Gold price breaks $1200/oz

The gold price is going from strength to strength. The price briefly breached $1200/oz, before closing at $1197/oz. Importantly the price closed only slightly off its high. The strong close is a good indication that the market is expecting further gains even though $1200/oz can be considered psychological resistance. It is also noteworthy that gold has already been sold off to $1150 last week, so we have yet to see the end of this rally.
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Andrew Sheldon www.sheldonthinks.com

The short term outlook for gold looks much better when you consider that crisis talks with Iran are failing to reach a resolution. Iran has even raised the stakes - it is currently conducting 'war games' in preparation for an attack by the USA/Britain and/or Israel. See this BBC News article.
Iran's hostilities to Israel are well-known. Its leader has long campaigned for the destruction of the Israel state. So what can one make of these preparations - is there going to be a war, or is this or political rhetoric?
There is no possibility of a win by Iran, however it could launch medium range missiles against Israel. The question is whether it would get a chance, and would it take that move. Is a settlement likely? The reality is that a number of Arab states have pushed the West to a critical point. During the early phase these Arab states are emboldened by the appeaser stance of the US and international community.
Does Iran have a right to weapons of mass destruction? After all the US and other countries have that capacity. The difference of course is the politics of the country. The US uses weapons for defense purposes; Iran cannot be trusted to do the same. The reason that Iran cannot be trusted is because it does not respect the freedoms of its own people, so don't expect much compliance with any code of objective law.
Having said that, I think Iran has an idea how far it can push the USA and Israel. I would therefore expect the Iranian government to back down at some point. It is likely that:
1. Iran will back down at the last possible point - as a war is not likely to be popular
2. Iran has a vested interest in preserving hostilities because it keeps oil prices higher. There is a security premium built into oil prices, so Arab states love Iran's actions. They probably joke about it an monthly OPEC meetings.
3. The prospect of war appears to Iranian nationalists, who must be the only group liking the Iranian leader, because of his failed economic policy. In an autocratic state, you can understand a corrupt state wanting money for its centralized coffers rather than any desire to create jobs, so don't expect the Iranian government to care about sanctions. They do however elevate disenchantment with the government because international sanctions are readily identified with the government's economic policy.

The implications for gold are good. In the short term, you can expect a rally in gold; though I would expect gold will fall back once Iran capitulates. This will not be the end of gold however, as there is a greater monetary issue in place. Its unlikely either that an 'Iranian war' will impact on global spending because any sense of fear is likely to die outside of Iran's missile range. One would think the US Defense Dept would be monitoring the movement of Iranian ships. One of course can be skeptical of government department's though. But that extends to the conceptual skills of the Iranian government as well. Its like watching two drunks fighting and wondering who is going to win.
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Andrew Sheldon www.sheldonthinks.com

Outlook for copper supply & demand

Here is a forecast for copper demand presented by an emerging copper producer. The forecast comes from the USGS, the US Geological Survey. They prepare a detailed account of all the mines around the world, so theyh have a good picture of the metal inventories, but I would not trust their forecast for the following reasons:
1. The idea that global demand grows by 3% compounding - is divorced from the current economic context
2. When I want an understanding of global market forecasts, the last people I speak to are government depts. They are notoriously bad at forecasts.
3. The amount of copper sold into the market will depend on an array of factors which this govt dept just has not grasped. Once again, I don't look to govt depts for an accurate depiction of the nature of reality, not for a current view, and certainly not a view of how the world will look in 20 years time.

These forecasts are however used by corporates seeking to pip up their stock prices or raise some money. The problem I have with this forecast is that its extrapolating an exponential curve off the top of a government-stimulated economy, and here we are now, just about to go into a period of rising inflation and interest rates. The full context of this forecast can be gathered from IRN or the USGS website.
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Andrew Sheldon www.sheldonthinks.com

Gold breaks support - going to new highs

The price of gold has broken its previous high, quashing any fears of a fall back to support. We are looking forward to gold going over $2,000/oz. Some commentators think gold is over-priced, but there are several reasons why gold is not over-priced:
1. Paper money is being printed by global governments to cover debts
2. Gold rose to $850/oz in 1981, so if you consider almost 30 years of inflation, gold has a long way to go. In fact as recently as last year producers were struggling to stay ahead of costs.
3. Interest rates are very low, inflationary pressures are going to build, creating a negative rate environment. Governments are constrained from rising interest rates by high household debt levels, at a time when people are losing their jobs.
If you want to know more about the political philosophy behind markets, and their manipulation by governments, in coming months we will be releasing a number of eBooks which discuss how these state of affairs have developed, and how they need to be reformed.
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Andrew Sheldon www.sheldonthinks.com

China seeks to use gold as money

Years ago I had an argument with my dad over the role of gold. He saw the fall of gold in the 1990s to $260/oz, and concluded that the problem with gold is 'it no longer has any uses'. What's it used for? I long maintained that it was real money, that it was nobodies obligation. This belief stemmed from my studies at the time on the history of gold. Gold was not somebody's line of credit. It was tangible, it was real, as opposed to a promissory note from the government.
In recent trading gold jumped $45/oz to $1043/oz on news that the Chinese government was proposing to use gold to pay for oil.

