December Gold:  Open= 597.0  High= 598.0   Low=592.0   Close= 592.6   -0.9

The gold market failed to advance past $600 yesterday and again today the market consolidated below this resistance.  Price action remains at the mercy of outside influences, whether it is crude oil or the dollar.  The North Korea situation is not warranting much worry as it lacks follow through potential.  There’s no threat to crude supplies and little reason for military action.  North Korea has never truly been a threat to its southern neighbor or any Western nation.  Kim Jong-il is content to stew in his own his mess as long as he remains in power.  Image is what lays at stake here, not military conflict.

A break in crude prices today pulled out support from any rally attempt.  Crude dropped hard on its close to settle at $59.30 after testing the low at $59.00 a barrel.  Why so weak? The Department of Energy reported a surprisingly large build in crude stocks which caught traders a little off-guard, causing the market to vacillate as to whether an increase in crude stocks or a decrease in products was more important.  The build in crude inventories was too large to ignore with OPEC’s meeting tomorrow.

OPEC is facing a critical test of its power as a price mover.  The market is suspicious that the cartel cannot collectively cut its production to halt this price slide.  Tomorrow, OPEC will announce its decision on a production cut.  Anything less than 1 million barrels will be bearish, and more importantly, it’s vital that Saudi Arabia must participate in these cuts if OPEC wants any decision to be respected. 

A bearish reaction to tomorrow’s decision could send oil prices down another wave.  Little support is offered between $58 and $50.  If OPEC cannot fully agree on a firm cut in production the market will force the cartel together to halt another price slide.  If nothing, the cure for low prices is lower prices.  The market smells blood and might just push this market lower until OPEC really acts.

Support for gold now comes in at the 25 day moving average at $589.  With such a predicament for crude, won’t weak oil prices hurt gold?  Yes, and no. While true that initially weaker crude will pressure gold prices.  But there is, ahem, a silver (gold?) lining.  A rise in global productivity due to lower oil prices may just keep the inflation worries afloat.  Already this week the CPI showed the largest increase in non-energy related products since 1996.  There is concern than inflation is creeping higher, flying under the radar of lower energy costs.  Not only could inflation worries keep gold prices at a fair value but also physical demand could be buoyed as economic activity increases with lower energy costs.

Support for gold comes in at $589,$583.5 and 580.  Resistance is seen at $600, $606.5, and $610, with strong resistance at $615.

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