Gold Update

Gold remains in a long term bull market. Chartwise,
I view the metal as extended by about $50.

Gold has been trending lower on my weekly chart since
the $730+ oz. blow-off top in May. One would have to
allow that the big thrust up since July, 2005 has not
yet been defeated. That would occur if gold fell below
$570. over the next several weeks.

The weekly gold macroeconomic indicator has been trending
down since mid-summer and is now just slightly above
the yearend 2005 level. Weakness primarily reflects the
drop in the oil price over this period coupled with a
further tightening of Federal Reserve bank credit.
Despite the slowing US economy, the basket of cyclically
sensitive materials prices I also include has held up
well. The macro indicator now suggests a price of $500 -
510. for gold, down slightly from the peak $520. seen
earlier in the year.

I guess gold is holding nearly $100 oz. above the base
$500 indicated by the model because gold players are
expecting that a softening economy will push the Fed to
begin accelerating liquidity growth reasonably soon. At
the worst, the Fed will probably add liquidity before
long if only to underwrite the forthcoming holiday season.
There is no shortage of gold bulls still looking for a
big pop in the metal from a geopolitical crisis involving
Iran's nuclear fuels program. But that scene is quiet
now.

October is often a weak month for gold on a seasonal basis
as it is for oil. The gold market could still respond
positively if the Fed picks October as the month to ease up
on liquidity suppression for a stretch. The primary dealers
through which the Fed works are also the main market makers
in currencies. A weakening dollar may well tip off the gold
traders when the Fed does loosen up.

I view the short term outlook for gold as a coin toss now.
If you have an interest in gold or are considering taking a
long position, compare your return projections against my
view that there is clear downside risk up to a $100 oz. if
the positives you perceive do not pan out in the weeks ahead.