Gold: the bottom is in

Here is a synopsis of the gold market during the month of May. Gold made its low on May 1 when it momentarily dipped below $850/oz. Since then, gold broke out of a two-month long correction/consolidation when it surged above $900/oz on May 16. Gold topped out at around $935/oz on May 21, and this was the day to "sell in May and go away." During the past week, gold has been put to the test and sold off by about 60 bucks to today's low of $870/oz. I think today will be the last day we see gold trade below $880/oz; the bottom is in. Gold will most likely consolidate over the next month or two within the blue triangle formation shown below (880-920). This period will be the last chance to accumulate ounces and mining shares before gold permanently moves into four digit land.



There has been much talk about the need to raise interest rates to curb inflation, and such notion has propped up the dollar during the past week. But with the housing market still far from any signs of recovery, an interest rate hike is all talk and no trousers. Indeed the Fed is running out of room to cut interest rates, but this only means that the Fed will have to resort to outright quantitative easing. As for the recent dollar rally, I think it is ovah. Perhaps tomorrow's consumer sentiment data will kick things back into motion (i.e. dollar down gold up).

Euro is losing steam

Chart looks pretty ugly. This could be bad for PM, which is already getting pounded this week. Also, with a potential bond correction around the corner, we may seem some deleveraging across the board.

Gold : Crude Ratio

Today's sell-off in crude dominated the headlines, as equities rebounded and precious metals got whacked. There was much talk about how a correction in crude will bring down the precious metals market, so I made a chart (normalized) comparing the performance of gold to crude. Note the dramatic reversal since Jan 2008.

If there is any merit to mean reversion and the historic correlation between gold and crude, we should see the gold:crude spread climb back up...but will this happen through a massive sell-off in crude or a strong rally in precious metals? With tightening oil fundamentals (peak oil!), soaring inflation, weakening fiat, and deteriorating market confidence, the latter scenario seems more likely.

BlackRock Buys $15bn UBS Debt

From tonight's FT headline:

"BlackRock, the US asset manager, will pay UBS $15bn (£7.6bn) for a portfolio of subprime mortgage debt in a deal that the Swiss bank plans to announce on Tuesday with its first-quarter results, people familiar with the transaction said."

Seriously, someone's been smoking too much black rock.

Almost time to start accumulating gold

With the dollar and equities on the rebound, capital has been gushing out of commodities. How did we manage to go from crisis to recovery in a matter of couple months? I suppose one could applaud the Fed for engineering such a quick recovery (TAF and whatnot), but shouldn't the natural course be: crisis --> RECESSION --> recovery? Perhaps the market over-panicked during the crisis stage, and any bit of optimism relative to Q1 2008 will be seen as a complete recovery: much like a big pendulum swing. I believe the Fed has exhausted itself during these massive pendulum swings, and has temporarily gone into neutral mode...hoping for the best. Over the next few months, I think the pendulum swings will slow down (i.e. markets will go sideways). As people re-evaluate economic fundamentals, which still point towards a deep recession, we should also see a consolidation in the gold market. A ranging market is something most gold bulls have been waiting for, and it will be the last opportunity to accumulate ounces and mining shares before three-digit gold becomes history.

Update on 5/29/08: I no longer think gold will trade to 850. Gold will most likely consolidate between 880 and 920 before resuming its next leg up. I should have loaded up on the day I wrote this post.