Price Outlook/Trade Recommendations

The gold market is expected to trade heavy in the near-term. MFGR anticipates prices falling toward the $800/oz level over the next 1-2 weeks but isn’t confident enough to recommend a short position. The market will be pressured by expectedly weak economic data and poor Christmas sales, a recovery in the dollar, and by technical factors. Support could come from a potential continuation of fund buying that’s recently taken place, and from fears of economic collapse. We favor trading the market as a trading affair.

  The gold market will face pressure this week from expectations that slower economic growth leads to less demand for gold jewelry and less need for an inflation hedge. Stocks of U.S. jewelry makers still hover near their respective lows, as demand has been decidedly weak. Weak demand for jewelry echoes poor demand for most goods, as major OECD countries experience simultaneous recessions. Poor demand for goods usually leads to deflation, or at least a lack of inflation, both of which should pressure the gold market. As shown in the first chart below, economic activity as shown by the ISM Manufacturing survey has tended to correlate with gold prices from 1990-2003. The chart shows similar correlations since 1980 as well. The second chart shows the two series post-2003, which exhibit an inverse correlation. We think the inverse correlation has been the result of the growth of index fund popularity, which has decidedly waned in the past 6-9 months. As markets return to normalize conditions, we think the weaker economy in general and ISM in particular will lead to lower gold prices.

  On the positive side, the gold market could receive support if large funds continue buying. In last Friday’s COT data, large funds added 25,094 contracts to arrive at a net long of 108,249 contracts. Support may also come from fears of economic collapse. While we recognize that some gold buyers had been using inflation as a reason to buy, the treasury market did not fall on the same sentiment. We think perhaps that traders are using gold as a safe-have to guard against the possibility of economic collapse either globally or in the U.S. Of course, collapse in the U.S. would have adverse implications for the dollar and therefore a sharply positive influence on gold.

Trades: None

Upcoming Metals/Dollar Events

Wed - U.S. Durable Goods Orders

Fri - Japanese CPI

Fri - Japanese Unemployment

Jan 15th - GFMS Gold Survey Update 2

Global Economic & Dollar News

  The dollar index traded -0.10 at the metals’ open and +0.22 at their close. The dollar traded in a small range with light pre-holiday volumes. A better than expected UK current account deficit failed to boost the sterling.

·        Italian Consumer Confidence fell to 99.6 from 100.4 previously. Expectations were 99.5.

·        UK Current Account was -£9.8B vs. -£11.85B expected and vs. -£11.0B previously.

·        UK Final Q3 GDP was -0.5% which was as expected.

·        U.S. GDP was left unrevised at -0.5%, which was as expected.

·        U.S. Existing Home Sales fell 8.6% to 4.49M vs. 4.90M expected and vs. 4.98M previously.

·        New Home Sales fell 2.9% to 407K vs. 420K expected and from 433K previously.

·        Holiday Retail Sales are forecast to decline by as much as 2%, according to the Int’l Council of Shopping Centers.

Precious Metals News Stories

·        India’s Nifty Index was -2.3%, China -4.6%, and Japan closed.

·        Peru’s Gold Output rose 1.63% y/y in Nov to 15.96 kg (15.96 tonnes).

·        Tontine Associates closed two of its hedge funds after losses of more than 60%. It said it would start over with a new fund in Feb.

·        Cerberus Suspended Redemptions on one of its funds for a period of one year.