Gold prices likely to consolidate

Gold prices are probably likely to retrace in the next week or two, given the price has returned to its previous high. The uptrend line is just an approximation, so you might want to look at a longer term chart for a trend-line support. But we can however expect some consolidation in the $1650-1780/oz range before gold advances. 

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Gold rally taking us to new highs

Several months ago we alluded to the current gold recovery that we are seeing. We are looking for gold to challenge its historic high set back in August 2011 of around $1850. We believe that this 'flag structure' is about to see gold rise $600/oz above this previous high, so we are looking for an ultimate price for gold of $2450/oz in the coming year or two.
A lot of rationalisations will be made to justify this price movement, as well as rationalisations to reject it. The most common arguments are:
1. Low mine output - annual mine production is just a small fraction of the amount of gold in existence. Ultimately it is only speculative demand which drives gold prices, relative to supply of course.
2. War in Iran - Really it is only the uncertainty over monetary unit values which drives the demand for gold.    The prospect of war in Iran is only significant if financing war is considered to be a significant cost on society.
3. Interest rates - The low return on bonds and equities is a compelling reason to hold gold; and this is the state of the current market.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Outlook for gold prices

The price of gold is currently consolidating around above $1550/oz. I fully expect that the price will move higher, though I see no hurry in this regard given the current crisis in confidence. The ultimate strength of gold will be the twin issues of:
1. Greater economic confidence
2. Lower interest rates - low bond yields
3. Few other places to place your money - aside from Asian/Latin American property yields

From this chart, you can see scope for a short run rally to $1650/oz, but we will eventually see a rally in around 1-2 years to $2400/oz. Watch for that break-out!

Source: Kitco

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Don't read too much into Chinese GDP figures

Australian markets are down today. Not surprising - the commodity markets are down. The question is - should they be down? Well, the purported reason for them falling is the 'concrete' reason that China has just reported that it is forecasting annual GDP growth of 7.5% in 2012 rather than 8%. One has to be suspicious of this number however for a simple reason - the Chinese government is:

1. Highly centralised

2. Even autocratic leaders need to depend on market info

The question is - what is deciding the reported forecast of Chinese economic activity. There are several possibilities:

1. The government bureaucratic analysts are looking at market trends - clearly this is not likely because they have a habit of always understating growth

2. The government bureaucrats are performing a market survey to assess market demand for commodities, demand for their products, and these forecasts are relatively negative, i.e. This could be because Chinese manufacturers and traders have a tragic, cautious nature....but alas the economy is growing fairly strongly. The other reason is that Chinese traders are advising the government that demand is weak because they want to drive market perceptions down, so they can buy commodities at lower prices.

3. Chinese commodity buyers, traders or manufacturers, are paying kickbacks to analysts to talk down prices and economic activity in China, so that international commodity prices fall, so that they can buy commodities lower. They can later in the year adjust their prices.

I favour this last approach because a lot of commodity prices are set on the basis of annual price negotiations; and they tend to occur in March or April, i.e. so these Chinese GDP figures are rather timely for the traders. I have over the years seen a great deal of corruption in Asian markets. Rest assured the economists studying PhDs in Canberra take Chinese bureaucratic numbers as gospel - but that is because there is no implication for their papers. i.e. Their salary is extorted from you the taxpayer, where you have no discretion. The trader has discretion, however they are responding to the 'news'; so I suggest they will be buying in coming weeks. I see copper prices are testing previous highs; and lead can go higher.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Focus on copper and nickel

Keep an eye on commodities in these times - particularly copper and nickel, as they are always the first to respond to signs of life. You can watch these commodities at:

1. Copper

2. Nickel

Please note our review of the economic outlook in 'Market Commentary'.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Short term upside to gold

You'd have to be a little more positive about gold at these times; principally for 2 reasons:

1. Prospects for ongoing low interest rates

2. Prospects of tensions in Iran, the Straits of Hormuz - as Iran borders the channel through which oil exports flow. This issue is of course escalating because Iran is building a nuclear weapon.

The reality however for gold is that its going to be a short battle, with the US eventually destroying key military capacity, the nuclear facilities, as well as retaining air and sea superiority.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com