According to the Independent Newspaper "The greenback's declining value has prompted the Chinese, French, Russian and Japanese governments to hold secret meetings with the Middle East's major oil producers to develop a new pricing system for barrels of oil".

The significance of this of course is that gold is going to be held by commodity traders rather than USD because traders fear losing money whilst they negotiate market positions. You can imagine the negative impact on traders holding USD as the price falls. Of course in the long term, it matters little. If the USD falls, then the oil producers will simply raise the price of oil to compensate for the diminishing price of oil in USD terms.

In case your wondering, my father still does not hold any gold stocks. There is just no convincing him. I told him there would be a financial collapse too. I reiterated my arguments every time I saw him for 8 years....it took me 30 minutes to get him to acknowledge the fact. Is there hope for gold? I hope he has a strong heart. :)
Of course all precious metals will benefit, but this is particularly good for gold and silver because they are the most liquid commodities, and demand for gold is particularly less impacted by negative industrial demand. But I caution you - the speculative demand for these metals will eclipse the industrial demand. This is of course just the start of things to come.
More news on this story at SMH Online.
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Andrew Sheldon www.sheldonthinks.com

Gold faces resistance at $1000/oz

Gold today is facing resistance at $1000/oz. It reached a high of $998/oz before retracing to $989.20/oz. This is of course just the daily action, and there does remain the prospect of gold breaking this level yet. This has proven to be a strong level of resistance for gold. In fact, we can see weakness to the $750/oz support level.

Gold has attempted to break this level on three occasions - July 14th 2008 and Feb 12th, June 1st and now Sept 3rd in 2009.

One might well ask if gold is likely to break this resistance given the recent expansion in the monetary base. Certainly this is a bullish factor, though without signs of inflation, and the possibility of higher interest rates, I would be expecting weakness in gold before we see further strength. Of course we need not guess these things. we need only watch the market to give us the lead.
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Andrew Sheldon www.sheldonthinks.com

Gold price outlook

The gold price has shown some strength of late - rising $27/oz and $15/oz in the last two days respectively. It is questionable whether gold will break its previous resistance at this point. I am inclined to think that it will not, and that the gold price will once again settle back. These rallies of course make great opportunities to trade. Our view is that the support for gold is the $750/oz mark, though I see nothing which is likely to push gold that low, except perhaps a recognition that the economy is too hot, and the Fed needs to raise interest rates. This will likely occur within the next year. Of course it will never raise rates by the amounts required to rein in inflation; at least not until the dying moments when it has no choice. By this point, based on the following chart, we are expecting gold to reach a level of at least $US2200/oz. Of course this is an evolving story.
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Andrew Sheldon www.sheldonthinks.com

Silver prices close to support

Silver prices have pulled back considerably of late. The $13.75/oz level will likely prove to be support, and provides a good entry point. I would wait for support though since there is downside to $12.95/oz.
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Andrew Sheldon www.sheldonthinks.com

Gold prices poised

It is apparent from the chart that gold prices have fallen back to a support level. If this level holds as I expect it will, then gold will be testing its previous high of $986/oz. I have been very cautious about gold because of the swine flu risk raised the prospect of deflation, which could not be addressed by government pumping more money into the economy. With swine flu concerns declining, I think we are going to see continued recapitalisation of the financial sector, which will mean more paper money floating around or higher interest rates. It remains to be seen how Obama deals with US government finances. My expectation is that the government will seek to raise energy taxes. Higher interest rates are inevitable now.

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Andrew Sheldon www.sheldonthinks.com

Gold outlook in question

The gold price is holding reasonably well at the moment. The metal found support at $890/oz. I do however believe that there is the prospect of gold falling back to $$700-750/oz, though by no means is it probable.
The positive for gold is the extent to which central banks are relying on fiat currency to support their economies. One could be forgiven for thinking that we are over the bad news, but in fact the USA is entering a period of ARM re-sets. Clearly low interest rates will help people survive this period. Another factor likely to support commodity countries like Australia, Canada, is the prospect of China buying up commodities. This of course will make any recession shallower, but it will also make it longer. One would want to retain some exposure to gold, though at this point I would only make that exposure emerging stocks with resource upside, rather than the gold producers trading as a yield proposition. For metal traders, I'd be looking for confirmation of trend before I enter the market, as there is grounds for some rapid moves.
We might yet see gold test its previous high of $990/oz, though I see more consolidation for now, with the prospect of a fall back to $750/oz. I would rank the swine flu as an issue, though of course its hard to say whether this will evolve into something more serious. It would seem inevitable that there will be a breakout as long as developing countries have dodgy animal husbandry standards. A major pandemic would spell a much deeper recession, and a run on banks. I think this would be a negative for gold because its not inflationary, but just a crisis of confidence which will undermine consumer spending. It will briefly cause the market to spike as people buy more food, and we might see some evidence of that in the current quarter. A pandemic is more an issue of perceptions since we need only hide in our houses for a week. But will we all be so compliant and organised. It remains to be seen if this will be a momumental blunder.

