Good Morning,

Sharp declines were seen across the board in precious metals overnight as the slump in crude oil continued to give the US dollar further breathing room to mount a rally to 72.60 on the index. The euro, which got dented following yesterday's German confidence numbers was threatening to get near 1.56 against the greenback in lieu of the 1.58 level it looked like it was going to go for previously. Oil sank to near $126.25, losing another $2.50 after concerns arose that demand would grind to a virtual halt amid record prices. What a realization. Suddenly, rice supplies also look a lot better, obviating the need to hurry to the big box stores to hoard some. The price of the staple has fallen 26% since its recent highs.

New York spot gold continued the sell-off that commenced on Tuesday, sinking a further $14.50 to $889.80 per ounce (the lows overnight touched $888) and now fully erasing last week's gains. Durable goods orders figures and crude oil inventory levels could provide some cushion later in the day, however the breach of $900 after nearly two weeks does not bode too well for the short-term at least. Silver shed another 30 cents to $17.12 while platinum lost a whopping $84 to $2028 and palladium fell $8 to $433 per ounce. An average of a loss of 2% was observed in the base metals complex this morning as the selling spread to the rest of the commodities complex .

Forbes reports that China, will likely surpass South Africa to become the world's top gold producer this year.

Chinese gold production may reach to 300 tonnes according to Hou Huimin, the vice secretary general of the China Gold Association. His remarks came at a conference held by the Shanghai Futures Exchange. Also from China, news that GFMS Chairman Philip Klapwijk expects one more spike to above $1,100 for gold before the year ends. This, on investment demand, a weaker dollar, and the lingering effects of the credit crisis. UBS forecasts today put gold at $900 in one month and $850 in three months. For silver, UBS sees $17.20 in one month and $16 in three months.

Someone who might disagree at least in part with our good friend Philip, is S.F. Fed President Janet Yellen. Marketwatch reports on her remarks about the Fed's actions to stave of a Depression-era dark scenario and how the odds of such an event (as well as the Weimar style hyperinflation alternate outcome) have been minimized:

The Federal Reserve's frantic action since January to slash interest rates and pour cash into financial markets in return for unwanted securities has paid off, according to San Francisco Fed President Janet Yellen. Although not so clearly explained by the central bank, Fed officials undertook these unprecedented steps in some measure to ward off what they like to call an adverse feedback loop.

That isn't a term from a heavy-metal concert. Instead, it is one of the quickest ways an economy can stumble and fall. Sharp declines in asset values puts pressure on banks and financial institutions, which are then forced to sell assets and cut back lending. This puts downward pressure on the economy as a whole, and starts the cycle all over again.

The Great Depression was an example of an adverse feedback loop.

In a breakfast speech on the economic outlook, Yellen said that the recent improvements in financial markets have lowered the odds of such a negative event. [I] am encouraged by what I've seen both from the economy and financial markets to believe we've really minimized the odds of that dark scenario, she commented. A sharp drop in home prices remains one of the biggest risks facing the outlook and one of the key questions going forward, according to Yellen.

The San Francisco Fed president's remarks came in the question-and-answer session following a speech, which was similar to one she gave last week. Yellen said that the road ahead for the economy was particularly uncertain given the financial turmoil, the housing cycle and commodity prices.

She also warned that the central bank would have to pay close attention to inflation.

The Fed's unprecedented lending to investment banks would have to end when the financial turmoil subsides, Yellen said. At that point, the Fed and Congress would have to discuss the ways and means of future Fed lending to these firms. The Fed traditionally has lent only to commercial banks, although it retained the right to lend to investment banks under emergency powers.

We have to deal with the moral-hazard issue, she remarked. The market may assume that the Fed would use these powers again under a crisis. We're going to have to work that one out with Congress.

While much depends on the action in oil later in the day, bargain hunting could emerge at or near these levels and lend some support to gold. Recapturing the $900 level remains the first task on the priority list before further confidence dissolves.

Happy Trading.