Gold Redux

Chris Laird
www.PrudentSquirrel.com
Oct 9, 2006

There are a lot of things happening in gold and in the macro economic world.

Among them are:

• Quite possible Fed interest rate hike. Two Fed governors (non voting) have said this week that inflation remains a US concern. US economic statistics are quite mixed, but there are signs the US economy is still strong in sectors non housing related. If the Fed surprises and raises, look out for gold, and worse will be a derivatives surprise later. Derivatives don't like surprises at ALL. Everyone is betting on paused US interest rates. Non farm employment is up 51000.
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• Continuing weakness in the commodities complex, not the least of which is gold's recent price drops running at roughly 70 plus USD in the last weeks.
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• The Dow meets a new record and the financial press is all gaga about it. I think it is very overblown considering the indications of weakness in the macro economy judging by things like the CRB and Transports which are indicators of economic slowing. Supposedly the lower oil prices are encouraging consumers to go on buying sprees, but that does not impress me at all because they are going to get exhausted soon anyway, the dropping oil prices are more indicative of a weakening macro environment, any bonus to the world economy will be overcome if there is a serious recession. And so on. There is a lot more to say about this.
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• Rumors that OPEC will drop production by a million barrels a day, then counter rumors that Saudi doesn't agree to that at this point. OPEC public statements they won't allow oil to drop below 60, oil rises over 60, then later come to find out that there is not a consensus in OPEC to do anything at this particular point, but surprises are always around the corner aren't they??? So oil again drops below 60.
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• Gold's mini rallies all have no legs, there is selling into any rallies.
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• Supposedly, first the Central banks sold all their gold, or were going to sell it all, then notice that they didn't sell it all, being short about 100 tons, then notice again that they indeed did sell all 500 tons for this past year..conflicting signals, and then that the CB forward sold their gold in a surreptitious manner.kind of like the whole tenor of the gold market now.
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• There are indications that the West is not finished with their round of interest rate hikes. If they resume or do one or two more rounds that just adds more bearish force on gold in the short term.

I wrote a forecast a couple of weeks ago that gold was going to between 500 and 550 by December, even after I had just seen a forecast by GFMS that gold was going well over 700 by December. That made me nervous, but it does appear that I am going to be right, possibly quite sooner than I thought.

No bottom as of yet in gold's recent drops

In fact, we have not seen a bottom in gold's recent 'correction' because this is not a gold correction, it is a fundamental change in gold's short and mid term prospects- gold is reflecting a deflationary macro economic expectation that is developing, but has not reached a stage of consensus either in the economic community or in the gold market for that matter. But such a consensus is definitely developing.

Speculation unwinding is overcoming all gold rallies, and is causing much of the latest carnage. Again, gold still has lots of speculative froth, as does the CRB. Much of this is going to spill off in the coming 6 months, but what has amazed me is the speed of the change and pull back by speculators. Their selling has proceeded faster than anyone expected, and it is overwhelming the normal seasonal demand for gold now. In fact, there are articles out indicating that jewelers are even waiting further. They still have a month or so they can wait till they must buy for their respective gold seasons.

In any case no one yet sees a bottom. The last jeweler buying point was around 590 - 600 bucks, but now gold has dropped well below that and now jewelers are looking for a new buy point, and I will hazard a guess that is in the 550's. But that won't necessarily stop gold's drops if speculators are still unloading all that paper gold so we will see.

There is a lot more to all this action. I will have a special report for subscribers about all this, and much more, in either this or next week's Prudent Squirrel Newsletter.

Chris Laird
Editor in Chief
website: www.PrudentSquirrel.com
email: editor@PrudentSquirrel.com

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