Going for the Gold!
Fundamentals
Moving from one extreme to another, market pundits have recently extolled the deflationary aspects of the commodity markets, as fears of a continued worldwide economic slowdown have put a negative spotlight on commodity prices. This comes just months after "inflation" was all the rage, and the seemingly unquenchable thirst for commodities from the emerging nations of Asia were sure to keep physical commodity prices on the rise. So how is the average trader to know where commodity prices may be heading? A clue may be found in the metals sector, especially if one looks to the price ratios between Gold and Silver and Gold and Platinum. Although all the "precious" metals are off sharply from the highs made earlier this year, Gold percentage-wise has fallen the least, down only 25% or so from 2008 highs. Silver is down approximately 50% from its highs, and Platinum is down a whopping 63%. This has caused the price ratio between Gold and its more industrial cousins to rise sharply in Gold's favor. At the beginning of the year, it took approximately 56 ounces of Silver to buy 1 ounce of Gold. Just yesterday it took almost 75 ounces of Silver to buy 1 ounce of Gold. Platinum has gone from being more than double the price of Gold to closing in on parity. The current stress in the financial markets has had a greater effect on the industrial metals, particularly Platinum, whose demand is keenly tied to the health of the auto industry. With auto sales down sharply and further cut-backs likely, the demand for Platinum is expected to be weak. Gold, on the other hand, has the benefit of being a "store of safety" in times of economic stress. This has kept retail demand for Gold robust -- especially Gold coins -- despite the current deflationary environment. Even the recent strength in the U.S. Dollar has failed to depress Gold prices as much as many analysts had expected. Until the more industrial precious metals prices begin to gain on Gold, the deflationary environment should continue. However, should Silver and Platinum prices begin to gain on Gold, it may be a sign that economic recovery has begun and rising commodity prices may not be far behind.
Technicals
Looking at the daily chart for February Gold, we notice the market starting to show a bullish bias, as we are now making higher highs and higher lows. The market is trying to remain above the 20-day moving average, and the 14-day RSI has moved into neutral territory. To remain in its bullish bias, February Gold should not close below last Friday's lows of $741.20, which appears to be the climax of the recent sell-off. To strengthen the uptrend, we would need to see a close above the 100-day moving average, currently near the $824 area.
Mike Zarembski, Senior Commodity Analyst
