December Gold:  Open= 577.2  High=583.4   Low=576.1   Close= 576.5   +0.3

Gold prices enter the sixth month of consolidation after peaking back in May.  The September and October time frame seasonally brings renewed physical demand into the market but prices sit about $75 off the August highs.  After a multi-year bull market, the past few months can be viewed as consolidation of these gains.  There is no clear direction and enthusiasm wanes as the market is caught juggling opposing fundamentals.

December crude oil prices settled under $60 a barrel for the lowest close of the year, some 25% below earlier highs in July.  Clearly, this drastic reduction in prices is easing many concerns about the global economy and removes a pillar of support for gold.     

While the Iranian nuclear situation simmers in the back of minds, Kim Jung-il set off a nuclear bomb, to what extent the test was success remains unclear, but this “me, too” action smacks of desperation.  North Korea is like the little pesky dog that instigates a conflict with bigger dogs and expects its owner to back it up.  China may be North Korea’s communist neighbor but the Chinese are growing tired of this pariah.  

One quick note about interest rates.  Short term interest rates have been falling recently, easing worries about inflationary pressure.  The September FOMC minutes were released today but again showed disunity in the Fed about which direction to take rates.  There’s some merit in the belief that despite crude prices easing, inflation could creep even with “reasonable” crude prices around $50 or $60, which is still 200% more than in 2003.

A few headlines prompted a spike in prices this morning, with the US and North Korea trying to draw lines in the sand.  OPEC is cutting back production some 700,000 to 1,000,000 barrels but with Saudi Arabia not agreeing to slow production this cut is largely immaterial.  Most OPEC nations have not even been meeting their quotas in the first place.  With that said, gold prices failed to close above $580 for the fifth time in six days. 

Price action remains supportive between $580 and $570 and is marking time.  Look for the $560 level for major support.  Note that this is a critical level and if breached could send the market reeling down to $520 -$500.  The $600 to $620 range is tops for a major rally at this point, unless the facts change.