FSU Editorial: "Gold at a Short Term Inflection Point" by Christopher Laird 02/15/2007

GOLD AT A SHORT TERM INFLECTION POINT
by Christopher Laird
PrudentSquirrel.com
February 15, 2007

700 or 630 next?

In early January, I wrote that gold was due for a new bull phase and that happened. Since then, gold rose from its 620 range to 670 as of this writing (spot).

However, gold is due for a moderate correction within its present bull phase which is clearly very intact. The major factor right now is that the USD just broke its trading range of between 84.5 and 85.25 or so, breaking down, Wednesday. If the USD gets into another test of 80 in the USDX (US dollar index) we could easily see gold continuing and breaking 700 before any correction.

US / world interest rates

The USD is pressured right now in the interest rate environment, as Bernanke just stated the Fed is likely to keep US interest rates stable � and the EU is indicating a probable interest rate hike in a month or so � which will further pressure the USD.

Japan is still locked at a ridiculous .25% rate that is just keeping the Yen carry trade flying right along. The trouble is, the EU among others, and even China, are concerned about a weak Yen. It is not easy for China to swallow a weaker Yen with all the pressure from the US and the EU for example to let the Yuan/RMB strengthen.

Yen uncertainty

The US is indicating acquiescence with a weak Yen in spite of concern by the EU and others. The US has a policy of tolerating a weak Yen to gain Japanese support of the US bond market. However, there is risk that the Yen could strengthen unpredictably and that would cause unwinding of some of the Yen carry trade which will be detrimental to stock markets right now, even gold could take a hit with paper gold now dominating the metals markets. One of the last times the Yen strengthened unpredictably was during the Russian bond defaults that led to the LTCM crisis. It is very important to track the Yen situation, and if there are signs of a Yen turnaround there will be weakness in gold for a period of time till the Yen settles down.

ETFs dominating the gold market

ETFs have now gained acceptance as good gold alternatives, and instead of gold prices being primarily dominated by futures markets, for example, lots of speculation money is hoarding into ETFs which is causing a rather new dynamic that supports the gold price since these ETFs and this ETF mania has come into vogue.

However, personally, I have written about my dissatisfaction with paper gold vehicles � particularly ETFs which are paraded as as good as gold � so to speak, but have about a thousand technicalities from legal ones to tax ones to my concerns that in a serious currency crisis, there will be foreign exchange controls by all interested countries � that will lock up ETFs�.

Nevertheless the gold ETF universe is strong, led by GLD that now has a 10 billion dollar gold position. With the ease of using ETFs to take gold positions, I see no let up in ETF gold bullish pressure, but I have to say, what goes up can come down, and as fast as ETFs can cause gold to rocket up, they can rocket gold down twice as fast. This is something people have to keep in mind with all this ETF mania, and its bullish effects on gold � best described as a blessing and a curse � blessing as a very strong gold bullish force, and a curse when they liquidate, and cause a hell of a lot of gold volatility � twice as fast on the downside.

Macro gold bullish except for stock risk

In any case, the macroeconomic fundamentals are in place for a continuing very strong gold bull, such as the record US trade deficit this week - with the exception that the stock markets look toppy to me, and if these let go, gold shares will take an initial hit. In fact, one of the most serious imminent events on the horizon is what a stock drop would do to all financial markets. In spite of the fact that some TA guys are saying how great stocks look in many respects, the fact is we are late in a stock bull that is based mostly on lots of easy money � in my view � and not necessarily by strong economic fundamentals � particularly in Japan, and the US.

But, depending on what the USD does in the next week or two, we will either see a nice break for gold above 700, or if the USD does not break down to the low 80's in the USDX, we will likely see a mild correction in gold to the 630/40 level.

The Prudent Squirrel newsletter is Chris Laird�s macro economic gold newsletter. There are 44 issues a year. Subscribers also get periodic email alerts when there are potential changes in the gold market. Subscribers are already aware of the content of this article.

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The Prudent Squirrel newsletter is Chris Laird�s weekly macroeconomic gold newsletter. A month or so ago, I predicted the short term gold bear market is over based on the weak USD and the continuing concern in the Mid East. That has proven to be true � holding up gold in spite of weakness in the base metals�. Stop by and have a look.

Contact Information
Christopher Laird
PrudentSquirrel.com
Los Angeles, CA USA
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