Three-Ring Circus

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Good Afternoon,

Firmer gold prices were the order of business today, as most market participants returned from the long weekend hiatus in the markets. The metal rose in anticipation of, and in the aftermath of, the poor US consumer confidence numbers (worst since 1973) and mirrored a drop in the dollar index to 72.20 during the day. The rebound ran into resistance near $935 but if gold manages a couple of sustained closings above $915/$925 it may yet try for an eventual run to the $960 zone. Absent a swift, successful, and sustained breach of higher levels, the general tilt in the market remains negative for the time being. There remain strong apprehensions among participants that a possible sea change is unfolding out there 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 today's special focus below.

New York spot gold was trading at $935.20 recording a 2.25% gain, eyeing a very small rise in crude oil to just under $101 per barrel and the digestion of the aforementioned economic data. Silver added 79 cents to $17.78 and the noble metals really shined, with platinum rising $109 to $1980.00 and palladium up $20 to $453.00 per ounce, respectively. Players are now once again refocusing on the expected deficits in the pgm complex are exhibiting confidence on assumptions that the US slowdown may be shallower than first estimated, and that this could therefore result in continued healthy automotive demand for the catalytic metals.

Investors are maintaining an intense spotlight on the credit markets and on the mortgage situation, as the Fed pulls out all the stops and electable politicians join the in the fray against the nine month-old subprime implosion. Data released ahead of the consumer confidence numbers revealed 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.

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.

If you want to see what this all looks like in a graphic way (some of it very graphic) take a look at Neil Behrmann's analysis over at MarketPredict.com: http://www.marketpredict.com/articles/mp-bubblecycle.htm Neil sums the current conditions up as follows:

"In equity markets, participants are worried, but are still bargain hunting ahead of a bull trap. Commodity markets are in the delusion phase. UK and European real estate markets are in denial, but fear reigns in the US. Mortgage and other credit derivatives are already in "capitulation phase; junk bonds have reached fear range. Investors in high grade corporate bonds are also nervous.

Behrmann's most relevant finding (and mind that it was expressed in February!): "CRB Commodity index reaches North Pole, while Baltic freight rates head south. If there were a boom in global commodities demand, shipments and thus freight rates would rise. This is a red light, showing that prices are soaring on speculative hot air."

Cut to last week. The margin calls [in commodities] 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. Dr. Gary North ( a familiar name to many) is of the opinion that we have in fact tipped into deflation and that its fallout will be anything but pleasant. Read all about it here: http://www.lewrockwell.com/north/north615.html