You probably know that silver prices usually track and follow gold prices but often amplify them during declines. Silver is both a precious metal used as a value reserve, but it’s also an industrial metal well known for its physical qualities, and used in numerous technical applications. Those two features make silver very attractive not only for industrial players but also for financial investors.

Silver prices are therefore driven by real factors like mining extractions or industrial demand, but also by speculation and other financial factors. Some of them become more significant over the time, depending on the economic and financial context. It appears that the leading factor recently has been the financial deleveraging. Indeed, the massive liquidations of positions from hedge funds which chase cash to face redemptions and therefore reduce drastically their risk exposure have been the key factor of the recent sell-off.

After oil and gold, silver is the third most accessible commodity in the world thanks to numerous financial contracts, futures, ETF’s, options, certificates etc…

The price action posted a low recently in parallel with the low posted by gold prices, in late October. Silver prices touched a low at $US 8.40, and have now bounced back at $US 10.35. It may confirm that the bearish trend started in March 2008 (point A on the chart) is likely to have ended last month (point B). This bearish trend has generated a loss in value of roughly 60% in silver prices.

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The chart shows the strong positive correlation between gold (red line) and silver prices (black bars). Since the beginning of 2008, this correlation was almost perfect. However, since mid-August, silver prices have been failing to keep up the pace and are much more “heavy” than gold prices. As mentioned in our last update, silver prices have been manipulated in July and August as 2 US banks accumulated massive short positions that created a panic movement on the downside. Now that the sell-off may be over on the near-term, a further rebound is probable. The technical momentum and MACD indicators signal that some positive trend is building up. In this scenario, the retracement levels of the bear trend occurred this year (between points A and B) may act as targets and resistance levels for the current price action.

The first resistance might be the 23.6% Fibonacci ratio at $US 11.50. However the main target will be the 38.2% ratio (around $US 13.50), which is a more significant level in technical analysis. Furthermore it’s a previous high that the price action already failed to clear in last September.

For all of history through the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop…gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.

Gold is bouncing back. According to the World Gold Council, which has released its last statistics recently, the demand has surged on the third quarter: from the jewellery industry first, but also from investors through certificates and ETF’s.

The physical demand has surged in Europe and in the US, but despite those flows prices remained between $700 and $800 an ounce on the market during the last month. After several months of correction and sharp countertrends, the last 4/5 weeks have been a consolidation phase.

Despite the turmoil on the finance sector and the banking crisis, the equity markets’ plunge and the growing global recession, gold prices did not soar as it could have been expected. Indeed, the deleveraging of the hedge funds that have been facing large redemptions has capped prices on the upside.

Last but not least, the US Dollar strengthening and the lower concerns about inflation (as commodity prices all fell sharply) have weighed on Gold prices.

Technically, the price action found some support just below $700 (point D on the chart), which is a previous low level tested several times in 2007 (points A, B and C). The main support level, around $635, has not been tested. This level is a previous high posted in late 2005 and that became a new low several times in 2006. On the downside, gold prices are therefore well supported by those two levels ($700 and $635).

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This morning Gold is trading around $820, which is more than 16% higher than 12 days ago. A further rebound is expected. On the upside, the main resistance is the line that goes through the lower highs posted since the historical peak of March 2008 (points E, F and G). The target for the price action is consequently just below $900.

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On the short-term chart, the indicators argue indeed for a further rebound. First, the Bollinger Bands are bullish as sharp price changes tend to occur after the bands tighten, as volatility lessens, which is the case here (the bands therefore volatility tightened in November during the consolidation phase). Second, when prices move outside the bands, a continuation of the trend is implied. This is also the case here.

The MACD has also triggered a positive signal two weeks ago, and its rise shows that some bullish momentum is building up.

In this scenario, the level of $890 may be the target and the first significant resistance on the medium-term.

Chart Courtesy of Stockcharts.com

TREND ANALYSIS - The powerful break above the $850 previous high is a clear trigger that signals a significant rally that initially targets the next high of $989. However despite the increase in volatility, gold’s most recent action has seen gold retrace to back below $900 in recent hours with last price at $880, which suggests a correction against the powerful rally is underway targeting a retracement to $850 breakout point.

