Gold looks cheap to me, when looked at in inflation adjusted terms

The Overall Fundamentals

Commodities saw volatile movement last week, driven by intensifying talk of US Double-Dip recession, spreading of sovereign crisis from the European periphery to core economies, speculations of US Fed's easing measures, and supportive macro-economic data.

During the week, the front-month contract for WTI Crude Oil dove below 80 for the 1st time since October 2010 while the equivalent Brent crude broke below 100 1st the first time since February 2011.

Both benchmarks recovered later in the week in tandem with the rebound in equities.


Gold was the best performer as players fled to the precious Yellow metal as a safe-haven investment.

The benchmark Comex contract gained +5.54% during the week with price rising to a new record high of 1817.6 Thursday before retreating after the SME announced margin increases.

While I believe Gold will see a further correction in the near-term, Gold will be the biggest beneficiary of low interest rates, rising economic uncertainties, and a new round of central bank easing that is coming.

Gold extended its rally last week, recording the biggest weekly gain since Q-1 of Y 2009, on Global economic uncertainty and speculations of the US Fed's QE-3 at appears solid in coming sooner rather than later..

The precious Yellow metal rose to a new all-time high of 1817.6 Thursday before fading after the CME Group announced margin increases.

The CME raised the initial margin requirement to 7425 per contract from 6075, and the margin for hedging to 5500, up +22.2% from 4500.

Gold's correction may continue this week, but the CME's margin adjustment will not reverse the precious Yellow metal's up-trend.

The market only used that as an excuse to take some profit from Gold's recent exponential rally.

Gold's accelerated rise may have been overextended in the near-term. The chart shows that its close Friday exceeded the upper 3 standard deviation. It is now reasonable for Gold to have a correction before resuming the rally.

The market has been talking about Gold price "Bubble" as it has risen more than +26% since the beginning of the year and almost 80% of the gain was made over the past 6 wks.

The nominal Gold price has risen to a record high and exceeded levels made in Y 1980. But, after inflation is adjusted, Gold price is still 20% below those levels.

Many people also compare the current economic situation with Y 2008 when Lehman Brothers collapsed, the current pattern of Gold price is more similar to the period from Q-3 of Y 2007 to Q-1 of Y 2008 instead.

If Gold is to resemble the movement at that time, price will need to rise +20% more it moved +50% back then.

Crude Oil

EIA, OPEC and IEA released their latest Crude Oil demand forecasts last week. In light of the economic slowdown and raised Global uncertainties, Oil agencies revised modestly their outlooks for Crude Oil demand growth.

OPEC lowered the demand estimates for both Y's 2011 and 2012, the IEA trimmed this year's outlook but raised next year's and the EIA raised demand from Y's 2010-2012 but the size of growth in Y 2011 was lowered as a result.

All 3 agencies warned of the great uncertainty in Global economic outlook.

The IEA stated that concerns over debt levels in Europe and the US, and signs of slowing economic growth in China and India have dampened the market and raised fears in some sectors of a Double Dip recession.

OPEC cited "Dark Clouds over the economy are already impacting the market's direction...The potential for a consequent deterioration in market stability requires higher vigilance and close monitoring of developments over the coming months."

Together with reduction of the price forecasts, the DOE/EIA said that 'there is significant downside risk for Crude Oil prices if economic and financial market concerns become more widespread and take hold.

Putting the headline growth forecasts aside, demand in non-OECD countries remains Strong, and its share of total Global demand was revised higher.

For instance: the EIA's estimate of non-OECD as a percentage of total Crude Oil demand was upgraded to 48.02% in Y 2011 and 48.48% in Y 2012, compared with 47.91% and 48.78% respectively in July's projections.

OPEC forecast non-OECD as a percentage of total Crude Oil demand to increase to 47.67% in Y 2011 and 48.43% in Y 2012, compared with July's projections of 47.62% and 48.38% respectively.

China will continue to be the biggest Crude Oil consumer in the emerging markets. So, the economic developments in China and emerging markets will be more determinative for Crude Oil prices in coming year despite short-term volatility.

