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.

Base metal prices resilient

Despite all the bad news we are hearing about the economy, its interesting to reflect on commodity prices. Given the weak overtones, you might have been expected to see weakness in commodity prices. Well they have been surprisingly resilient. Copper has fallen to $US2.90/lb, but its back up over $3.00/lb. Zinc and lead are fairing even better.
I would like to think that its a sign of incredible resilience in the global economy, but I dont think so, or at least its not the whole story. I think its a shortage of metal, or more specifically delays and difficulties commissioning new mine capacity, combined with the odd strike, as mine workers attempt to benefit from some of the high metal prices. There is a huge shortage of semi-autogenous grinding (mills), tyres and a range of other consumables. Its evident that these shortages are delaying projects, and even hindering established projects. So whilst the global economy might we softening, there is little relief for commodity buyers. The reason I suspect this is the case is because metal stockpiles seem to be falling. Take a look at stockpiles at the LME and COMEX exchanges. Nickel is rising to medium term highs, but zinc stockpiles have been falling since Oct'07, lead stockpiles started falling this week, copper on the COMEX has falling stockpiles since Oct'07, and flat on the London Metals Exchange lately. Aluminium stockpiles have stabilised.
At the same time most of the commodity producing currencies have experienced something of a sell-off. eg. The AUD has fallen from 93c to 87c against the USD. So it all looks good for commodity producers. So I like Matrix Metals, given that its planning to expand output significantly.

Gold consolidating

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

Copper prices break support

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

Gold plummets 4.6% overnight

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

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

1. Carry trade being unwound by rising USD

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

3. Gold is a very small market traded by institutions

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

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

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

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

Technical Analysis

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

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

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

Gold vulnerable for short term sell off

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

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



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

Opportune time for agricultural commodities

Anyone interested in agricultural commodities should check out my latest post on my forex blog. Its particularly pertinent to NZ and Australia. See http://forextraneous.blogspot.com/2007/09/dont-ride-off-nz-economy.html.

Gold breaking out! Confirmed

Friday's trading in NY gave us clear confirmation that the price of gold is just about to rally. The gold price closed at $US743.70/oz, the highest level in 27 years (since Jan 1980). And if you think thats significant consider that inflation over the last 27 years is likely to have discounted the gold price by 60% by the distorted CPI measure , and probably 120% in real terms. You would need to look to see how the money supply has expanded over that time.

The break is convincing in several respects:
1. Gold broke the previous high of $730.30 set on the 8th May'06.

2. The gold price rally was convincing in itself - up $9.75/oz
3. The gold price closed near its daily high
4. The gold price move is supported by strong fundamentals

But if we look at the following chart we can see that the current rally in the gold price is partially due to gold fundamentals (in as much as the gold price is rising in terms of all currencies) and partly due to a weaker USD (in as much as the USD denominated gold price has risen more). Of course what we would like to see is the gold price break out in Euro & Pound terms, as well as Yen and AUD.

A real increase in the gold price in terms of multiple currencies communicates a growing distrust of monetary units. The reason for this distrust is the relative decline in the valu of those currencies. Currencies decline in value in real terms because the amount of currency in circulation is growing faster than the productive capacity of the global economy. You might think this is a signal to buy other tangible or physical assets as well, but actually this is not the case because their prices are already too high. Most asset markets are high priced because in a period of prolonged monetary expansion, those assets become priced (not on the basis of cost + profit margin) but your ability to pay and your belief in the sustainability of those high prices. The consequence is thus, asset prices are too high, and they will only offer gold buying when interest rates have risen to an extent that property holdings have been deleveraged. You might ask what level of deleveraging has to occur. Well that depends on each country's monetary expansion over the last 20 years less the amount of productive capacity added. Those countries like Australia which have huge exposure to metals are more vulnerable, even though they are helped by gold mining capacity.
You might ask 'why gold' since it is an asset? Well the reason is that gold has under-performed as an asset class over the last 5 years compared to other assets. The reason that it has under-performed is because it offers a low return - assuming you lease the metal, and none if you dont. Its this criticism of gold that makes it the most attractive investment, along with other precious metals. But gold is the best at this stage of the cycle because other precious metals will suffer eventually from a 'demand shock' as higher interest rates curtail industrial demand for commodities.
But gold is a financial asset as well, and as such, its possible for companies to leverage themselves into gold, so prices will in times of uncertainty be volatile. Financial intermediaries will be inclined to sell gold to cover other loss-making positions. But gold will recover like no other financial instrument - at least until the market is deleveraged. In times of instability markets tend to over-react.
Over the last 20 years western governments have been competing in a money expansion fest. Rising inflation will undermine that. Governments can conceal inflation, but they can't conceal the financial burden that places on 'real' people, so there will be a backlash. Higher gold prices will raise attention to this fact. Why is gold over $400/oz if not inflation? Afterall it offers bugger all return. The reason is - its real money when fiat paper is not trusted. The other sign of high inflation is wages...and with falling housing prices, reseting interest rates, tight labour markets, we can expect higher rates.