The next resistance level above $989 is the $1033 March high, which given the vicinity to $989 would probably break soon after a break of $989. However Gold resistance at $989, would target a retracement to support at the recent high of $926, with strong support in the range of $926 to $900.

Failure to break $989 - Would see gold continue to develop a sideways pattern in the range of $989 to $800.

Price Targets - The 2006 downtrend witnessed a decline of some 185 points, the subsequent rally to 1033 was up 490 points, or 264%. Gold also made an intermediate high at $850, up 308 from the low or 165% of the 2006 decline. The downtrend from 1033 to 740 represents a decline of 293 points. Therefore the two trend targets above the 1033 high are 1220 and 1516.

MACD - The MACD indicator is heavily oversold after registering a sustained bear trend of 6 months which is similar to the length of the downtrend experienced during 2007.

SEASONAL TREND - The recognized seasonal pattern for gold is for a rally from late July / early August into February. Clearly up until last weeks action Gold has been ignoring the seasonal pattern. However the recent catchup move implies that Gold is now targeting a trend inline with the seasonal pattern staring a month late, therefore this suggests a + / - one month up trend target for a gold of between late Jan to Late March 2009..

ELLIOTT WAVE THEORY - The decline from the March 2008 high clearly indicates a simple ABC wave pattern , each of which were themselves comprised of abc waves. This strongly suggests that the decline was corrective, and therefore implies a 5 wave advance to above the 1033 March high.

Gold Forecast Conclusion - The immediate action suggests an ongoing correction towards $850. Gold has experienced a major significant breakout to the upside which is targeting a volatile up trend to $989, on break of which Gold will target a new all time high of above $1200 by Feb. to March 2009.

A FAILURE to break above $989 and follow the forecast trend would imply a sideways trend in the range of $989 and $800 for probably the next 11 months i.e. until the next bullish seasonal time period approaches.

Very quietly compared to all the noise about the big bailout proposal from the US Government and the other move for the Fed to offer a lifeline to struggling mutual cash management funds, new steps to relieve distressed commodities markets were launched Friday by US regulators after Lehman and AIG woes triggered a wave of selling and emergency actions by exchanges earlier in the week.

The Commodity Futures Trading Commission, the main regulator of US commodity markets, said it was ”prepared to provide temporary and conditioned hedge exemption relief for firms taking on swap positions from distressed companies”.

The move would allow Wall Street’s investment banks and trading companies to take over some large commodities’ positions held by Lehman Brothers and AIG, known as swaps, without surpassing limits set by the regulator and the exchanges on speculative limits.

”This will allow for continued risk management and orderly functioning of the markets,” the CFTC said in the statement.

That means in particular the huge oil market will be stable.

AIG acts as a counterparty to a substantial portion of the $US30 billion invested in the DJ-AIG commodity index, the second most popular benchmark in the asset class. Lehman Brothers was also a significant player in commodities markets.

The CFTC added that it was coordinating with commodity futures exchanges to facilitate rare block trading, which allow the transfer of large positions. That would allow the people liquidating Lehman and winding up AIG’s speculative positions to handle large groups of deals with the same counterparties.

“CFTC staff is engaged in heightened monitoring and surveillance of financial company single-stock futures traded on futures exchanges – in coordination with the SEC’s emergency action on short selling and in our collective effort to prevent manipulation of financial stocks,” the Commission said.

That will be significant as already there are traders developing ways of circumventing the ban on short selling: one is sell the S&P500, then hedge the stocks you don’t want; in effect you short sell the stocks remaining in the position unheeded.

The move links to the one on Friday where cash funds were guaranteed. Many mutual funds have commodity based offerings and investors use the associated money market fund when moving their money from fund to fund..

The US Treasury on Friday rushed to the aid of ailing money market funds, saying it would guarantee the holdings of funds as it attempted to prevent the spillover of the financial crisis to the $US3.4 trillion business.

In establishing the temporary guarantee program for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression. The support will be done via the Fed.

The move to shore up the fund is designed to allow the Treasury to insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

It came after the Reserve Fund was forced to reveal it was ‘breaking the buck’ in paying investors 97c in the dollar and not the usual $1 in redemptions after being exposed to $800 million worth of Lehman Brothers debt that is facing big losses.

Crude oil rose Friday in New York, capping the biggest three-day rally in almost a decade, on speculation government measures to resolve the bank crisis will spur the economy and bolster petroleum demand.

