The Greatest Show on Earth

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Good Morning,

Firmer gold prices greeted traders and investors as they returned en masse from the long hiatus in the markets. The metal rose in anticipation of poor US consumer confidence numbers and mirrored a drop in the dollar index to 72.34 overnight. The rebound ran into resistance near $935 but if gold can manage a couple of sustained closings above $915 it may try for an eventual run to the $960 zone. Absent a successful and sustained breach of higher levels the tilt in the market remains negative for the time being. There remain strong apprehensions among participants that a possible sea change is unfolding out in the world of finance and that the "Great Unwind" will result in less than friendly conditions for many a hitherto white-hot commodity. For more on this issue, please read below.

New York spot trading opened at $928.50 recording a 1.5% gain, eyeing a small rise in crude oil to just over $101 per barrel and the release of the aforementioned economic data. Silver added 45 cents to $17.44 and the noble metals really shined, with platinum rising $74 to $1946,00 and palladium up $12 to $445.00 per ounce respectively. Participants were refocusing on the expected deficits in the pgm complex and gained confidence from assumptions that the US slowdown could be shallower than first estimated and thus result in healthy automotive demand in the catalytic metals.

Players will now keep an intense spotlight on the credit markets and on the mortgage situation as the Fed pulls out all stops and politicians join the in the fray against the nine month-old subprime implosion. Data released ahead of the consumer confidence numbers reveals that US home prices fell by 10.7% over the past year - a record. Case-Schiller's home price index also showed a record price slippage in January of this year, when values fell by a record 2.4%

More and more is being written about the "Big Deleverage" these days. We were of the opinion that last year's winding down of the yen carry-trade would have significant long-term effects in various markets. We called it the "greatest show on earth" at a roundtable presentation made at the end of February 2007. Now, we have the Fed's recent pin in the commodity balloon and a second stage of the abandonment of risky positions unwarranted by fundamentals. Last week's plunge in commodities was fueled by hedge funds and other fast-money players liquidating positions to meet margin calls, according to analysts. We had fingered the hedge funds as being loaded with fickle money for quite some time. The CRB index has lost 8% since March 14.

The margin calls have been precipitated by the fast-falling value of many assets used as collateral, such as mortgage-backed securities, collateralized debt obligations and other assets battered by the credit crisis. Intrepid reporter Polya Lesova over at Marketwatch set out to poll a number of analysts for their opinion on this, the hot topic of the week. Here is what she found:

"Powerful performance in commodities over the last couple of years raises the plausibility that aggressive assumptions have further driven up prices that appear to be on the verge of correcting meaningfully as deleveraging in various asset classes continues to play out," wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup, in a research note dated March 20 and released to the media on Monday.

Deleveraging refers to the unwinding of trades funded by borrowed money. In his note titled "The case for crumbling commodities," Levkovich argued that all credible investment theses have factual basis that tend to get overdone.

"The impressive economic development of Brazil, Russia, India and China has spawned a sense of never-ending growth that has stoked speculative juices," Levkovich said.