Red-Hot Resources

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Monday, January 08, 2007

Monday is Chart Day

Here are some charts and commentary I sent to my coworkers at 8 am this morning ...

I was as surprised and disappointed by gold’s swoon last week as anyone. Technically, it opens the door to further weakness. If we see that weakness, I’d look for gold to revisit the 571 area in the short-term. Longer-term, the market needs to get past its liquidity concerns.

The liquidity concern is a four-headed monster. India and China both tightened their money supply in the same week. Japan is likely to do the same. And the jobs numbers last week give the Fed cover to not cut rates. Combine these developments with a short-term overbought condition in the market, and we got last week’s sell-off.


First is that tightening is not severe. Indeed, money is still pretty loose. However, that’s more long-term.

Second -- paradoxically, investors who fear a global recession, may take money that has been in base (industrial) metals and put it to work in gold. Indeed, that may be some of what we have seen with copper/gold in the last 2 months or so. That’s already ongoing.

Third -- the US dollar has had a pretty good bounce, but it's coming up to some serious overhead resistance. On the other hand, the dollar's bounce is being fueled by realization that the Fed is dead-set against cutting rates anytime soon. Is that fully priced in? You tell me. If the greenback goes down, you can bet that gold will go up.

The most bullish factor for gold in the short-term is that crude oil looks ready to bounce. Usually rising oil prices pull gold higher. With that in mind, let’s look at a chart of oil…

Oil hit the skids last week, pushed by the way-too-warm weather across the Northeastern US. The warm weather has slashed demand for heating oil and natural gas, and also cut back on consumer weekend ski vacations, etc..

Still, the sell-off was way overdone. Crude rallied on Friday as OPEC, roused from its coma by the plunge in prices, said it might hold an emergency meeting before its next scheduled meeting. The fear of an emergency meeting, combined with a drastically oversold condition, could push crude back to $60 in a hurry.

Longer-term, the deciding factor for energy could be weather. Heat wave this summer? Lots of hurricanes or no hurricanes at all? It's hard to trade on the ever-shifting weather, but that's what the energy complex may require.

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