That’s the theory, the reality is that there will be no impact on the US economy and oil prices will start sliding very quickly.

Oil rose 6.8% on Friday as output disruptions from hurricanes in the US and attacks in Nigeria’s main oil producing region continued to have as much impact on price and sentiment as what was happening in the sharemarkets and credit system.

October crude futures jumped $US6.67 to settle at $US104.55 a barrel in New York after rising 7.4% to touch a day’s high of $US105.25 a barrel.

Oil prices rose 15% last week, the biggest three-day rally since December 1998 as shorts scrambled to cover short positions.

That lifted the week’s performance to a 3.3% gain, the first weekly rise since mid August. It’s still down 29% from the high of $US147.27 reached on July 11.

The October contract expires tonight, our time, so when the Fed and the US Government moved on the mega bailout, traders decided to cover their positions.

Inventory positions in the US in the wake of twin Hurricanes Gustav and Ike will be key figures for the market this week.

Energy companies have resumed about 12% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of it before the hurricanes.

The Gulf accounts for about 26% of American oil output and around 14% of gas production.

In Nigeria, Shell warned that the recent escalation in militant attacks would hurt earnings. The country has lost about 280,000 barrels a day from the violence on top of production already shut-in, according to government officials.

November Brent crude rose $US4.42, or 4.6%, to $US99.61 a barrel in London.

Gold futures dropped sharply on Friday to end a very volatile week.

But it still had its biggest weekly gain in almost nine years on the turmoil in the financial markets.

Comex December gold futures fell $US32.30, or 3.6%, to $US864.70 an ounce in New York, but the metal jumped 13% over the week, up $US100.20, the best since October 1999.

Comex December silver futures dropped 22.5 USc, or 1.8%, to $US12.475 an ounce on Friday. That left it up 16%, the best since early 1987.

Gold is now up 3.2% so far this year, while silver has dropped 16%.

Comex Gold for immediate delivery rose $US18.26, or 2.2%, to $US869.23 on Friday.

Comex December copper futures rose 11.05 USc, or 3.6%, to $US3.1765 a pound in New York. But that still left the metal down half a per cent over the week.

On the London Metal Exchange, three month copper rose $US311, or 4.6%, to $US7,060 a tonne, or $US3.20 a pound. The price is up 5.8% this year.

Nickel however had its biggest weekly drop in almost four years as stocks of the metal rose to a nine-year high, signalling weak demand from consumers, led by stainless steel producers.

London Metals Exchange stock rose 0.9% to 52,326 tonnes, the highest since July 1999.

That was after a 0.6% dip in second quarter stainless steel output this year, compared to the same quarter of 2007.

Three month nickel ended at $US16, 843 a tonne. The fall was more than 12% for the week, the biggest since October 2004.

The International Nickel Study Group said the world’s nickel surplus rose for a third month in July as consumption of the metal dropped to a nine month low.

The INSG said nickel production of the metal exceeded demand by 9,900 tonnes tons in July, compared with a surplus of 7,700 tonnes in June.

Lihir Gold Limited (ASX:LGL) is a gold mining, development and exploration company, focused on the Lihir gold mine and processing facilities located in Papua New Guinea.

Yesterday we saw that Sino Gold Mining (ASX:SGX) was likely to take advantage of the strong Gold price rebound. Today we have a look at a similar stock, also strongly correlated with Bullion prices. The analysis is therefore almost the same as the 2 stocks (SGX and LGL) have the same price action.

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Two charts illustrate this: the first one is the LGL price development in parallel with gold prices (Gold in red line), while the second one is the LGL/SGX comparison (SGX in blue line). There again the positive correlation of LGL with both Gold and SGX is flagrant.

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As indicated yesterday, many indicators argue for a strong rebound of the Bullion, in the current context of financial crisis and uncertain business climate. Gold price soared yesterday, the biggest gain ever posted in one day, as the credit market turmoil convinces investors to pull their money out from equities and to put it back in safe-haven assets. Yesterday SGX jumped by 22.54% and LGL bounced 15.89%.

As same causes create same consequences, a further momentum is expected for LGL.

Several signals argue also for a positive development.

