Price Outlook/Trade Recommendations

 Today’s trade in gold is expected to move lower. Prices could fall toward the $725.00 level. We favor trading the market as a trading affair.

  While we had anticipated a higher trade in gold yesterday due to stock market strength and a small return of physical gold demand, yesterday’s trade had difficulty moving above technical resistance at $772.20. Additionally, crude oil was held to key resistance at $68.53 & $68.92. Trade in the dollar has also shifted its focus toward upcoming rate cuts in Europe sooner than we anticipated. The BOJ is poised to cut rates at its board meeting today, which could create another round of risk appetite. Such a development should be negative for prices today. The gold market must also be on guard for potential month-end selling by hedge funds facing customer redemptions amid poor commodity performance. We anticipate dollar strength through year-end, which should offer slight pressure on gold, as we detail in a study below.

Trades: None

Upcoming Metals/Dollar Events

Fri - Japanese CPI

Fri - Chicago PMI

Nov 14-15 - World Finance Summit at White House

Nov 15th - G20 Meeting at White House

Nov 18th - TARP Oversight Hearing in House

Global Economic & Dollar News

  The dollar index traded -1.12 at the metals’ open and -0.18 at their close. The dollar fell initially on risk appetite, but recovered by the end of the day on a shift in focus toward European rate cuts next week.

·        The BOJ announced a second stimulus package worth JPY 26.9T.

·        Eurozone Industrial Survey was -18 vs. -14 expected and vs. -12 previously.

·        Eurozone Retail PMI was 44.3 vs. 46.2 previously.

·        U.S. Q3 Advance GDP was -0.3% vs. -0.5% expected and vs. +2.8% previously.

·        Initial Unemployment Claims were 479K vs. 475K expected and vs. 478K previously.

·        Fed’s Yellen said that recent data was “deeply worrisome” and that the economy will likely contract “significantly” in Q4.

Precious Metals News Stories

·        India’s Nifty Index was closed, China +2.6%, and Japan +10.0%.

·        AngloGold Ashanti said that it reduced its hedge book by 580,000 ounces (18 tonnes) in the latest quarter to end at 6.3 Moz. It said that it’s book will be cut down to 6.0 Mozby the end of the year, or another 9.3 tonnes.

·        Japan’s Gold Exports are on track to double this year and hit a record 350 tonnes. Individuals have been selling gold in Japan to lock in profits, according to dealers in Singapore.

·        Citadel Will Wind Down a $1B fund of funds and shift the capital to another business.

Copper News Stories

·        Copper Stocks on the LME rose 6,575 MT yesterday.

Analysis

Gold Seasonal Patterns

  The gold market typically enjoys a bullish seasonal pattern in the last few months of each year, but under current conditions of economic weakness and dollar strength, MFGR has doubts as to whether the pattern will work this year. After all, the dollar has risen over 11.0% this year so far, and appears to be in the early stages of a long-term uptrend. The question will become whether dollar strength through year-end will be enough to keep gold prices from fulfilling their bullish seasonal tendency.

  Using data back to 1985, the seasonal pattern shows the last major bottom formed in prices each year typically occurs around Oct 23rd (first chart). Buying on Oct 23rd and selling on Dec 23rd has been a winning trade in 15 of the 23 years. The average gain has been 2.0% while the standard deviation is 4.7%. The trade is even better when looking at the weak dollar period since 2001, where it’s been a winning trade in 7 of the last 7 years. Average gain is 6.0% while the standard deviation is 3.7%. The trade since 2001 is shown in the second chart below.

  Given the strength in the dollar and forecasts for continued dollar strength, we’re not strongly of the opinion that gold prices can rally through year-end. Especially when index funds have fallen out of favor and many hedge funds find themselves facing customer redemptions and/or investment still tied up in the Lehman bankruptcy. However, we find that our bias receives only slight support from the data. As the following chart shows, years when the dollar rallied between Oct 23rd-Dec 23rd haven’t necessarily led to declines in gold during the same period. Likewise, declines in the dollar have still coincided with periods of losses in gold. While there is some slope to the line of least squares, the  r-squared of the equation is only 10%.

  We tried to look at the dollar’s trend in the first ten months of the year as an indication of what it will do in its last two, but the data show randomness. For instance, the 11% gain in the dollar so far this year is higher than 21 of the last 23 years. Of the two higher years, 2000 & 2005, the dollar reversed 6.8% lower in 2000 and gained another 1.2% in 2005. The gold price changes in the last two months of those years were +3.3% and +9.1% respectively.

  What if we are correct in predicting dollar strength through year-end? In past years where the dollar has done well in the last two months, gold prices have been mixed. Again, there’s some relationship, but the r-squared is only around 10% (following chart). Out of 11 years when the dollar rallied in the last two months of the year, gold finished lower in five of them (the top five are shown in table 1). While the equation line in the following chart again has a slope to it, what’s most interesting is that the biggest gains in gold in the last two months of the year have come when the dollar has weakened by 5% or more (table 2).

Table 1: Top five dollar advances at year-end:

Table 2: Top five gold advances at year-end: