Kitco, I see that gold has fallen $25/oz in the USA, that brings it back to $US850/oz, an important support level. There is of course no assurance it wont fall further, but I will be looking for consolidation, if not a rally off this support level.
This level was the historic peak for gold reached in Jan 1981 and it was also a resistance level before on gold's recent move up to $1030, so it should be firm. Of course it will be supported by the Fed's rate cut and growing inflation.
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Andrew Sheldon www.sheldonthinks.com

Gold destined for $US850/oz support this week

Gold is expected to fall back to a significant support level of $US850/0z in the next few days as the Federal Reserve considers ending its recent cuts. Gold has seldom been so cheap judging by an important historical gold value - the gold oil ratio. The ratio has fallen to just 7.5, suggesting the precious metal is oversold, though it has some downside yet according to my analysis, suggesting my target of $US850/oz remains good. I think we are looking for a significant rally in gold from that point.

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Andrew Sheldon www.sheldonthinks.com

Gold, copper outlook

As expected gold is off, going back to $US850/oz support I suggest, at which point ity should go higher. Copper will stay flat I believe, supported by a weak $US, but I dont see it breaking $4-4.14/lb area.
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Andrew Sheldon www.sheldonthinks.com

The gold-oil ratio still high

Looking at the Gold-Oil ratio you might wonder if we are close to the stop. Far from it. The gold-oil ratio has not moved much over the last 6 months. This is because the oil and gold price have been moving up together.
Looking back in time, in fact, the fall of the gold-oil ratio occurs mostly because the rise in 'cost of living' inflation raises interest rates to an extent where economic activity is curtailed. Of course that hurts oil, and not gold since there is comparatively less industrial demand for gold whilst paper money is being debased. I suspect gold & oil prices will continue to rise until oil prices start crimping economic activity, then I suspect the oil prices & gold-oil ratio will fall, but gold prices will remain strong.

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Andrew Sheldon www.sheldonthinks.com

Metal prices rally on rate speculation

The price of copper in New York and London rallied overnight as speculation of further aggressive US rate cuts favoured commodities as a good hedge against inflation and USD weakness. At least that is the rhetoric. The reality is that at some point economic activity will be undermined by rising inflation. Only gold, silver and food commodities can be expected to buck the downtrend in commodities because they are least exposed to weakness in industrial demand. LME copper futures for 3mths delivery settled at $US8,730 per tonne, up US$190 from Tuesday's close. On the COMEX exchange copper for May delivery ended up 10.95 cents (2.8%) at $US4.00/lb.
Despite a 2.8% rise in copper, the metal still failed to close above $4.00/lb. I think that is a telling sign that industrial metals will fall, though they might consolidate at these high levels as the USD falls. But gold and silver can be expected to perform well.

Other base metals followed copper with three-months aluminium rising by $US112 to $US3,100 and nickel up $US475 to $US29,350.Lead rose $US63 to $US2,958 and tin was at $US20,650/20,700 versus $US20,400/20,450. Zinc rose $US22 to $2,372. NYMEX May crude closed at a record $US110.87, a gain of $US2.37 (2.18%), after trading betweeen $US107.95 to $US112.21. This is the highest level since NYMEX launched crude oil trading in 1983. The previous record was $US110.33 set on March 13 while the prior intraday high was $US111.80 hit on March 17.

Gold prices rallied 2% higher, reaching a high of $932.60 an ounce. Trading volumes are low in anticipation of a central bank and G7 meetings later in the week, which could offer guidance as to future policy on currencies and bullion sales. The IMF has announced plans to sell some of its gold reserves, but this would have little impact on prices since its likely to proceed in a gradual manner. The IMF is the world's third-largest gold holder after the USA and Germany, with 3,217.3 tonnes in reserves. It plans to sell 403.3 tonnes and use the proceeds to invest in government and corporate bonds, and possibly equities. Its possible that these events will bring gold back to the $850/oz support for gold that I have discussed already.
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Andrew Sheldon www.sheldonthinks.com

Gold - having an unconvincing rally

I remain convinced that gold is going to fall back to the $850/oz support. Recent levels have been weak ones, and I dont think a basis for a new rally. The gold price would have to rally above $US950/oz before I would concede. Regardless it is apparent that gold is revising its upward trend, with 3 plausible new trends in-play. I have indicated my preference for the more gradual trend line which sees gold falling back to $850/oz.