The stock actually lost 61% of its value between the historical high posted in last March, at $4.39 (well the real historical high had been posted in October 2007 at $4.45), and the recent low posted last week (at $1.6950). The stock has been obviously oversold and, as it has already bounced back impressively, a large retracement is more than likely.

The MACD just triggered a bullish signal yesterday, as it crossed above its signal line. So did the Relative Strength Index, which has quit the oversold area and has been soaring for a week now. The On Balance volume indicator (OBV) provides a running total of volume and shows whether this volume is flowing in or out of a given stock. Here the OBV has also clearly bottomed and has turned upward: money is flowing back into the stock. Once again, if both price and volume move on the upside, it’s a good sign that a bullish momentum is building up, and that a positive trend may be possible.

A significant retracement of the recent decline is likely. Yesterday the price closed at $2.48, well above the 23.6% Fibonacci ratio. The next objectives are therefore $2.7 then $3.1 (the 38.2% and 50% retracement ratios).

NEW YORK - Wall Street ended mixed on Tuesday as concerns about the path of Hurricane Gustav sent oil prices higher and offset a better-than-expected reading on consumer confidence.
Comments from the Federal Reserve about rising inflation added to the market’s unease.
The Dow Jones Industrial Average managed a gain of 26.62 points, or 0.23 per cent, to 11,412.87.
The technology-heavy Nasdaq fell 3.62 points, or 0.15 per cent, to 2,361.97 while the broad-market Standard & Poor’s 500 index added 4.67 points, or 0.37 per cent, to 1,271.51.

LONDON - European stock markets closed mostly firmer on Tuesday, recovering from early losses as investors cheered better-than-expected but still weak US consumer confidence figures.
London bucked the firmer trend, with the FTSE 100 index fell 34.90 points, or 0.63 per cent, to 5,470.70 points.

FRANKFURT - The DAX was up 43.57 points, or 0.69 per cent, to 6,340.52.

PARIS - The CAC 40 index added 12.68 points, or 0.29 per cent, to 4,368.55.

TOKYO - The benchmark Nikkei-225 index lost 99.95 points , or 0.78 per cent, to 12,778.71.

HONG KONG - The benchmark Hang Seng Index fell 48.13 points, or 0.23 per cent, to 21,056.66.

WELLINGTON - The sharemarket improved during the day after an early slide, but failed to make it into the black despite some solid company results.
The benchmark NZSX-50 index closed down 5.91 points at 3,321.0.

SYDNEY - The Australian stock market is expected to open in positive territory after US stocks ended mostly higher overnight.
At 0740 AEST on the Sydney Futures Exchange, the September share price index futures contract was up six points at 4,992.
Today, the Australian Bureau of Statistics (ABS) releases preliminary data on construction work done in June.
Companies releasing annual results include IOOF Holdings, Westfield Group, Transurban Group, PrimeAg Australia, Hastie group, Regional Express Holdings, Macquarie Media Group, GPT Group, Gloucester Coal, Australian Vintage and Australian Infrastructure Fund.
Woodside Petroleum’s interim results are due.
The Australian share market closed marginally lower yesterday, with mixed performances from many sectors after a weak US lead overnight provided little direction.
The benchmark S&P/ASX200 index was down 7.4 points, or 0.15 per cent, to 5,007.5, while the broader All Ordinaries shed 7.8 points, or 0.15 per cent, to 5,082.3.

NYMEX

Oil prices rebounded on Tuesday on concerns that a strengthened Hurricane Gustav could damage energy facilities in the Gulf of Mexico.
New York’s main contract, light sweet crude for delivery in October, climbed $US1.16 to close at $US116.27 a barrel.
In London, Brent North Sea crude for October added 60 US cents to settle at $US114.63.
Oil bounced higher as Gustav grew from a tropical storm into a hurricane Tuesday.
The storm barreled into Haiti, packing powerful winds and heavy rains that were likely to cause massive destruction throughout the desperately poor Caribbean nation.
Gustav was also on a path to strike Jamaica and Cuba, and possibly offshore oil rigs in the Gulf of Mexico later in the week - a threat that led to a spike in oil futures prices.
Anglo-Dutch energy giant Royal Dutch Shell meanwhile said it was planning to evacuate some staff from its Gulf facilities because of Gustav.
Earlier on Tuesday, oil prices had fallen as weak German data stoked concerns about slowing global economic growth and lower demand for energy.
Heightened tensions between Russia and Western countries over Moscow’s military action in Georgia also stoked supply concerns.
Investors were worrying that a new standoff could interrupt the pipeline flow of Azerbaijani crude from the Caspian Sea to the Turkish port of Ceyhan on the Mediterranean.
Oil prices have tumbled from record highs above $US147 set on July 11 after breaking through $US100 at the start of the year.

