Bubble Bursting Blueprint?

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Good Morning,

Relatively quiet conditions dominated the overnight action in gold as it spent the time within the $860-$870 range following yesterday's dip to one-week lows. Light physical buying emerged and lent support to the metal, along with a turn lower by the US dollar. Germany's GDP apparently grew at the most rapid rate in a dozen years, and the revelation sparked a mini-rally in the euro. Crude oil refused to give up much value and was once again heading towards $125 on the back of bullish forecasts ahead of the summer driving season. Black gold has already gained about 30% in 2008.

New York spot trading opened with a slim $0.60 gain this morning, quoted at $865.00 bid. Players awaited last week's initial jobless claims numbers along with capacity utilization figures as potential dollar-movers later in the day. Silver rose 8 cents to $16.57 as potential labor action in Peru has raised some concerns. Platinum was off $7 to $2025 and palladium rose $4 to $435 per ounce. Conditions remain fragile as sustained rallies have not been materializing of late. Standard Bank's analysts see gold showing "strong downside potential, and primary support at $861, with $857 and $849 as near-term possibilities."

Thus far in the credit debacle and resultant slowdown, the Fed has been seen using its old reliable 'blunt tool' -interest rates- to try to address the situation. However, new ways of dealing with such problems have also appeared on the scene, such as term auction facilities, the potential for buying some of the radioactive assets, and -most notably- its intent to avert complete implosions by direct life-saving actions. Now comes word of another sort of strategy in the making - one that should have commodities players on red alert.

Financial Times reporter Krishna Guha relays the story from Washington, and here it is in its entirety, as we felt it is important enough for you to give it a complete reading:

" The US Federal Reserve is reconsidering the way it deals with asset price bubbles in the wake of the housing and credit bust, in a move that could see the central bank using regulation or even interest rates to fight unjustified increases.

Top officials are re-examining the Alan Greenspan doctrine that central banks should not try to tackle asset bubbles and should focus on mitigating the fallout when they burst.

They are open to the possibility that the Fed may have to adopt a different strategy in future. However, they have not reached any conclusions and could end up reaffirming their traditional hands-off stance.

Any move by the Fed to focus more explicitly on asset prices rather than simply take into account their expected effect on growth and inflation would be a radical break. The Fed has long stood out among central banks as the least willing to embrace the idea that it should "lean against the wind" when asset prices are rising rapidly.

Former chairman Greenspan famously argued that it was in practice impossible to identify bubbles before they burst, and attempts to prick them by raising rates were likely to do more harm than good.

Ben Bernanke, current chairman, endorsed the Greenspan view in 2002 following the bursting of the dotcom bubble, though with the caveat that central banks should use microeconomic regulation to mitigate the risks caused by bubbles.