By Financial Trader Research, LM Lupo

Gold Market Fundamentals

In our last gold market report we detailed four primary fundamentals that would weaken the gold market towards a new intermediate bear market phase--one that would last several months.  If that were not convincing enough, we even toted out our sophisticated inference engine which agreed with our fundamental analysis.  After years of being long the gold market, all models went bearish and the gold market obliged...for one week.  Since then the market has traded higher for six consecutive weeks running our models 6% in the red and out of the short side.

Has Anything Changed?

We won't discuss the weakened U.S. dollar like the media and even naive money center banks, such as BNP Paribas SA, France's biggest bank here in this Bloomberg article.  With the market logic presented, they wont be France's biggest bank for long. 

As we have noted before, the U.S. dollar is no longer the currency of reserve, helped in part by poor U.S. fiscal management and the long term trend of U.S. multinationals arbitraging labor profits in foreign soil back to U.S. dollars.

Gold Fundamentals Stabilized and More for 2006/07

Distilling the 2006 year end fundamental report from independent analysts GFMS Ltd London reveals the following:

• Physical supply shrank to 3451 tons from 3984 tons
• Physical demand of 3362 tons including ETF purchases
• 340 tons drop in sector sales (de-hedging)
• 533 ton reduction in total supply  (13%)

The fundamentals for gold now look similar to the corn futures market where demand is the primary driving force, and supply is beginning to trickle out of the market place.

Despite the weakness in oil, which has a tendency to wear middle eastern sentiment thin, gold volatility and the fabrication market for gold jewelry has stabilized, in part at least.  It is worth noting that currently ETF demand for gold accounts for roughly 3% of overall demand.  One can only imagine the fireworks created by even mild investor euphoria towards the gold market ETF's.

Gold Technical Analysis

Our models were stopped out of the short bullion position today at $675.00 and from the looks of it, our machine was not the only one buying.  The breach of $675 was technically very significant.  Price is always dispositve regardless of technical constructs or even fundamental assessments.

The market is currently overbought, which is bullish longer term.  The cash market high of 725 is the next target with our long term price objective of $1200 still achievable, particularly with the promising fundamental support.  The very brief pause in the price of gold over the past few months is indicative of strong demand and not attributable to fund buying only.

Conclusion:  Newmont remains on our sell list for now,  with investors better served by Yamana Gold (AUY), or bullion based ETF's, a superior alternative for equity appreciation as a result of the continued gold bull market.

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