COMEX
Gold futures for December delivery added $US2.40 to $US828.10 an ounce on the Comex division of the New York Mercantile Exchange.
Silver for September delivery increased 0.205 US cents to settle at $US13.575 on the Nymex while September copper fell 0.0430 US cents to settle at $US3.4385 a pound.

Gold finished below $US 800, finishing the biggest weekly slide for the metal in a quarter of a century as punters, speculators and anyone else just went off the metal big time. The surging greenback helped, but there seems to have developed a real disinterest in the metal, despite the continuing instability in Georgia and Russia’s bellicose stance. Seeing gold peaked at $US1033.90 on March 27, it’s now at $US792.10, down more than $US240 an ounce, or more than 23%. Comex December gold fell $US22.40, or 2.8%, to $US792.10 an ounce on Friday in New York. The metal fell 8.4% last week, the biggest drop for a front contract since February, 1983. Gold has fallen every day this month except for a 2.1% gain on August 13. December silver futures fell $US1.43, or 10%, to $US12.93 an ounce on Comex, the biggest fall for a most-active contract since June 13, 2006. Prices are still; up on a year ago, but the gap is shrinking. That gold prices peaked a good four months before oil did means investors lost faith in gold before the final surge in inflation off the back of the roaring price of oil. World prices retraced back to well over $US900 an ounce as inflation surged in May- July off the back of higher oil and petrol prices and the continuing impact of high food prices. But it never followed oil back into record territory. Falling demand from users, such as jewellers looks to have been more important than speculative interest: an oversupply of the metal started depressing prices. That’s an old fashioned concept, supply exceeding demand in these days of hedge funds and other ‘financial’ investors. That’s the view of the World Gold Council in its second quarter wrap up, released last week. Here’s what it reported: “The high and volatile gold price continued to dampen demand in tonnage terms during Q2, particularly for jewellery. While the average gold price, at $896.29/oz based on the London pm fix, was well below the peak of $1,011/oz seen in mid-March, it nevertheless represented a 34% rise on the average price of Q2 2007. Total identifiable demand fell 19% relative to year earlier levels to 735.6 tonnes. In contrast, total demand in value terms rose 9% on year-earlier levels to reach US$21.2bn – a new all-time quarterly record. In volume terms, jewellery was the biggest contributor to the overall annual decline, falling by 158.7 tonnes (24%) to 504.0 tonnes. However, despite the adverse economic conditions affecting much of the globe, consumers continued to increase their spending on gold jewellery. In value terms, demand rose 2% from year-earlier levels to $14.5bn, a new quarterly record. Identifiable investment demand was also softer than year-earlier levels as some investors took profits, but was nevertheless more resilient to the high gold price than jewellery demand. The 4% decline in tonnage relative to year-earlier levels represented a 9% decline in net retail investment; partly offset by a change from small net disinvestment to small net investment in Exchange Traded Funds (ETFs) and similar products. Inferred investment demand (which cannot be directly measured and is proxied by the statistical residual) continued to enjoy sizeable inflows. During July, total gold held in gold Exchange Traded Funds exceeded 1,000 tonnes for the first time.

Second quarter industrial and dental demand declined by 5% to 111.8 tonnes, primarily due to declining demand for gold in the dental and ‘other industrial’ sectors, in response to the continued high gold price. In value terms, this was equivalent to $3.2bn, a rise of 27%.

Gold supply grew by 1% in tonnage terms relative to year-earlier levels. A 13% increase in scrap due to the higher gold price was offset by a 4% reduction in mine output. Supply was also restricted by lower central bank sales.

India was the biggest contributor to the fall in gold demand during Q2, as it was in the first quarter. Both jewellery and investment demand were severely affected by the high and volatile gold price and higher local inflation, which has squeezed disposable incomes.

Jewellery demand in Q2 was down 47% in tonnage terms on the levels of a year earlier, while net retail investment fell 41%. Indian demand also fell in US$ value terms, by 29% in jewellery and 20% in investment.

