The Gambler's Fallacy

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Good Morning,

After hitting resistance just above the $945 pivot point both yesterday as well as today, gold prices managed to head into slightly calmer waters but retained their small gains trading near $943 amid still rising crude oil prices and a small loss in the greenback. Rising apprehensions about (once again) dwindling jewelry demand (the largest offtake sector in the market) and the increasing amount of short positions being added in the oil markets and related ETFs also contributed to the metal's stall. Core jewelry buyers are apparently holding out for eventual inventory acquisitions at levels in the upper $800's.

However, bullion remains fairly well supported near the $920 and $930 marks at the moment, as participants factor in a small ECB rate hike for tomorrow and little in the way of a Fed response to inflationary pressures in the near-term. Another stab at the $947 to $950 zone or even higher, could still be in the cards, barring a selling bout in oil, or the opposite in the dollar. The shortened trading week may contribute to added tomorrow but action of a larger order of magnitude is really only expected in the coming week.

New York spot gold prices were quoted at $942 up $2.30 per ounce at last check, and participants will now focus on tomorrow's employment data and ECB rate decision. Both factors could (neither of them perceived to be very helpful to the dollar in the near-term) add to a pre-holiday spike in gold, but do not offer sufficient fuel to overcome the coming correction in crude oil. When (and not if) that event comes about, we will not be talking about some fantasy $200 intra-day spike in gold (as some are dreaming about) but rather about a $50 to $75 pullback within the same timeframe. The current price action in gold is deeply intertwined with that in the oil niche and the latter could have its wheels come off at any moment if conditions become right. Therefore, the question of value for a short-term speculative holder is once again at the forefront.

The Dow was expected to gain a bit in today's session but problems such as car sales at a 10-year low, fears of a possible GM bankruptcy and Starbucks closing 600 of its java dispensaries are keeping the equities crowd on full red alert for the time being. Gold could also benefit from the quest by stock sellers for a place to park their funds. It would benefit a whole lot more however, if it was not being seen as within $100 of its all-time high seen in March and possibly offering a $200 risk on either side of its price scale. Silver was ahead by 19 cents on the day, quoted at $18.28 after a brief overnight dip to sub $18 levels. Platinum was down $11 at $2054 and palladium lost $1 at $464 per ounce. US car sales figures are putting a dent into the otherwise strong noble metals complex.

Background geopolitics, while far from showing signs of a detente, simmered down a bit overnight as Iran's foreign minister Mottaki referred to a "new trend" in negotiations with the West regarding its nuclear programme. European nations and the US, China, and Russia are apparently pulling out an arsenal of carrots to block the view of the sticks that Israel (and the US) have waved at Iran recently. Mr. Mottaki remains convinced that the likelihood of military conflict with the Jewish state is -as he puts it- "nil." President Bush said that military action against Iran is 'not his first/preferred option. Let's all hope that the cooler heads prevail. Also in the background, the realization that at $100 per barrel, the proven oil reserves under the sands of the Middle East are worth as much as the aggregate size of public equity markets around the world. We are talking now about kings who could really be king...makers. Were it not, of course, for the notorious corruptive powers of oil-based wealth. History is the best witness.

Since it is mid-year, we bring you a perspective on equity markets as seen through the eyes of history and those of Mark Hulbert over at Marketwatch:

"No doubt about it: It was an awful June, quarter, and first half of the year.

Indeed, the 10.2% loss produced in June by the Dow Jones Industrial Average

was the third worst for that month in this index's history, eclipsed only by 1930 and 1896.

The Dow's loss during the second quarter is not ranked quite as close to the bottom as June's, but still low: Only 15 other years out of the last 112 have had second quarters with worse returns.