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Andrew Sheldon www.sheldonthinks.com

Silver consolidating $16.25-18.50/oz

I am expecting silver to consolidate within the $16.25-18.50/oz trading range for the near term. This will create some very good buying support off $16.25. Support is needed after the big fall in silver from $21.25/oz during March. The justification for the weakness is likely to be concerns over weaker economic outlook, which I suspect will drive all commodities lower.

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Andrew Sheldon www.sheldonthinks.com

Copper price outlook - falling to $3.00-3.30/lb

The price of copper is looking peakish at current levels. That is evident enough based on copper prices and the rise in copper stockpiles. LME stockpiles rose for the first time several months. The copper price is currently $3.97/lb, slightly down on its recent high of $4.00/lb, an important technical resistance. This is the 6^th time copper prices have reached such levels before being sold off. Its important to recognise that this volatility is being driven by copper supply shortages (due to strikes & project bottlenecking) and USD movements. These factors are responsible for the volatile technical trading between the $3.00 to $4.00/lb price levels. I dare say this will be the last time that copper prices fall. I would suggest the next rally in 2^nd half of 2008 will see copper break the $4.00 resistance.

In coming weeks there will likely be more rallies tied to USD weakness, but the technicals are likely to see copper fall back on softer demand issues. The net long, or bullish positions held by non-commercial investors in the US copper futures market rose 27% to 9,581 lots in the week to April 1, compared with 7,555 contracts a week earlier. I suspect they will be unloaded this week. The price of copper is up more than 30% this year.

There are traders suggesting that strong demand from world No. 1 consumer China will outweigh any slackening in consumption caused by a recession in the USA, but this market talk neglects the significant part US consumption plays in Chinese demand. It will take time for US sluggishness to feed through to Chinese demand.

LME inventories rose 1,000 tonnes to 116,150 tonnes - their first weekly rise since mid-February, though stocks still remain tight at just 2 days of global consumption. Citigroup regards copper as the most positive of the base metals. It has lifted its 2008 price forecast by 14.7% to $3.556/lb ($7,840/tonne) and $3.50/lb for 2009 ($7,716/t). Citigroup said prices in 2007 were supported by 800,000 tonnes of production losses compared to expectations. As a result of these supply shortages, there is likely to be a market balance in 2008. In the long run there is every chance that we will see $10,000/tonne copper, but it will not be until emerging market demand recovers.

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Andrew Sheldon www.sheldonthinks.com

Gold going to $850/oz

We are quickly gathering evidence that gold is going to $850/oz support. Apart from the fact that was an import resistance back in 1981 adds to the likelihood that it will be an important support today. More current evidence is the fact that we are seeing gold pause between $900-915/oz. A break above $US935/oz would give evidence to the contrary, supporting a move higher by gold. That would need to be a convincing move to buy at that point.

Markets often rally back to a supporting trendline, only to disappoint, and I think gold will do it on this occasion, so I am inclined to see $850/oz a more realistic outlook before returning to $1000/oz, and beyond.

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Andrew Sheldon www.sheldonthinks.com

Gold in downtrend to $850/oz level

Overnight gold fell to a support at $880/oz. This is a significant support because it broke an important trendline, having tested it several weeks ago. Based on this news, its likely that gold will fall at least to $US850/oz support level. I believe it will find support at this level. Why? Well for starters $850 was the resistance level back in 1981 when gold last peaked, so it seems probable that gold will find support their.

I dont see much compelling evidence for a fall to $680-690/oz. Inflation is picking up around the world, despite not having reached a critical point. More importantly oil is getting to levels where it has historically caused a slowdown in the global economy. I will address this issue more in Market Commentary blog.