Other major gold consuming nations experienced a more mixed quarter. On the jewellery side, only China and Egypt experienced a rise relative to year earlier levels in tonnage terms.

In China’s case, the rise was just 2% while in Egypt the rise was somewhat larger at 8%.

High levels of the gold price, and high volatility, have been a key deterrent along with rising petrol and food prices, which have squeezed disposable incomes. 

Countries and regions that suffered the largest decline in percentage terms (apart from India) included the US (-30%), Taiwan (-20%) and the UK (-20%), and the “Other Gulf” region (-23%), which was largely attributable to a decline in Kuwait.

Nevertheless, the fact that the dollar spend on jewellery in most countries remains above last year’s levels is encouraging given the current economic environment.

Countries that enjoyed strong growth in net retail investment inflows included China, the US and Vietnam.

Higher inflation and falling stock markets were a common theme in all three countries, highlighting the inflation hedging and safe haven motives for investing in gold.

Net investment demand in Vietnam in H1 2008 totalled 56.8 tonnes, already just outstripping the 56.1 tonnes recorded for the whole of 2007. In Q2 2008, demand more than doubled in China from 4.3 to 9.8 tonnes, and in the US, rose from 1.2 tonnes to 11.3 tonnes.

In Japan, sales of existing gold holdings by investors seeking a profit outweighed purchases to the tune of 12.1 tonnes.

This level of net selling back was well below the record 39.3 tonnes seen in the previous quarter, reflecting the move in the gold price down from its earlier highs.

September crude oil fell $US1.24, or 1.1% in new York Friday to finish at $113.77 a barrel. That left it off 1.2% in the week.

Figures from the American Petroleum Institute show that demand for petrol fell 2.1% in the seven months to the end of July. Petrol prices at the retail level in the US continued to fall at the weekend, closing at $US3.77 a US gallon, well down on the all time high of $US4.11 reached on July 17.

Jiangxi Copper, China’s second-biggest smelter of the metal, said last week it would cut output of copper rods and wires by 30%. This is on top of other cuts by other Chinese producers in recent weeks.

Comex copper December delivery rose 1.65 US cents a pound in New York on Friday, to $US3.3145 a pound.

The price fell 0.4% over the week.

Were planning to write to you about a potential gold turnaround today, reader. But it’s just too unpredictable at the moment. Yesterday’s close told us little.

So even though gold’s fundamentals are solid, the time might not be right. Instead, let’s take a look at an interesting pattern in the copper market.

Like most other commodities, copper has been selling lower for weeks. The global retracement in commodities, driven by oil and gold prices, is hurting all products.

However, there are still significant differences in terms of performance. Nickel, zinc and lead prices have taken double-digit hammerings. But aluminium, tin and copper are still at higher levels than January 1.

The copper price is up 14.5% this year. But it’s also down 13% since June 30, when the price was trading at $US 8,775 a tonne. It closed on August 13 at $US 7,635.

As for the pattern…copper is moving in a long-term indecision triangle. The basis line of this triangle is the long-term support line that backs the bullish trend from late 2003. It has been tested and validated in February and December 2007 (points A and B on the chart below) where the price bounced back strongly.

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The upside of the indecision triangle pattern is the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone is currently around $US 8,900.

Like any triangle, this pattern is narrowing at the end, the price is likely to reach the downside of the triangle before eventually bouncing back once again.

A few ambitious LME (London Metal Exchange) traders are anticipating this. They jumped back in when copper hit a low 3 days ago (point H).

Why now then? As usual, a Fibonacci pattern gives the answer. The low of last Tuesday bounced a retracement level. It is actually the last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D).

Those levels are important for commodities traders. In late March, as the copper prices were correcting, the first rebound came on the 38.2% ratio level (point F). It happened a second time in early June (point G).

Go easy though…this does not mean that copper will fly back to its historical highs straight away. We’re actually mildly bearish on copper right now. But it’s a good example of what you can expect in the commodities sector. Bounces from corrections. Higher highs and higher lows. We’ll let you know when we reckon the momentum has shifted.

While gold prices are likely to decline further in this correction, gold mining stocks have already been pounded much harder. That makes some of the best mines in the business highly attractive at these low levels.

