MARKET FORCE ANALYSIS UPDATE FOR KEY COMMODITIES MAY 5, 2008

By Adrian Douglas

Here is the latest update on the Market Force Analysis for the key commodities.

The last update was on March 30. Due to a heavy travel schedule and preparation for the presentation at the GATA Conference the usual mid-month update was not made.

GOLD (Figure 1)

At the time of the last update gold was trading at $930. In that update I said

“There was no indication of weakness in the market before this happened [drop from $998]. The debacle was not created by market exhaustion and in fact the uptrend in the MFA is unbroken. What does this tell us? It tells us that this was without a doubt the Cartel who decided to do a hatchet job. This is equivalent to the golden beach ball being pushed under-water. It was NOT due to the water draining out of the swimming pool. The Cartel always hopes in these raids that they can panic the longs to persuade them to pull the plug from the pool and drain it for them. So far this has not happened and the MFA uptrend remains intact. If this remains the case gold will recover very quickly. There is always the possibility that the Cartel will try again in the coming week. In fact I would say it is very likely. The question is will they be successful? The MFA uptrend looks very strong so I would say that the dynamics favor the bulls. This is the type of set up where fortunes are made. However, it is also exactly the type of setup where the weakly capitalized lose a fortune as they are stopped out before the market rockets higher. The Cartel’s Achilles Heel is a lack of physical bullion. Anyone who tries to out-trump them in their strong suit of endless paper promises is asking to pay a high price in tuition fees! As pointed out on many occasions when the MFA is near the top of the channel it is a high risk entry point. However, for those who are already long that does not mean “sell”, because the rise in this upleg could still be dramatic”

And the Cartel did try again, and again. And gold was knocked down last week to $848. BUT what is clear from Figure 1 is that the MFA did not breakdown! Even in the Zoom of Figure 1A the uptrend line has not been broken to the downside. This makes this correction so far a very unusual correction. This had me scratching my head as to what is going on.

Peter Brimelow of marketwatch.com noted input at the Metropolecafe as follows

QUOTE

The current gold slide began on April 17. A LeMetropole Café contributor reports: " ... Since gold peaked on April 16th at $945.10, open interest has declined only 5,006 lots (15.6 tonnes) in total: 1.2% for a $94.20 or 11.1% decline. While it is theoretically possible that there could have been short selling of an incredibly heroic scale, by far the more likely explanation is the presence of a massive seller of physical."

END

This would explain why the MFA does not respond radically to the gold takedown because the cartel supplied a large injection of physical gold via the London “fix”. This becomes extremely interesting. Why did the Cartel have to resort to supplying real gold instead of paper gold? Considering how low on physical gold ammunition the Cartel must be, this must have been an action born of desperation. It means that, as reported in Midas, that the supply of gold in thr physical market was drying up. Under such circumstances gold could go up vertically in a heart beat and is in line with my predictions of a “quantum leap” in the gold price coming soon. This suggests this hypothesis has a lot of merit. It means that the Cartel is into a re-run of the 1960’s gold pool where massive amounts of gold were being flown to London to try to defend $35/oz. At GATA we have for the last 9 years said that the cartel will be defeated by the physical market. We have had our first glimpse of that. The indications are that paper gold can not hold this market down. In my last update I said “This is the type of set up where fortunes are made. However, it is also exactly the type of setup where the weakly capitalized lose a fortune as they are stopped out before the market rockets higher”. As it turns out this move could have been traded, but my warning stands. If we are as close to the tipping point as this analysis indicates then gold and silver could have a “Potash Experience” where recently prices were adjusted up 300% overnight! Good luck trying to get back in position!

Gold closed at $872/oz.

