Gold Price ($740. 0z)

Gold remains mired in a cyclical bear market, down about 28%
from an historic peak set earlier in the year. Gold is hardly
immune from recession periods. It can fall 30-40% off cycle
peak levels in a moderate downturn and 50% when the recession
is broad and deep.

My macroeconomic directional indicator hit an all time peak in
July, and followed the high in gold by about 4 months. The
indicator has fallen sharply since July, and is back down to levels
seen about 15 months ago. the sharp decline in the indicator reflects
major price weakness in oil and a broad basket of industrial
commodities. At the micro level, gold production has not been
rising but commercial demand has weakened. It is also of interest
that US dealers were deluged with gold jewelry for resale when gold
cracked the $1000 oz. level.

The gold price remains quite volatile, but it has fallen below the mania
cut-off line. So I would say the metal is losing the high return for the
assumption of high risk profile. Barring the development of an extended
deep global downturn, gold could well fall to the $650 oz. level, with a
further $150 downside to $500 oz. if we find the global economy in the
deep yogurt.

I would be pleased to add gold to my list of tradable options should it
fall to the $650 level. I played the game eagerly in the late 1970s out
of the London market, but have found less stressful but equally
rewarding alternatives since 2001 when gold made its move.

The bugz are freaking over the recent large expansion of the US
monetary base and look forward to an inflationary future for the US
and a weak dollar. I have this as an important memo item only for
now, as experience shows that the Fed can shrink the base quickly
when signs point to a more positive economic environment.

The gold macro indicator is better for direction than for actual price,
but for your interest, it now suggests a price 0f $680 oz.