One important indicator I track now suggests a massive rally lies ahead for distressed gold stocks. 

Since 1974, the Gold-XAU ratio has been greater than 5.0 for about 15% of the period.

The XAU Index or Philadelphia Gold & Silver Index is a composite of leading gold and silver mining companies. Most of the stocks in this index are large-cap gold shares.

When the Gold-XAU ratio has been 5.0 or more, like now (currently at a whopping 6.02), the XAU Index has recovered with an annualized gain of 89.6%.

When the ratio has been 4.0 or higher, the XAU Index has rallied an average 27.4%. But when the XAU has traded at 3.0 or less, the index has declined an average -36.6%.

The Last Time This Chart Looked Like This Gold Rallied Over 280%

This chart above is quite mind-blowing if you’re a Gold-Bug. Basically it strongly points to a major up-crash for gold stocks. No one can say exactly when this will happen but it’s safe to say speculators will earn a bundle once it bottoms.

The current Gold-XAU ratio is an extreme 6.02 as of August 7 and at 5.99 as of August 11. The last time this ratio stood north of 6.0 was back in 2001. Seven years gold stocks soared more than 280%.

For now, the U.S. dollar rally still has legs and gold along with most commodities will probably continue to decline.

The buck has been badly oversold for months. Now the greenback is embarking on a secular bear market rally. But without higher interest rates to support the buck, balanced budgets or a rapid return to above-trend economic growth, there is absolutely no reason for the dollar to sustain this rally beyond a few months.

The United States will not escape an economic recession, possibly a hard recession. The contraction of credit combined with deflationary forces still plaguing the housing industry are events that won’t disappear with a minor housing rescue package or a government spending bill.

The real threat to the United States is deflation, not inflation. This threat to consumption will likely lead to below trend growth for at least another six to 12 months.

The dollar’s rally won’t last forever. Don’t abandon gold.     

For the first time this year gold prices are breaking important technical support levels. In fact, gold might drop below US$800 an ounce before this painful correction is over.

Worse, gold stocks have collapsed since July. These stocks now sit at the same levels they were at two years ago.

Gold prices are now in negative territory this year for the first time since mid-2005. That year also coincided with a U.S. dollar bear market rally that drove the dollar 12.8% higher against the euro. Still, gold finished 2005 with an 18% gain.

Major Correction Likely

The correction now underway in gold prices will probably be far more severe than the declines posted in mid-2005.

We’re seeing a wicked U.S. dollar reversal this month and commodities are coming undone.

Since peaking on July 11, the CRB Index has tanked a cumulative 19%. Meanwhile gold prices have declined 16% and the XAU Gold & Silver Index has plummeted 34%.

If commodities were heavily overbought heading into July, then now the opposite is true. We’ve seen brutal declines in just four weeks of trading.

Now, a possible economic slowdown in Europe, Japan and other economies has caused traders to abandon the “carry trade,” (buying high-yielding currencies with weak dollars to finance global speculations). As the dollar strengthens, higher yielding currencies, including gold, are likely to decline further.

Why Now is the Time to Buy Gold

The inflationary story is out of fashion. No-one wants to own gold. That’s the best time to.

Gabriel will cover gold prices for you in tomorrow’s MM. He’s sweating over where it closes today - it’s key for the next leg in prices.

But even with our own amateur technical experience, we have deduced that last night gold went up. And right now, the sentiment in the market is utterly against gold buying.

It comes down to the argument between deflation and inflation.

Everything has been deflating recently; shares, metal prices, oil, gold, wealth in general. But there are two key reasons inflation isn’t done with yet. Oil and central bankers.

You’ve surely heard our opinion on oil. Economically, there’s only just enough production to keep us happy as it is. And geologically, we’re not finding enough of it to keep that production up. We hear that oil gained US$3 last night. Petrol supplies in the US declined.

That, we expect, will mean inflation in the oil price. And expensive oil tends to inflate everything else. That stuff just gets into everything. Have you used a plastic bag from the supermarket recently? About 18 litres of oil went into making that bag.

The other thing on this planet that gets a kick out of inflating is a central banker. And you can expect cheap money to come back into the equation. It’s the only tool central banks have to stimulate: flooding markets with liquidity.

Eventually that liquidity has to go somewhere.