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Andrew Sheldon www.sheldonthinks.com

Gold prices poised for a fall

The gold price is poised for a significant fall in coming months after a rally to $1000/oz. The attached chart shows that the metal is on the verge of a wedge break either up or down, and given the strength of equities and new-found market liquidity, I would expect weaker gold for the short-medium term. All of this liquidity will end up being inflationary of course, and I'm sure the various government treasuries around the world have not finished their spending spree.
I can see gold falling to a low of $US700/oz. That fall will like take about 2 months before we see signs of recovery. This will hit gold stocks very hard I think, particularly those struggling with project finance or equity raisings, so I would be looking at opportunities among these stocks in particular. Perseus Mining would be one I would be particularly interested in.

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Andrew Sheldon www.sheldonthinks.com

Gold support at $US880/oz

Gold has come under short term selling pressure over the last few days, breaking support. Given the weakness in the broader market, and the lack of apparent inflationary pressures, we would expect gold to build new support around the $US880/oz level before moving higher. Entry at the current level of $US915 is fraught with downside.
Importantly gold has broken the previous highs set back in Oct 2008, so its worth holding existing positions, or adding to them on weakness for all but the more aggressive traders.

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Andrew Sheldon www.sheldonthinks.com

Gold poised for another rally over $1000/oz

Now could be another good time to make gold investments. The gold price has retraced $60/oz over the last week to $US950/oz, and is poised for a move higher. We can see in this chart that the gold price has consolidated at the current level.
The monthly chart confirms also suggests that the gold price is going higher, though we might like more confidence from thew US market overnight. I am confident.

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Andrew Sheldon www.sheldonthinks.com

Gold oil ratio signals stronger gold

It is apparent that another important ratio we look at to determine fair value for gold is the gold-oil ratio. Its particularly interesting to look at this ratio because the oil price has collapsed in recent months, falling from $140/barrel to $40/barrel. The result has been a rise in the gold-oil ratio from 7 to 28. In recent weeks the gold-oil ratio has recovered to 21, as oil prices rose.
Its apparent that the first rally in the gold-oil ratio (measured on the right negative axis) was caused by the fall in oil prices. Having recovered to 21, I believe the next rally in the ratio to 28 will be in the midst of rising oil prices and gold prices. I would contend that the rise in oil prices will be caused by inflation and a weak USD. One might also attribute cuts in OPEC oil production as a cause however this is transitory since OPEC is going to lag in production cuts only for as long as such adjustments prove necessary.

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Andrew Sheldon www.sheldonthinks.com

Gold destined for $US2000/oz

Some time ago I suggested that gold was destined to rise to $1400/oz price level. In fact based on current movements in the Dow, I would suggest we are likely to see the gold price rise as high as $US2,000/oz. The basis for this forecast is an important measure of relative price value - the Dow gold ratio. Just as you have price-earnings ratios for stocks and housing affordability indices for property, there are ratios for commodities as well; and they are very bullish for gold.
There are several ways you can trade gold. You can buy gold stocks - blue chips or the juniors, or you can buy the metal from the Perth Mint, or a derivatives such as options, futures or contracts for difference. If you have less confidence in the financial viability of financial institutions, then you would avoid derivatives because you will bear the counter-party risk if the counter-party fails. No one talks about these risks. Its just assumed that counter-parties are of good standing. Don't think that rising asset prices will protect you from that risk.
I have extrapolated the charts above. You can see that to get to a Dow-gold ratio of 4 (the historical low) we need to see gold reach $2,000/oz. That is based on a Dow Jones index of 8,000, and we are just above that now. We have this week been given the signal to buy gold exposure because gold appears to be holding above $900/oz. Another solid rise should see it continue higher.

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Andrew Sheldon www.sheldonthinks.com

Dow-gold ratio is quickly moving towards target

The gold price moved over $906/oz again in Monday's trading, giving more credence to the belief that gold is going to rally. Its rather timely that this is happening when bank (broad equities) are reaching an important support level. The Dow-gold ratio is currently 8.91, still well short of the ratio of 4-5 which we would associate with fully priced gold. You might wonder why gold should be fully priced when no other asset class is? The reason is that when its rallying its the only asset class people will have confidence in. Everyone likes a bargain. At this point gold is cheap, and it will remain cheap until it gets dumped.

