Sell GLD, Buy GDX ?

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Good Afternoon,

Gold's midweek gains were partially given back on Thursday, as the greenback rallied from its lowest level in a month amid rising speculative bets the Fed will start raising interest rates by year-end, its current 'stand pat' signals notwithstanding. The central bank has also signaled that rate cuts are not to be expected next month, despite the ongoing contraction in the economy, as the threat of inflation at fully 1% above its target represents a larger risk. Rising apprehensions that US demand for crude might take quite a hit in the wake of current values put a dent in oil's rally and black gold thus fell $1.62 on the day, to $131.55 after having scaled peaks above $135.30 earlier. Whether or not the tipping point has been reached remains to be seen, but indications are that at least one such pivot may be approaching and that it could lead to some serious selling across the board. Some metals went their own way regardless, as nickel fell to a 24-month low on growing surpluses, and lead fell....like lead, down nearly 6%.

Spot gold was showing a $14 or 1.5% loss in New York at last check, quoted at $917.80 per ounce, practically mirroring the decline in oil in terms of percentage. The release of US initial jobless claims figures, (down on the week) gave the dollar a further boost (continuing unemployment claims were flat) in today's trade, but the focus today remained firmly fixed upon crude oil as that market continues to dominate the headlines as well as determine current values seen in other assets. We reported mass demonstrations over fuel price hikes in Indonesia yesterday. Today's word is that French fishermen will be bringing in no fish or crustaceans for their chef friends in the country, as they are shouting "Zut Alors!" over a doubling of fuel prices in a year. The government has offered them financial help.

Oil executives were slowly being turned on the rotisserie in front of a very inquisitive Congress yesterday and they expressed their opinion that crude prices would be "fair value" at anywhere from $35 to as high as $90 per barrel. Perhaps lawmakers should have invited a few traders to their interrogation room, as the picture of a classic short-squeeze is now emerging for this latest $25 rally in oil. Bloomberg reports that:

"Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange. The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13."

"The fundamentals [in oil] justify a price between $80 and $100,'' said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. ``The run-up in prices has more to do with institutional investors coming into the market. There's nothing to discourage them from doing so because the returns have been so high.''

Ah, the joys and wonders of 'sector rotation' by the hedge funds. >From dotcoms, to real estate, to gold, to oil. What next? All guesses welcome.

Silver lost 6 cents on the day, last showing at $17.82 and the noble metals saw profit-taking as well, with platinum down $44 at $2157 and palladium falling $7 at $453 per ounce. Other recent familiar patterns came to light in today's background news, with reports that jewelry demand slipped 21% in the first quarter, to a fifteen year low, and news that the trade boosted scrap sales significantly, selling into the market during the latest rally to values above $900 per ounce.

Those who have held out through the agony of poorly performing gold mining shares for quite some time now, may see their resolve pay off in the not too distant future, according to analysts. At a Toronto CFA Society Luncheon in mid-January, I saw a set of compelling slides presented by one of Canada's top technical analysts, Don Vialoux, wherein he pointed to an impending switch in performance from gold over to mining shares.