So deflation will probably happen in bouts. But there’s a limit to it, provided by monetary authority and rising energy prices.

Until things change, inflation remains the threat. And gold remains the inflation hedge. It’s sold off 16% in the last two weeks. That’s a nice dip to buy on.

The slump in global commodity prices, led by oil and gold, is looking ominous for producers, and great for consumers and economies like China, India and the US and Europe. But the reasons for the fall are sending a different message; one that you might not want to hear: the rest of this year and much of 2009 is going to be miserable, more miserable than we have so far seen in 2008. Oil prices eased further overnight after initially rising on the fighting in Georgia: prices fell under $US114 a barrel before closing at $US113.01 in New York.  Gold fell more than $US33 an ounce in overnight trading, and then fell a further $US4 an ounce in early Asian trading yesterday to trade around $US828 an ounce, the lowest level since late December, 2007. It then rose a touch, then fell sharply by almost $US16 an ounce to trade around $US813 an ounce. Gold actually hit an intra day low in Asia yesterday around $US802 an ounce.It then recovered and traded around $US822 this morning. Oil is now down more than $US33 a barrel form its peak a month ago of over $US147 a barrel, a fall of more than 22%. Prices have fallen more than $US6 a barrel from before the Georgia fighting started last Thursday. But gold prices have plunged by more than $US50 an ounce since the fighting started last week and that is as good an indicator (along with oil) on the enormous switch in sentiment in global commodity markets. The Australian dollar fell, rose and then fell well under 88 US cents in Asian trading yesterday, while the US currency jumped under $US1.49 to the euro to maintain its rapid appreciation. The Australian dollar was actually closing on 87 US cents late yesterday as oil and gold prices continued to weaken.It was at 87.60 US cents this morning. A month to six weeks ago fighting in such a sensitive area, plus the bombing of a major oil pipeline, like the one in Turkey at the weekend, would have seen a surge in oil prices, while gold would have chased itself higher as nervous bears sought their usual haven of value or protection in volatile times. Now the normally nervous nellies in the markets don’t seem to care. Investors no longer see commodities, especially gold and oil, as havens or plays to make money.It is an astounding change in sentiment. The surge in the US dollar has become too powerful as momentum from big investors searches for new havens of safety. And they have found it in the US which they figure won’t lose as much as leaving money invested in Europe, Australia, New Zealand, or in commodities. Markets like commodities would have reacted negatively to news of war in the Caucasus, which is an important oil-exporting region.

The fact that oil and gold prices keep falling strongly suggests that investors/traders now strong believe the world economy is in bad shape. That is bad for oil prices, gold and other actively traded commodities.

If you believe that speculators were responsible for some of the strong surge in commodity prices, then you have to blame them for some of the rapid retreat in commodities in the past month.

When we look back at this time we will see that the first 11 days or so of July were the peak of the current commodity price surge.

But while there’s good news in lower commodity prices, the fact that markets now reckon 2009 is going to be worse than this year isn’t good news.

There are some important statistics due out in Europe (eurozone growth for the June quarter) and the US (retail sales and industrial production) which could confirm the downturn in both giant economies, or at best, sluggish growth.

And what are big investors doing? Selling commodities (open interest positions, which are contracts not closed out or delivered on any given day) are falling, indicating that the investors who plunged into commodities, are retreating.

And they are buying US shares.

But for Australia there’s goodish news from China, with consumer price inflation down and signs the economy is not tanking in an inflationary spiral (See accompanying story).

This slump in oil and other commodity prices is sending a message that global economy will worsen, not improve: a message that the Reserve Bank has been very alert to.

It’s why the bank has been pushing a message of an incipient easing in monetary policy with a rate cut next month.

The Bank is angling to make a pre-emptive cut in rates (just as it launched pre-emptive rate rises, starting a year ago to tackle inflation) to allow the economy room to adjust to any further downturn in the global economy.

Reserve Bank Governor Glenn Stevens has made it clear on a couple of occasions that the bank moved early to act against inflation, not wait until inflation appeared, then act.

It’s why its reading of the global economy, and the rapid slump in domestic activity, has seen it push domestic economic growth to equality with inflation in its short to medium term policy objectives.

And that’s why the National Australia Bank yesterday warned that the RBA had to avoid engineering too hard a landing for the economy.