Gold

As discussed in the 12/27/06 post on gold and the USD, gold,
then $628 oz., was in a strong seasonal mode and could run some
if it could take out $640-650 resistance. It was also noted that
the positive seasonal window could run through Jan. Gold did
oblige, rising to close to $700 oz. in late February before
selling down to the current level of $643. Gold is now in a
seasonally weak period that could last through April.

Gold remains in a long term bull market, moving in nice tandem
with the broader grouping of industrial commodities pricing.
These markets have all enjoyed positive demand growth and very
high operating rates, as capacity additions involve long lead
times. The impetus to gold from the growth of monetary liquidity
has slowed appreciably from late 2004, but the strong liquidity
underpinning from the late 1990s through 2004 paved the way for
a powerful industrial economy that has only recently begun to
slow. The oil price was also a major factor in gold's rise, but
has likely been a drag since mid-2006, as the oil market
has moved into a better balance of supply vs. demand.

For the gold price to hold the accelerated uptrend underway since
mid-2005, gold must hold above $640 - 650 oz. over March and April.
A break below this rising support line would suggest gold might
return to the more modest uptrend it established from 2001
through mid-2005. It will be interesting to see how gold fares
during this period of seasonal weakness.

My macro indicator for gold declined from mid-2006 through October,
but is now trending up. The trend trajectory suggests gold could
be around $550 for the end of the year, and implies that the
gold price excess generated over the past fifteen months has not
been fully wrung out. The macro indicator prices gold as primarily
an inflation hedge asset and not as a geopolitcal play or as a haven
during times of financial stress. There is no shortage of gold bug
sites that play up the latter two avenues of interest.

The macro indicator has a modest positive trajectory now because of
a quiet oil price and also because the monetary liquidity
indicator component remains in a sluggish uptrend. As I have discussed,
I think the Fed would like to hold off giving the economy a goose
for as long as it can this year. Obviously, if the global markets
continue to reflect the slowing of global liquidity in place, the Fed
and other central banks may have to relent. There are no doubt gold
players who are betting strongly on that very point, while hoping their
baby does not go out with the bath water in the interim.