I'm working on something to publish shortly. I know I'm late, but in part I have been distracted. The signs are mixed and I'm having trouble making a solid call on this one. My feeling is that gold is getting clobbered on account of three things: 1) recent monetary trends at the Fed, 2) oil price weakness, and 3) the fact that the broad market is supported by #2.

In terms of our suggested allocation I'm not worried about weak commodity prices generally EXCEPT to the extent that they underpin stock and bond values outside of the commodity-related and housing sectors, as well as the USd FX rate.

We have been bearish on the energy sector this year, and have held the view that the move above US$60 oil was not sustainable in the intermediate outlook (though I'm still bullish on all the commodities in the long term outlook).

It should be noted that the monetary and economic trends are working against stock values generally, as well as commodity values. The stimulus to the stock markets from weaker oil I don't think has legs. If I'm wrong then gold might be a sell because the combination of neutral/tight money plus rallying stock prices is bearish for gold prices.

It is suggestive of another productivity miracle, for instance, which is the worst outcome for our current allocation.

But, I don't think I'll be wrong.

I don't think the stock market, or the underlying economic boom, can sustain an advance in the light of monetary trends as they are, and I don't think it can buck the decline in the housing and commodity related sectors for long. My 'initial' instincts tell me that the buy signal for gold will occur concurrently with a rollover in the major stock market averages.

Using the DJIA as a proxy for this, that would imply a drop to and inevitably through the 10750-11000 level.

At that point we would expect to see signs of central banks abandoning the current withdrawal of accommodation, and for gold prices to take up the slack in a general asset and commodity correction. Ideally, as regards my outlook at any rate, the stock market fails despite continued bullish stimulus from weak oil and energy prices, which should prompt both a bullish reaction by the gold market and renewed accommodation by the central bank.

But until this occurs, it is possible for gold to stay weak. Technical support for the intermediate trend in gold prices, which is currently neutral, lies between US$535 and US$555 per ounce. A break of this support would turn the intermediate chart outlook to bearish, and imply a move down to about US$455 - which is the support point for the longer term five year trend. This is certainly possible. Support for the HUI lies at about 275 for the intermediate trend, which is also neutral. Failure of support at this level could very well lead to a drop to around the 225 handle, resulting in the primary liquidation that I had originally forecast for this year but have postponed in the short term outlook.

I think that is still premature, but had suggested booking 'some' profits earlier in the year (at slightly higher levels) just in case, especially for gold shares due to their relative overvaluation (relative to gold that is). I do not feel that further profit taking is justified at this point unless none has been exercised so far. It is more possible that gold prices break down here than at any other time in the past several years, if only due to the factors mentioned at the outset of this summary.

However, I do not accept the argument that if the commodity advance has peaked (for now), so has gold.

The potential weakness in the economic and financial boom, as well as geopolitical boiling points, offer a large pool of potential fireworks that promise to recover gold's glitter in the short and intermediate term outlooks.

My main underlying market thesis is that while many of the commodities have factored in the expansion in money, past and future, gold has not. The spotlight has only gradually shifted toward the inflation story; mostly it is still on the China and other emerging markets growth stories as driving the demand for commodities. The result has been record lows for some of the gold ratios (i.e. gold/oil and gold/copper) and a fundamental mis-pricing of inflation risk by the bond market.

My outlook is for this imbalance to correct itself as the spotlight shifts to the inflation story, which as a matter of fact is the most dominant driver of prices, or at least the most dominant driver yet to be factored by the market. Should this spotlight shine on the inflation story, gold prices could do at least what the hottest commodities did under the illusion of growth in final demand, which means a fundamental target between US$900 and as much as US$1,500 on the next leg.

However, the Fed has so far been successful in heading off this potential shift by slowly turning off the taps (though they are still dripping) that feed inflation expectations. The trouble with this strategy is that it also endangers the 'boom' that is dependent on easier monetary conditions (as opposed to growth which is dependent on 'real' savings growth). So we are at a point where the markets aren't sure if the Fed has finished raising interest rates, and where the Fed is not sure if it has gone too far already. Thus, my bullish outlook is a bet that the boom will falter before inflation expectations do, as a result of the monetary policy of gradually withdrawing stimulus from a structurally unsound consumption binge, which I think we are seeing unfold before our very eyes; and that gold will react by factoring in the next round of money pumping.

At that point the advance will accelerate and steal the spotlight from other commodities.

The bull (and inflation story) will no longer be stealth. But my take at the moment is that we are in a vacuum where this thesis lacks the main visible confirmation: a rollover in the stock market and Fed reaction. If it is as close as it appears to be, then the intermediate support structures for the gold sector should hold and approximate the final correction low.

More in my upcoming report...