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Andrew Sheldon www.sheldonthinks.com

Gold up $17/oz to $931/oz

The recent sell-off of gold highlights the volatility of the commodities sector. Investors should keep this in mind when they trade leverage investment types. They should also not avoid such risks, rather they should manage them. Out of such calamity comes great opportunities. Such falls tend to leave trepidation in the minds of investors, but actually these are often the best entry points, particularly for your leveraged investments. Of course we need to look for support indicators.

There is no question in my mind that this was a profit-taking sell-off. I have seen arguments made that the gold sell-off was caused by the liquidation of the gold position of Bear Stearns. I think that is a pack of nonsense. An attempt by some analyst to have a 'profound thought' to get published. Why? Because the smoke has yet settle on the Bear Stearns case. You could argue that the sell off was precipitated by a market awareness that Bear Stearns had long exposure to gold. Regardless I dont think JP MorganChase would be in a hurry to liquidate this holding. Its one of the best asset classes to hold.

The gold price has fallen through the $950/oz support that I saw as support, so it now looks like holding a lower support. Regardless that just makes this a better buying opportunity. I retain my belief that gold is going over $US2,000/oz. In the coming week I will update my model for the gold price outlook.
You might ask what could actually cause the gold price to fall back to the next support at $US850/oz. I suggest talk of central banks selling off their gold reserves. I dont think that is likely since the international monetary system is likely to come under scrutiny in future years and central banks will not want to be holding an empty draw. Another factor might be a decision by the Fed to aggressively raise interest rates based on an inflationary outlook. Again I think recent action and statements by the Fed dont support that possibility. It is my belief in fact that if a bank like Bear Stearns is going to fail, gold is more likely to go up because monetary assets are going up, and the bank fails because they are short on gold, not long. One would have to conclude that Bear Stearns failed inspite of their gold holdings, not because of them.

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Andrew Sheldon www.sheldonthinks.com

Gold finds support at $1000/oz

As expected gold is finding support at $1000 level, having fallen to that level during early Monday US training, then recovered to $1009/oz. Oil prices were off $4/barrel, bringing them back to $106/barrel. Any relief there can be expected to support a rally in equities.

For the rest of the week I think we will see some consolidation above $1000/oz. But I imagine there will be a lot of fund buying in gold thereafter. But I look forward to even greater interest in equities from this point forward.

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Andrew Sheldon www.sheldonthinks.com

Gold convincingly breaks $1000/oz

Gold has convincingly broken $US1000/oz, in fact it ran up to $1030/oz before being sold back to $1010/oz at the time of this post. Based on the current market circumstances, having broken $1000 there seems no 'fundamental' reason why it should not hold the $1000/oz support. It was a firm breach of the psychologically important $1000/oz level, so I am expecting it to hold.
I was actually expecting some short term weakness in gold because its rallied recently, and I expected the USD to hold the important JPY100-101 support for at least a week or two. The failure of the 4th largest US investment bank Bear Stearns on Friday changed that. That saw the Fed aggressively lift support, which greatly changed the risk perceptions in favour of gold, and made the prospect of lower interest rates more likely....all to no avail mind you.

I note the greater interest shown in spec gold stocks today (Monday), and I expect that will continue for the remainder of the week. I do believe we have seen the bottom. As indicated previously, I see base metals trading south, though they will hold their long term uptrend. I expect uptrends will be tied to weaknesses in the USD and I believe these industrial-based commodities will be sold off during times of USD strength. I can't see copper breaking $4.00/lb in the current environment, though I guess since I think the USD is going to 85Yen, that is not out of the question. It is my firm belief that whilst USD weakness works for base metals too, these metals will come under pressure due to subdued economic demand.
There are stock-specific factors to consider here though, such as the 60% increase in production by Matrix Metals and similar expansion for CBH Resources. See my stock blogs for those stories. But my focus herein would be on gold-related stocks - if not producers then stocks which are as close as you can be. Since its difficult financing conditions it should be a good project, and hopefullu already have the equity component of the issue since its a poor market for making equity contributions to project finance.
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Andrew Sheldon www.sheldonthinks.com

Commodity Prices dont respond to the news

Commodity prices did not rally in the face of the 416 point rally in the Dow Jones, which was caused by a $200 billion Fed injection into the US economy. The reason is purely technical. Commodities in previous weeks had already rallied to a new high, so with little upside to that major resistance, we can expect commodities to come off. The Fed injection is good for gold, though even it should weaken for technical reasons. I see gold coming back to $950/oz support. Copper, which peaked last week near $4.00/lb rose $0.10/lb, but was sold off, so now sitting around $4.75/lb. Commodities might not have shown their meddle, but expect commodity-based equities sold off during the last week to perform well, particularly those small spec miners - gold, copper, nickel, coal, etc. You should have been buying them yesterday.