FIGURE 1

FIGURE 1A (ZOOM)

COPPER (Figure 2)

In my last update copper was trading at $3.88/lb and I said “Copper took a bit of a dip due to the across the board sell-off in commodities but has recovered quickly. The MFA uptrend has not been broken and it still remains at the low side of its channel, and a low-risk entry point”

Copper hardly blinked during the recent drubbing of the precious metals and commodities. The MFA dropped to the lower support line and so is again at a low risk entry point. Copper opened the May 5 session on the COMEX on steroids shooting up to $4.26/lb and chalked up an historic all time high for any contract. This has some analysts scratching their heads wondering how copper can be so strong in the face of a global recession. Any readers of my column should not be surprised. Copper is about to blow the doors and the roof off the barn!

Copper closed at $3.98/lb.

FIGURE 2

CRUDE OIL (Figure 3)

In my last update Crude was trading at $106/Bbl. I said “The sell-off in commodities hit crude oil and the MFA uptrend was broken to the downside. In percentage terms the price correction has not been dramatic but unless the MFA trend reverses to the upside further weakness may be seen”

The MFA trend did reverse and headed up for most of the month of April. The general commodity price take-down of last week hardly made a ripple in the MFA as it remained in an unbroken uptrend and today crude came storming back to make a new all time record high of $120/Bbl. I suspect the general sentiment toward the crude oil market is going to change as corrections no longer go below $100. We may not be there quite yet but two digit oil prices may soon become museum pieces.

FIGURE 3

SILVER (Figure 4)

In the last update silver was trading at $17.90. I said “Just as with gold the cartel instigated a vicious raid on silver. However, as can be seen in Figure 4 the uptrend in the MFA has not been broken. The price gyrations were painful for the under-capitalized, highly leveraged players. It is likely that the cartel will try again to break down the market. The indications are so far that the odds are not in their favor. There are wide spread reports of a shortage of physical silver in the market so this will severely frustrate the cartel’s efforts to make a prolonged correction. In fact they may well be digging their own grave in that the takedown has given an excellent opportunity for well capitalized longs to enter”

The Cartel did of course try again to take down silver and made quite a dent in the MFA. The MFA has fallen to mid-channel. There is a possibility that the MFA will correct all the way to the lower support line which would be achieved by some volatile market action or it could behave like crude and head back to the top of the channel allowing silver to rally strongly. Considering what copper and crude have just done I suspect the physical market is a huge problem for the cartel in both silver and gold and significant moves higher are the most likely.

Silver closed at $16.72/oz today.

FIGURE 4

US DOLLAR (Figure 5)

In my last update the USDX was trading at 71.72. I said “As can be seen from figure 5 the MFA is still indicating an astonishing breakdown of the dollar. The slight bounce this last week was very definitely of the dead cat variety. The MFA is indicating the sort of market dynamics that might very likely lead to panic selling. The chart in no way provides logic to the brutal silver and gold sell off last week, but on the contrary bolsters the conclusion that it was the usual suspects who triggered it”

Nothing has changed in the USD MFA. The MFA has made somewhat of a rising trend which has allowed the dollar to make an unconvincing bear market rally. When the MFA turns south again the dollar move will be ugly. The only thing that will be “strong” about the dollar will be its stench!

The USDX closed at 73.06.

FIGURE 5

Summary

The dollar looks so dangerously sick the World Health Organization might soon advise wearing latex gloves and a face mask while holding it.

The fact that the gold market appears to have needed an injection of real physical to stop it from exploding vertically suggests we are close to a tipping point where it could do an impersonation of potash. Just like Walmart limiting purchases of rice to four bags, your local broker may well limit you to buying only 4 ozs of gold. It is a good idea to buy as much as you can while you can.

Considering that the word “recession” is being bandied around many analysts are befuddled how oil and copper could behave like athletes on steroids but still pass the blood test. As George Bush might say, I can answer that in one word “monetary debasement”.

When the owners of 14 trillion dollars try to find a way to escape the black hole of evaporating purchasing power the only thing that will count will be to exchange them for some real thing in short supply. Despite the covert operations of the Cartel frightening the uninitiated, to the trained eye we just got a glimpse of one thing that is desperately in short supply. Gold!

Adrian Douglas

May 5, 2008

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