Gold / Silver

The gold macroeconomic indicator I use as a gold price directional
broke down sharply over Half 2 '08 and in so doing, decisively
broke below the long term uptrend in place since 1999. The index
has fallen back to levels last seen near the end of 2006, when gold
was trading $600 - 650oz. The decline in this indicator reflects the
collapse in both the oil price and a composite of industrial commodities
prices. These tank jobs far offset an improvement in the monetary
component.

The gold price led the indicator down from its plus $1000 Mar. '08
high and tracked the indicator well until the end of Oct. '08 where
a major divergence started. Gold started heading back up and the
indicator continued to sink. The ratio of the gold price to the
indicator is the highest it has been since the 1979-81 period.

The gold market, seeing the global easing of monetary conditions and
the nearly global announcements of fiscal policy stimulus programs
turned into inflation anticipation mode this past autumn. The sharp
seasonal sell-off in the dollar from the latter part of Nov. '08 through
late Dec. lent considerable encouragement to the gold rally.

Now, whenever global economic recovery commences, both oil and
industrial commodities prices will surely rally. But, with sizable slack
building in the global economy presently, it could take a fair while
before inflation turns serious, if at all. So, sustaining a gold rally will
take an effort of will and courage by the bulls in the interim.

Gold remains too rich for my blood, and whatever the upside over the
next year or two, I see a good $200 oz. price risk from the present
$825 - 830 area.

I remain interested in trading silver with the long side entry point
below $10 oz. Silver, unlike gold, trades much closer to economic
value. Gold continues to carry a huge premium over its economic
value.

The SLV silver etf chart is here.