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Andrew Sheldon www.sheldonthinks.com

Why metal prices stronger on weaker outlook

You might be wondering why copper prices are rallying to new highs at a time when the US economy has never looked sicker. The reason is simply two things:

1. The lag between the US economic outlook and producers ability to forecast it. Producers in China and elsewhere are not the most market-savy people. They are waiting for queues from the market before they reduce output. Even when that point in time comes, they are probably more inclined to reduce prices to stay competitive than to accept a slower rate of output. They want to remain relevant, so they willingly accept falling profit margins.

2. The rising USD-denominated price of commodities. Traders need to hold $US to buyt their commodities because all commodities are transacted in USD. At times like now, when the USD is falling, commodity consumers prefer to hold metal rather than USD on account, because they will actually make money from the transaction, and they will happily trade that position. I suggest that commodity inventories are not falling for some metals like copper because of resilient consumption. Really its just consumers building their inventories to profit from the falling USD. If that is the case, we can expect that consumers will dump copper and other metals at some point.

The question is which point? Well here are some clues:

1. Technical support in the USD - but relative to which currency? Well I guess that could be in the currency of a number of large consumer countries, eg. China, Japan, South Korea. Some of these countries have managed exchange rates, so I'm inclined to think it will be a technical resistance in the metal prices.

2. Technical resistance in the metal price: Copper prices have rallied to new highs. The copper price is currently $US3.93/lb, having reached $US3.97/lb in earlier trading. I would suggest that the $4.00/lb level is going to be a difficult resistance level to break, and thus I am expecting copper prices to be dumped from this level.

3. Stockpile levels of the metals: We might wait for the stockpile levels of the metals to start rising as a queue as to when metal prices have peaked, but I would suggest this is a lagging indicator. Understanding the fundamentals, followed by the price action is the best guide. Of course easier said than done.

I think we can expect copper prices to peak around $US4.00/lb - since its an important psychological level. Interestingly the copper price is almost there (currently $3.93), and the bigger news is that the USD has just reached an important support - 102.36 Yen - last reached on 18th January 2005. You can follow the USD-JPY forex and copper price action yourself at Kitco.
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Andrew Sheldon www.sheldonthinks.com

Nickel stockpiles flat, and prices off their low

Nickel stockpiles are currently consolidating at a 1-year high, and I do believe that prices have found a floor, though I dont see it as time to enter this market just yet until stockpiles start falling. Prices seem likely to respond soon enough since they are close to their lows.

As we can see in this 5yr chart, nickel prices are consolidating at current levels (right chart)
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Andrew Sheldon www.sheldonthinks.com

Copper prices up, stockpiles falling

There is some good news in the market for copper stocks, as copper prices are up to $US3.50/lb, and seem destined to reach $US3.75/lb before they are sold off. The reason for the rise is clearly stronger demand, but also traders in futures covering short term requirements. Mostly its just technical trading. I see copper trading this range for a year to come.
Stockpiles are falling as a result - in fact stocks are plummeting on the LME. See Kitco.
The copper price like alot of commodities is trading in an ascending wedge, and will eventually break out as a result of inflation or debasement of the USD.
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Andrew Sheldon www.sheldonthinks.com

