Gary North

March 18, 2008

Yesterday, copper prices fell. Also lead, nickel, zinc, and aluminum.

This report provided a warning.

Copper turned sharply lower, dragging the other metals down with it as the dollar recovered slightly, profit taking set in and as the current global credit crisis sparked risk aversion across the board, even in commodities.

Oil prices fell sharply lower midday having hit all time highs earlier this morning, while gold came off historic peaks set overnight as funds took profits and reassessed their preference for commodities in the current market turmoil. . . .

Dollar weakness aside, metals might yet recover on continued strong fund flows. Funds have been piling into commodities this year on the view that real assets offer a safe haven in the current financial crisis.

Of all the commodities, however, base metals are the most vulnerable in the current financial market crisis, as demand for them is very strongly tied to the global economic cycle.

Also, betting on continued weakness in the dollar and buying metals as a result is an increasingly risky prospect.

"There is talk that the Fed could engineer a round of currency intervention with other central banks in order to wrong-foot speculators and break the weak dollar/high commodity price spiral, even temporarily.

"Other factors that are giving us pause about the upside potential in metals is the current state of the equity markets; if markets do not stabilize, the weakness could call into question the viability of other financial institutions and conceivably impact the global growth picture," said MF Global analyst Ed Meir.

In other metals traded, lead was down at 2,935 usd a tonne against 3,085 usd, nickel dropped to 31,400 usd against 32,550 usd, zinc fell to 2,490 usd against 2,600 usd while aluminium dropped to 2,987 usd against 3,088 usd.

I have posted my analysis of commodities in a recession. It appeared on March 7.

The precious metals are up because the press finally caught on to the boom which began in 2001. But a 4-to-1 increase is unlike to repeat. Late-comers are getting in. This is a sign of a market top: new buyers.

There was an NBC Evening News story on March 17 on how women are selling their gold jewelry to a pair of women who have started a business that sponsors Tupperware-like parties. This also is a sign of a market top: new sellers.

Gold fell yesterday, after rising to $1,029.

The Federal Reserve may add fuel to the fire today by announcing a cut in the FedFunds rate. If it does, this will send a signal to foreign investors: "The dollar will fall." That is bullish for the precious metals. But the reality is this: so far, the FED has not been inflating.

Also, Indians have stopped buying gold. This is a bad sign for gold bulls.

Hold gold bullion coins. These are for hedging against disaster. They are held to pass down to children. Don't buy them as a hedge against inflation in 2008. There is neither monetary inflation nor price inflation today. The CPI in February was flat: 0%.

In a recession, short-term credit is king. This is why the T-bill rate fell on March 17 to 1.11%.

If you are not sure which way gold is going, but you want to hold your physical position, you can short gold. What you lose in one account, you will make in the other. This is a break-even strategy.

Don't sell yet, but get ready emotionally to sell. If gold falls to $949, sell 10% of your bullion position, or short enough bullion to protect 10% of your investment. Sell 10% on $50 moves downward: daily closing prices.

Consider this: events that would push gold up to $2,000 would collapse the stock market. But a recession could drive down both gold and stocks. It's safer to sell gold and use the money to short stocks. I don't see the stock market rising and gold falling for months on end.

I am not talking about your coins.