Source of Base Metal Charts

Until about 12 months ago you could download daily price and stocks data for base metals. Sadly the LME has gone commercial and you now have to pay for it through one of their intermediaries. Fortunately Kitco and others offer daily prices and historical charts which effectively does the job for you. I would however argue that the charts are not as accurate as the trading platform charts.

The historical charts can be accessed at:
1. Copper: See www.kitcometals.com/charts/copper_historical.html
2. Zinc: See www.kitcometals.com/charts/zinc_historical.html
3. Nickel: www.kitcometals.com/charts/nickel_historical.html
4. Lead: www.kitcometals.com/charts/lead_historical.html
5. Aluminium: See www.kitcometals.com/charts/aluminum_historical.html
6. Tin: See ???
In the precious metals we have
7. Gold: See www.kitco.com/charts/techcharts_gold.html
8. Silver: See www.kitco.com/charts/techcharts_silver.html
9. Palladium: See www.kitco.com/charts/techcharts_palladium.html
10. Platinum: See www.kitco.com/charts/techcharts_platinum.html
11. Rhodium: See www.kitco.com/charts/historicalrhodium.html

These are the traded metals where there is a high level of price discovery or disclosure. There are of course alot of other where price information is not so transparent because these metals prices are concealed by confidential commercial agreements between producers and end users. The reason for this is that these markets are illiquid. Another problem is that the metals are often sold as ores or metal concentrates with widely variable concentrations, as well as price bonuses (for precious by-products) and penalties (for deleterious contaminants). For this reason its difficult to reach a standard price for these commodities because every refinery has a different pricing policy to achieve competitive advantage. These metals include:
12. Zircon:
13: Niobium:
14. Tantalum: See www.metalprices.com/FreeSite/Charts/tantalite_charts.html?weight=lb (before 2006) and http://metalsplace.com/prices/?a=14&grt=6 since.
15. Molybdenum: See www.adanacmoly.com/adanac_stock.php
16. Manganese: See www.metalprices.com/FreeSite/Charts/mn_ferro_charts.html?weight=lb (before 2006)
17. Cobalt: See ??
18. Magnesium: See http://metalsplace.com/prices/
19. Chrome: See ??
20. Antimony: See ??
21: Bismuth: See ??
22. Tungsten: See http://metalsplace.com/prices/?a=4&grt=5
23. Mercury: See ??
24. Vanadium: See ??
25. Cadmium: see www.asianmetal.com/Metal_News/index_product63_en.asp or http://metalsplace.com/prices/?a=15&grt=6
26. Iron ore: See http://metalsplace.com/prices/

No other metal not listed here is sold as a discrete commodity because they dont occur in isolation. Even some of the commodities above are seldom mined as a discrete commodity. eg. Cobalt is usually a by-product of nickel mining, bismuth is often a by-product of tin mining, antimony is often associated with gold. These metal combinations might simply be liberated by physical crushing, but often they require more expensive chemical separation processes that directly impact on the value of ores, thus making price determination less transparent.

Finally we have the energy-based commodities:
25. Petroleum:
26. Natural Gas:
27. Uranium (yellowcake): See www.uxc.com/review/uxc_g_price.html or in constant dollar terms www.uxc.com/review/uxc_g_hist-price.html
28. Thorium: See http://minerals.usgs.gov/minerals/pubs/metal_prices/

Otherwise you can perform price queries at this site: www.metalprices.com/freesite/historical/price-query.asp. See the US Geological Survey for more more info on commodities: http://minerals.usgs.gov/minerals/pubs/metal_prices and www.crbtrader.com/fund/articles/default.asp. Here are a few other places for metal price charts - http://www.mineralstox.com/.