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