I expect equities to rally soon. Its the new year, and stocks generally rally at this point, and more importantly stocks have fallen to an important support level. The rally in equities will likely offer good profit potential, but nothing like gold. Already gold equities have been strong for some time now. If you want to know how to pick gold equities - I will refer you to here. As indicated about 6 months ago, based on the expectation of a rally in the Dow to between 8,500-10,000, the gold price could rise as high as $2125-2500/oz. The rise will partly reflect weakness in the USD, but it will also reflect real price gains for gold, so you will benefit in any currency.
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Andrew Sheldon www.sheldonthinks.com

West Texas Intermediate price likely to rally

The West Texas Intermediate crude price shows every sign of having bottomed, so could be considered as offering good buying up to $50, which could be considered a resistance (sell) point in the short-medium term. The slow down in the global economy has placed oil under pressure, and you can expect OPEC to drag the change with respect to any steps to reduce demand. It is for this reason you can expect oil prices to be oversold. OPEC cuts in production will eventually catch up, and you can expect a rebalancing of supply and demand. Don't expect oil prices to fall back to $9/barrel, as we are in very different times. The factors pertinent to today are:
1. Improved policy under Obama
2. Global weakness matched by cuts in OPEN supply
3. Rising inflation
There will likely be consolidation in oil prices in a lower range between $40-50/bbl, and I would expect some good trading opportunities in this range.





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Andrew Sheldon www.sheldonthinks.com

Gold rallied overnight in the US to $903.60/oz, a 4-month high. The 5% rise of $43/oz was attributed to expectations of a weaker than expected outlook for the global economy and volatile currencies. This is an interesting rationalisation by fundamentalists, but really it reflects no more than technical trading. Basically funds think its a good time to get into gold and they are buying within zones of weakness, and riding the rallies.
As we can see from the chart, gold fell to near $800/oz, so funds started jumping in. It is interesting that gold rallied to $900/oz, but did not break it convincingly. The implication is that gold traders are waiting until Monday to see which way the markets will go. Clearly they will be looking for a lead from the rest of the market. Expect some volatility in gold in coming weeks. Clearly moves of 5% are attractive for traders because gold is a pretty liquid market.
The fact that gold closed below $900/oz at $897/oz is a weak indicator, but the fact that it closed just $5/oz from its high could be considered a sign of strength. One need only compare the current chart with Sept 2008, where the gold rally was quickly sold into over $900/oz. The current strength suggests gold is going higher, though it might not happen for a few days. We need to look for direction from the market. Likely the market will find a lead from the Dow on Monday.
So what about the rationalisations of the gold fundamentalists? Well they are not wrong. Weaker global markets means less growth, reduced tax receipts, subdued earnings, greater welfare spending, tax increases and of course more government debt, and even printing of money at some point for those countries with weak credit ratings. This package of problems of course results in greater inflation since it implies more money and less economic activity.
The markets are not yet suggesting to me a breakout, though we are coming close to that point. Gold has risen to a point where it is making new highs, so that is a bullish sign, though in the short term, gold can still come off, and it might just do that. In these times of weakness its a good idea to buy.

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Andrew Sheldon www.sheldonthinks.com

LME commodities likely to rally - except copper

LME traded metals rallied of late, but looking at historical data I am inclined to think its a short term rally which will be quickly exhausted. Copper and nickel are the far more liquid markets. It would be imprudent to trade it until it forms a new support, whether at the current $3,000 level, or the stronger support at $2,000/tonne. After all, the other metals have fallen to historic levels, and the notion that copper fundamentals are better might just prove to shallow to hold markets.

I tend to think that all the other commodities have reached their lows, and so in the New Year rally, they will present good trading opportunities, particularly as I would expect them to be supported by a weaker USD. I will demonstrate as much on my forex blog.
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Andrew Sheldon www.sheldonthinks.com

Lacklustre outlook for gold in the New Year'09

Gold prices have rallied to $885/oz in recent weeks. This is a traders market, so I would be taking profits. The New Year is often a time when the market rallies. I would be expecting a swift kick in the balls anytime soon. there is no basis for a recovery in the metal complex. Even gold prices are not likely to rally just yet. I don't see them taking off until inflation is more prevalent. Market sentiment might be generally stronger though after Xmas, but I would tend to favour the broader market than metals. Gold prices can be expected to fall back to $700/oz. Still that still makes for good earnings for gold prices in Australia, but I would not expect much support just yet.

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Andrew Sheldon www.sheldonthinks.com