Martin Murenbeeld, the Chief Economist at Dundee Wealth Economics and a noted gold analyst, fears that gold is vulnerable to a sizable correction (drop in prices) while resource industry icon Rob McEwen makes a case for $5000 gold and $200 silver — in four years!  What to do?

This may be a “trading opportunity” for speculators plying for quick profits, but physical gold (and silver) investors need to hold their positions.

Even if Murenbeeld is correct, multiple challenges arise for sellers at these levels.  First, taxes would be incurred on profits.  Second, sellers would be out of the metals at a time when near chaos reigns in the financial markets.  Third, determining a re-entry point is difficult. Fourth, and I’ve see this often, having the discipline to re-enter the market on a drawback requires nerves of steel.  Too often, traders will not re-enter the market at all because they are constantly looking for still lower prices and are left on the sidelines are prices roar to the upside, passing sellers’ original exit prices.

While reading the Murenbeeld article, keep in mind that he is a bull and is only advising clients that gold is vulnerable.  He is not necessarily recommending that investors try to trade this market.

As is often the case, this week’s significant price action in gold garnered media attention.  First Fox News’ Channel 10 came by yesterday for a live broadcast at 9:30 am, followed by a brief interview that aired for the evening news.   Later Channel 12 came by to get comments for their evening news.  This morning, a reporter called, wanting to develop a gold story for Channel 5.

Invariably, the reporters want to know if gold’s price action has resulted in increase calls.  Yes, we are seeing increased calls, but nothing like the volume of calls we received when the GFC (Global Financial Crisis) surfaced in 2008.  We could not handle the calls then.  What’s the difference?  Why the crush of calls in 2008 buy fewer calls today?  Doesn’t gold’s price surge signal significant problems?

First, gold’s continued move today to the upside does suggest real concerns, not only about the dollar but the euro and all other fiat currencies.  Just when the Europeans thought that they had calmed the waters with the Greek bailout, Italy’s problems surfaced.  And, last week the Bank of Japan sold huge quantities of yen in an effort the lower the yen’s value.  (Anyone old enough to remember when a strong currency was desirable?)

Still the 2008/2009 GFC more directly impacted average investors than does today’s currency crisis.  Average investors knew it was bad when Lehman Brothers failed , Merrill Lynch went bankrupt and was  forcibly rolled into Bank of America by regulators and mortgage companies went under.  Not to be omitted from the GFC was the housing collapse, which directly impacted millions of average Americans.   They understood what was happening in 2008/2009; they are not as attuned to S&P downgrading US debt.

Although average investors  can see a free-falling stock market, they have not yet reacted to it.  As the losses grow worse, many investors will pull out of stocks and move to the metals, proving a whole new group of buyers, which will send prices yet higher.

Finally, it must be noted that Congress’s failure to quickly agree to raise the debt ceiling contributed to rising gold (and silver) prices over the summer.  As the issue wore on, many investors looked  at the situation and did not like what they found.  They became precious metals investors and helped make this summer one of the strongest in decades.

Gold now has the media’s attention.  We can expect more frequent and hopefully better coverage as prices move higher.  We can also expect widespread coverage when there are significant price moves to the downside as there always are in bull markets.   Nonetheless, this is a precious metals bull market, brought on by a real currency crisis, which will not soon be resolved.

Metals prices pushed upward amid the same unresolved concerns that moved China’s futures markets Tuesday, including the ongoing strike at world’s largest copper mine and the unbroken stalemate in the US over raising the country’s debt limit.

The most active copper contract, for October delivery, rose about 0.6 percent on Wednesday to settle at 72,830 yuan ($11,307.08) per ton on the Shanghai Futures Exchange. The contract jumped 0.8 percent at the market’s opening, following the rise in international copper prices overnight.

The benchmark three-month copper contract on the London Metal Exchange rose 1.7 percent in Tuesday’s session, but then retreated on Wednesday. It was trading at $9,821 per ton, down 0.2 percent, at 3:15 pm Beijing Time on Wednesday.

SHFE gold prices rose steadily on Wednesday, with the most traded contract rising 0.4 percent to settle at 336.84 yuan per gram. The price of gold for immediate delivery hit a record high of $1,624.55 an ounce on the COMEX on Wednesday.

Other SHFE base metals benefited from the rise in international prices overnight, with the most active aluminum contract spiking 1.9 percent to settle at 18,210 yuan per ton. The contract was up more than 3.5 percent for the week due to strong fundamentals, according to Tong Changzheng, an aluminum analyst with Huatai Great Wall Futures.

A bulletin on the China Nonferrous Metal Industry Association website highlighted a rumor that may have influenced aluminum futures, according to an analyst surnamed Yuan with Shanghai East Asia Futures.

The bulletin said that Indonesia may impose export restrictions on aluminum ore to China, though probably not this year.

“China, the largest consumer of aluminum, imports 80 of its aluminum ore from Indonesia, so the change could constrict supply,” Yuan said.

Zinc for October delivery rose 1.3 percent to settle at 19,010 yuan per ton.

The September delivery lead contract gained about 1 percent to settle at 17,740 yuan per ton at close on Wednesday.

Earlier we noted a worrisome sign for bulls: On-net, all speculation is on the long side. There are virtually no portfolio managers willing to go against gold.

Here’s another bad sign according to RBC (via FT Alphaville and Pragcap). Speculative positions on COMEX are spiking, while gold under ETF management is flat.

The weak physical demand for gold combined with the rapid rise in the speculative activity could give rise to a sharp correction, especially if the US dollar rallies.

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