Copper prices reach new high

Copper prices have broken out to fresh highs, in fact copper prices are up almost 3% at this point to $US3.40/lb, though I expect prices will pull back to support at $US3.30/lb in coming days. See the charts at http://www.kitcometals.com/charts/copper_historical.html. The UK Bank of England has followed the Fed by cutting rates. The prices have limited upside. I dont see prices breaking $3.90/lb, but we can expect institutions to trade the metal between $2.90-3.80/lb. So I see the metal going sideways for some time to come, but with good rallies.
Basically we are looking at copper forming an ascending wedge structure with the apex to be reached in a year or so. I can see it breaking out at that point due to inflation and a weak USD, but I can also see higher interest rates undermining the copper price at some point. The other emerging trend will be the amount of money doing into new mine development around the world. I see this step as a currency management policy to some extent correct the over-investment in US treasury notes (ie. A falling USD). That investment will eventually result in higher mine output whilst higher western inflation will eventually undermine western consumption.
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Andrew Sheldon www.sheldonthinks.com

China world's largest gold producer

According to www.gfms.co.uk/Press%20Releas...7_overview.pdf, China has overtaken South Africa as the world's #1 gold producer.
I have not read the report but there are numerous reasons for this:
1. Falling Sth African production due to: (i) Blow out in mine costs, (ii) Strong Rand because they mostly produce precious metals, PGEs, gold, plus other high priced metals, (iii) deep underground mines that are inefficient, (iv) High pay rises for highly unionised workforce, and from memory, alot of workers (immigrants) dying of aids onsite. Black empowerment also cutting investment. Just look at the outside investment/diversification of gold producers, eg. Anglo in Philippines, Harmony in Aust & PNG. Other African states more attractive. Some of this is just globalisation, but also risk diversification. In recent years the fall in production has been quite startling, like a 15% drop in gold production last year.
2. Chinese investment - alot of USA, UK, Australian & Canadian development dollars in China has no doubt helped build the gold mining output, plus the huge gold resources in western state of China.
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Andrew Sheldon http://www.sheldonthinks.com/ - yep but sometimes he doesnt get time to read.

How high is the gold price going? Part B

Another useful ratio for anticipating future gold price movements is the chart of the oil price vs the gold-oil price ratio. Because of the importance of oil and gold, there is an even better price series to construct this ratio. Unfortunately for a great many years the gold price was fixed, so going back beyond the 1900s is futile since the gold data series is distorted.
It is apparent that the gold-oil price ratio has traded within a band (approx. 7 to 34) for the last 146 years.
This band was only breached for a short time during the 1930s Great Depression. What is interesting is that there appears to be a change in trend, or the commencement of a new cycle starting with the Depression in 1933.

I have no conclusive evidence to account for the cause in this cycle, but I can suggest some insights into its cause, or the relationship between gold and oil prices. Gold and oil are both tangible commodities priced in USD. Both commodities are driven by supply & demand for periods of time, but gold has a 2nd function as money. By 'money' I mean 'real' money with a tangible asset to support it. Unlike the paper trash that is backed by governments legal sanction to expropriate your wealth. When fiat (paper) currency is no longer trusted because of declining credit standards, then a speculative demand for gold emerges, and hence the price of gold rises in these periods. It matters little whether the credit crisis is created by business, households or government, you can be sure government will be called upon to clean it up.
For this reason, in 1933, a high gold price corresponded to a very low oil price, as demand for petroleum sank with the global economic woes. I think the black bands marked above account for the normal price variance of oil & gold during periods of normal economic conditions. I suspect the 1920s broke this trend because during a boom, gold prices were low because the metal offered no yield. This also corresponded to the ascension of the modern car-based society, so I suspect there was a shortage of oil for transportation at this time.

Ok looking to the modern times. The following chart offers a better (daily) data set - from 1986 to 2008. It shows the oil-gold price ratio trading in the same band, though on this occasion the band has a shorter time span and more data points. It is apparent that the curve slopes slightly upwards. I suspect the slow is the result of growing energy intensity for the global economy. We all know the USA reliance on oil has fallen as it has shifted to a services economy. But we need to appreciate that this shift is offset by growing reliance of China, India and other developing countries for oil - hence a rising energy (oil) intensity for them. Anyway thats my theory. More imoportant is what it implies about gold prices. It suggests in relation to oil prices they are relatively low. Of course the fortunes of gold (in terms of oil) will be greatly improved as oil prices fall. We can expect at some point inflation to prompt central banks to raise interest rates to subdue spiraling wages. This will spark a slowing in the global economy and a contraction in oil demand and prices.

