David Fry's Daily Market Outlook

It’s useless to argue with current thinking when it’s in command. The historical correlation between gold and crude oil prices is not that reliable. But if it’s what some pundits wish to use to explain the smackdown in gold today, then they’ll use that until they can’t. Typically gold trades either lower or higher based on inflation expectations [higher if worries persist]; current economic conditions [higher if robust]; interest rate policy [lower if rates rise]; and most commonly with the level of the dollar [higher when Bucky is weak]. It’s just that simple.

Now from all technical measures gold heading into trading today was not much overbought. We’ve been pointing out for weeks now how difficult a grind it has been for gold to push past various resistance levels.

Currency markets don’t justify the smackdown today as the yen was weaker while the euro did little.

So what’s going on? First, important Asian investors are still on holiday and trading remains thin. The meeting of the Japanese central bank is also putting gold on the defensive should they raise interest rates. These two circumstances alone set the metal up for a sell-off.

Now there’s plenty of conspiracy talk about “cartels” and central banks that may wish to hold the metal back. Frankly, we just don’t know. There may be forward selling by commercial interests [miners] and maybe even a sense from some important trading desks that with liquidity low, the market was ripe to get picked-off. The latter resonates best with my thinking.

The stock market was the beneficiary of some “happy talk” from Fed Governor Susan Bies who, after much pundit translation, convinced everyone the Fed isn’t going to raise interest rates, the housing market is just fine and the subprime mortgage problems are a mere “sliver” of the mortgage market. Not-to-worry was the message.

And despite poor earnings results from The Home Depot Inc. (HD) investors chose to focus instead on good reports from Wal-Mart Stores Inc. (WMT) and bid stocks higher.

Meanwhile, overseas Asia lingers on holiday with volume light and folks celebrating Carnivale are just returning home today. It’s amazing anything happened.

The above charts generally sum things up for this first day of trading in a shortened week. Gold markets should be lively the balance of the week as important players in Asia are quiet and gold bears are stalking for opportunities. I’m willing to keep an open mind that perhaps folks can make real a gold/oil price correlation that endures. Until then I’m a skeptic, but respectful of the tape.

Disclaimer: Among other issues, the ETF Digest maintains positions in: streetTRACKS Gold Trust ETF (GLD), Rydex S&P Equal Weight Consumer Discretionary ETF (RCD), S&P 500 Index (SPY), Rydex S&P 500 Equal Weight (RSP), MidCap SPDRs ETF (MDY), ProShares Ultra MidCap400 (MVV), iShares Russell 2000 Index ETF (IWM), Ultra Russell 2000 ProShares (UWM), Rydex S&P Equal Weight Tech (RYT), iShares Goldman Sachs Network Index Fund (IGN) First Trust DJ Internet Index ETF (FDN), streetTRACKS KBW Capital markets (KCE), PowerShares Aerospace & Defense (PPA), PowerShares Water Resources ETF (PHO), PowerShares Zacks Microcap Index (PZI), iPath MSCI India ETN (INP), iShares MSCI Malaysia (EWM), iShares MSCI South Korea Index Fund ETF (EWY), iShares MSCI Japan Index ETF (EWJ), iShares MSCI Australia Index Fund (EWA), iShares MSCI Canada Index ETF (EWC), iShares MSCI Brazil Index ETF (EWZ) and iShares MSCI Mexico Index ETF (EWW).