The Overall Technicals

Comex Gold (GC)

Gold's up-trend accelerated to new record high of 1817.6 last week, formed a short term Top there, and faded on profit taking.

The initial bias is Neutral this week for some consolidations, but, any downside is expected to be contained by 38.2% retracement of 1478.3 to 1817.6 at 1688 and bring on a up-trend resumption.

A clear break above 1817.6 targets 1900, the psych mark, and then 161.8% projection of 1309.1 to 1577.4 from 1478.3 at 1912.4 next IMO.

The Big Picture: Gold's up-trend from Y 2009's low of 681 is in progress, and momentum is Strong even though RSI in weekly and monthly charts are both in the overbought Zone. But, just as long as 1577.4 , the Key resistance turned support, holds, I am staying Bullish on Gold, and expect the up- trend to extend to 2000, the psych mark, next.

The Long Term Picture: the rise from 681 is the resumption of the long term up-trend from Y 1999 low of 253 and there is no sign of Topping yet. This up-trend can now target 161.8% projection of 253 to 1033.9 from 681 at 1945.6. And sustained trading above 2000, the psych mark, should point the way to 261.8% projection at 2727.2. Stay tuned...

Comex Silver (SI)

Silver moved lower to 37.025 last week, forming a temporary low, and turned sideway. The initial bias is Neutral this week and some consolidations should come on first. But I expect any upside to be limited by 40.40, the minor resistance, and bring resumption of the fall from 42.294.

Right now, I am favoring the case that the corrective rebound from 32.30 finished at 42.294. A clear break of 37.025 should point the way to retest 32.30/33.38, the support Zone, first. But, abreak of 40.40 will negate this Bearish POV and turn my focus back toward 42.295 instead.

The Big Picture: the Silver price actions from 49.82 are treated as consolidation pattern in the long term up- trend. The 1st leg from 49.82 should have completed at 32.30. Rise from 32.30 is treated as the 2nd leg and may have finished at 42.295 already. Sustained trading below 55-Day EMA, now at 38.108 should send Silver South through the 32.30 support Zone to 61.8% retracement of 14.65 to 49.82 at 28.085.

On the Upside: a clear break above 42.295 will delay this Bearish POV, and bring another rise towards 49.82, the high, instead.

The Long Term Picture: the deep sell off from 49.82 raises the possibility that long term up-trend from 4.01 is near completion as it faced Strong resistance from 261.8% projection of 4.01 to 21.44 from 8.4 at 54.032. But, it is still early to confirm a long term reversal yet, though an important top should be near, if not already in at 49.82. Upon confirmation of a Key reversal, Silver will likely dive towards 55 months EMA at 21.4. Stay tuned...

Nymex Crude Oil (CL)

Crude Oil fell to 75.71 last week, just above the mentioned 100% projection of 114.83 to 89.61 from 100.62 at 75.40 and recovered.

A short term bottom was formed there, and some consolidations should be seen in near term.

Any Northside of recovery should be limited by 89.61, the Key support turned resistance.

On the Downside: a clear break below 81.03, the minor support, will turn bias back to the Southside for retesting 75.71 support first. A clear break there starts the decline again from 114.83 towards 70, the psych mark, next. But a clear break of 89.61 dampens my Bearish POV, and turn focus back to 100.62, the K resistance, instead.

The Big Picture: the medium term rebound from 33.2 is treated as the 2nd leg of consolidation pattern from 147.24. Sustained break of 83.85, the cluster support, indicates that the rally finished at 114.83, and the 3rd leg of the consolidation will have started. The current fall from 114.83 should now target next Key cluster support Zone at 64.23, 61.8% retracement of 33.2 to 114.83 at 64.38. A clear break there points the way to retest 33.2 low.

On the Upside: a clear break of 89.61, Key resistance, is needed as the 1st signal of bottoming or I will stay Bearish.

The Long Term Picture: Crude Oil is in a long term consolidation pattern from 147.27, with 1st wave completed at 33.2, and the 2nd wave may be finished. Upon confirmation of medium term reversal, the 3rd (a downward wave) wave of the pattern should have started for a retest on 33.2 low. Stay tuned...


Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.