It is difficult however to use this ratio as a price determinant for gold. There are several reasons:
1. Oil prices are very volatile
2. OPEC has considerable impact on oil prices
3. Oil prices - unlike the DJIA or gold - are priced at the margin for industrial demand

We can however use the ratio to give us some guidance though of when to sell as time passes.

How high is the gold price going? Part A

Increasingly I am seeing the question being asked - How high is the gold price going? Its a great question. A great people are inclined to take a punt and say some huge number in the future, though few people are able to defend these numbers. I think fewer still understand the fundamentals underpinning gold. I have written so much on this subject - I wont repeat - other to say that - yes, supply and demand are driving the market price, but ultimately it has nothing to do with the metal balance calculations published by the World Gold Council. The reason those numbers mean nothing to traders is because those numbers are NET figures calculated for a market at two (annual) points only, and certainly not the points which you bought and sold your investment.
The reason why the gold price does not depend on falling gold supplies from South Africa/Australia, growth in demand from India, etc, is that the higher the price goes, the less gold Indians can buy. Indians just dont control much of the global capital. Nor do they have the leverage that fund managers have. More important than that is the fact that the investment that drives gold prices is the more transient 'speculative demand' for gold by investment funds, hedge funds and the like.
So back to the question.....There is actually a lovely correlation between the gold price and the Dow Jones Industrial Average (DJIA) Index that has stood the test of time. The index has proven itsel in the 3 speculative precious metals booms in the 1920s, the 1950-60s and now the 1990-2000s. It will be apparent from the following chart that gold is not just going anywhere - but that it has a target in mind. Mind you that index includes the DJIA as a variable, so its conjecture where that number is going. You will have to see my market commentary blog(http://market-action.blogspot.com/) on the Dow outlook to see my projections for that index.
Based on my price target for the DJIA of 11,650pts, I can see gold rising to around $US2,200/oz. Some people will laugh off this projection, but I make the following points:
1. Credit markets are highly inflated. There is so much money in the market,
2. Inflation over 35 years: Its been thirty five years since gold last peaked, so thats alot of inflation to factor into the present day price of gold, and dont be so sure that the published CPI is a legitimate measure of inflation. Governments have been fiddling with the books since before you were sucking your thumb.
3. Small size of gold market: The total gold market is worth just twice the value of Microsoft. There is few other places to place your money. Other precious metals have significant industrial demand bases, and are less liquid. The reason why gold is attractive is that there are all types of funds available.

You might think my projection for the Dow Jones falling to 11,650pts is too pessimistic, but actually that is my conservative scenario. If I used the current DJIA Index value of 12589.07 points (8 Jan-08), we would need to look at a gold price closer to $US2,600/oz.

Of course the argument is not whether we should be pessimistic or conservative, but realistic. So to be realistic, I would expect the Fed to drop interest rates slightly prior to the next US election, or at least keep them on hold. We have already seen tacit announcements by the US government to provide some level of support to the credit market. Though its hard to see a bale out on the scale necessary. With a rising threat of inflation I think there will some a point in the next months (after the US election) when the Fed will be forced to raise interest rates. I would expect it to trail the inflation in this respect so as to not cause serious economic malaise.

Periods of inflation are historically periods of flat corporate earnings, though at first businesses actually benefit from asset inflation, but earnings falter with basic cost of living inflation (food, oil, rent). That is the stage where we are now. So I see flat earnings being offset by rising inflation, causing equiities to have swings to provide yield incentives to investors, but otherwise I see broad market equities going sideways for years to come. The excitement will be in the gold market.

Based on this chart, you would have started buying gold or gold stocks back in 2000, and you would have made excellent returns, though base metals soon over-shot gold. Clearly this ratio will be a good indicator of when to sell as well.

The gold-DJIA ratio is not the only measure of when to buy and sell gold. Next we will consider the gold-oil ratio.

Base Metals surprisingly strong

Base metal mining stocks have been weak over the last 3 months - the blue chips having fallen 20- 30%, whilst the smaller emerging producers have fallen as much as 70%. The reason of course is the belief that commodity prices will fall with any softening in the global economy. I think this is sure to happen. At some point the Fed and other central banks will be forced to respond to inflation. Higher interest rates will be necessary. But until then we can expect governments to respond to subdued demand (amidst weak but growing inflation) with cuts or stable interest rates. I think we should not expect the Fed to have some balls. They might correctly sense that a 'dose of reality' will be good for the market, but they will not want to surprise it too much.
So is the sell off in base metal miners and emerging producers justified? I think it depends on the market. There are some strong factors in base metals favour:
1. Demand for metals in China remains strong. I believe Chinese demand will not remain strong. Historically I have found the Chinese traders and producers to be poor market analysts. They are sooo anti-conceptual. Demand has been strong for so long, so they believe it will be strong tomorrow. They would rather be wrong with everyone else than right alone. Chinese traders will be the last to recognise that the market is turning. That augers well for markets in the short term.
2. Weaker markets has a benign impact on domestic commodity markets. If you are a Canadian or Australian investor, you might be miffed by the fall in commodity based mining stocks. Miffed because metal prices remain strong, so why are mining equities being sold off with reckless abandon. The reason is that international investors are preparing for a slump in commodities (apart from gold). Whilst a falling $AUS or $CAN will boost or offset the fallin USD prices of commodities for domestic investors, the international investors will loose on the exchange rate. Expect those foreigners to re-enter the market at lower prices. Of course it makes sense for local (Australian & Canadian) investors to abandon mining stocks if the foreigners are going to, but they should also be ready to buy back in. The trick is to find the turning point in the $A. See my forex blog. So whilst base metals have fallen off slightly (15%), so has the Australian dollar, so producers are actually doing rather well, unless they have entered into some rather unfortunate hedging positions.
3. Tight supply. There is of course a concern in the markets that a slide in global economic activity will undermine demand for metals, and that should not be ignored. But there is also considerable tightness in equipment, plant and consumables supplies that has actually prevented an expansion of metal supply capacity. The implication is that prices might not adjust as much as expected. Having said that, prices are high in part because of that tightness, so any relief will be bad for prices. But that need not be true for all markets. A number of projects have not proceeded because they were out-bid for plant by bigger projects controlled by bigger companies. The iron ore, bauxite miners have got their ball mills before a small gold miner. So supply has been curtailed in some commodities more than others.

Gold looking for support

Gold is doing very well as expected despite weakness over the last few days. You can expect gold to fall back to $US840/oz, its highest support level. If you are worried about gold - dont be? Its true that a strong global (US) economy has been a positive for gold, but actually its under-performed other metals. During the following 'inflationary period' expect gold to out-perform. There are several reasons for this:
1. Gold is driven by speculative demand - not supply & demand. The reason is that most gold consumed is typically recycled because of its high value, and thus because there are so much gold inventory that any year's supply or demand becomes irrelevant.
2. Gold is a hedge against inflation because you dont hold gold to make a yield. It is precisely the poor yield on gold that has made it a poorer performer (against base metals) over the last decade.

The speculative demand for gold arises from several angles:
1. Gold is not priced so high compared to other tangible assets. So if there is a liquidity crunch, gold will perform better because assign from cash - everything is going down except gold. In that context, gold only goes down because ignorant speculators are selling a stronger gold security to cover positions elsewhere.
2. Gold is a tangible asset so its price will generally rise (due to inflation) along with other commodities, real estate. But there will need to be a demand-related shake out of those markets first, and that is already happening.
3. Gold is more attractive if yields are falling. With other asset classes priced so high, the yield on all asset classes is looking a little thin. If there is little yield from all asset classes, then the small yield (gold lease rates) on gold looks good. For this reason, as the Fed responds to the weakest US job figures in a long time by reducing interest rates, expect gold to perform well.

For all these reasons one can expect the gold price to fall on short term profit-taking, but there is still alot of latent speculative demand for gold that will support it on weakness.