Good Day,

The overnight trading hours saw little change in the now eight day-old one-way patterns we have been recording courtesy of the continuing weakness in the US dollar. While the US currency managed to remain perched just above the 75 mark on the trade-weighted index (and above the level against the euro), observers were quick to point out that the infamous ex-parrot in the Monty Python pet shop had also managed to remain perched - only because it had been nailed there.

Thinning ranks of traders, ahead of the long US holiday weekend started to take some of the vigor out of the size of the moves today, as opposed to what had been witnessed in recent days, but the trend remained essentially intact. Overnight ranges in gold were smaller, with the yellow metal bouncing between $1160 and $1172 per ounce.

This morning's initial action offered no large departure from that rage, as bullion opened the NY session with a $4.50 per ounce gain, quoted at $1168.60 spot bid, against a US dollar at 75.08 on the index. Crude oil was off only marginally, dropping 14 cents to $77.42 per barrel. Base metals traded a tad lower as well, but the percentage declines were hardly worth noting. Silver rose a penny to $18.59 at the start of the Tuesday session, while platinum gained $4 to reach $1459.00 per ounce. Palladium was seen flat, opening at $370.00, and rhodium added $10 to climb to $2600 the troy ounce. Albeit the push to higher levels appears to have fuel left, conditions might further thin out a logbooks are tidied up before the turkey meat orgies get underway.

Focus at 8:30 NY time shifted to US GDP revision figures. A pretty clear case of good news/bad news in this data set. Marketwatch reports that As consumer spending gained the economy expanded at a 2.8% annualized rate in the third quarter, compared with a contraction of 0.7% in the prior quarter, the Commerce Department reported Tuesday. The 2.8% growth rate is below the government's first estimate of 3.5% due to downward revisions in consumer spending and business investment in nonresidential structures, as well as changes to imports and exports. Compared with a year ago, real GDP is down 2.5%. Economists polled by MarketWatch had expected the third-quarter result to be revised to growth of 2.8%.

Well before such mixed numbers hit the news wires, Marketwatch's Irwin Kellner had already slapped the W label onto the snapshot of the US economy at this juncture. Mr. Kellner fretted about consumer spending [which] is  being suppressed by the $13 trillion in wealth people have lost because of the decline in prices of homes and stocks, along with their high debt loads and depleted savings accounts.

He added a couple of additional worry factors to the list, including: industrial production [which] barely budged in October compared with a 0.7% gain in September. New-home construction took a header in October, while prices of new and existing homes continue to tumble. Home prices have a lot further to fall because supplies figure to keep rising. A record 14% of homeowners with a mortgage were either behind on payments or in foreclosure at the start of last month. This is the ninth straight quarter that this figure set a record. We might add a little disturbing factoid showing 25% of US mortgages (10.7 million of them) being upside-down in terms of loan-to-value.

As for values in the commodity sector, well, they just keep on rising. Of course, the story that is being offered up is the recovery-flavoured one. However, Standard Bank's research team finds that: commodities are also seeing a rapid rise in speculative positions. There are gathering signs of growth, especially in Asia. However, the crude oil market, the base metals market, even the precious metals market, remain well stocked. Stockpiles are high, while benchmark commodity prices are well above the cost of production (PGM being the exception, but even here, metals prices are starting to rise above production costs).

With stockpiles high for many commodities, and with little pressure on margins, from a fundamental perspective, upside should be limited. However, there is enough liquidity to drown fundamental factors. Unfortunately, ample available liquidity continuously raises the risk of sharp corrections. There is a clear correlation between dollar weakness and a rise in speculative length (especially since 2007). As a result, speculative length could last longer (but not keep rising without intermittent liquidation).

This could mean two things: Firstly, commodities will remain partly a dollar play (and therefore remain highly correlated with other financial assets such as equities). Secondly, commodity prices could be subject to sizable corrections lower, as more speculative activity means greater volatility. We would buy on large dips.

Just how large such dips could be, or would need to be to elicit less than highly nervous buyers, remains the question of the day, the week, and the month. Make that, almost of the quarter - if you were to start on September 1st as a benchmark. In any case, the spec positions have ballooned to levels last seen in May of 2008 - and a bit beyond as well. By the 7th of July, the landscape looked a bit...different.

EW's Monday gold snapshot revealed a maintenance of the conditions its analysts had described last Friday. Namely that: Extremes are being reached in gold sentiment. The Daily Sentiment Index (trade-futures.com) of gold traders has been above 90 percent bulls for 14 consecutive days, which is consistent with the final move in an extended advance. The trend reversal, when it starts, should be intense. A decline beneath $1129 will be an early warning signal that a trend reversal is taking shape, while a small-degree five-wave decline will indicate greater bearish potential thereafter.

None of the above has managed to stem the tide of daily utterances about gold's blindingly shiny prospects. In a single day's worth of news story content, we were able to identify calls for gold (either soon, or at least in 2010) at: $1250, $1300, $1650, $2,300, $5,000, $6300, $8000, and...$15,000. Per the same, single ounce, or as an average price for a period. Some numbers offered up even had 'expiration' dates (!) attached to them - a highly hazardous undertaking for crystal ball gazers. Normally, one of the two components (price and/or date) are not offered up, in order to protect one's hind quarters.

An amalgam of emotion-stirring stories is also permeating the Internet, on the periphery of the actual daily market observations and relaying of the black and white figures it generates. The objective remains the same: instigate fear or greed, or both, in sync. Thus we get to read about how truckloads of gold are leaving HSBC's vaults in NYC. A story that is a non-event, and dates back to late summer.

The bank made a business decision not to store metal for clients smaller than institutional size (read: the ETF). As a result, it has asked small, retail clients to move their metal elsewhere. There is, and should be, no problem finding a reputable and willing custodian for one's metal. Firms such as storage and transport icon Brinks were mentioned by HSBC when it offered alternatives to clients it asked to depart. Firms such as ViaMat - Swiss in origin, worldwide in it presence, and a specialist at the storage of valuables, are but a phone call inquiry away. They all beat the risky prospect of parking one's Maple Leafs or kilo bars in a totally uninsured bank safety deposit box.

However, the headlines about this story, as offered these days, to an uninitiated reader: Armored trucks leave NYC loaded with gold sounds as compelling as any plot line from the Italian Job. And then, we have the usual mix of blogosphere sci-fi, one in which the world is now expecting the imminent default of various exchanges (NYMEX, LBMA, take your pick) - a story that was also supposed to become reality a year ago in December- and is replete with tungsten-filled good-delivery bars. You know, kind of like the frequently floated fairytale about Ft. Knox containing no gold. Well, at least that one is partially true. That's because much of that gold is parked in Uncle Sam's facilities in West Point, NY, instead. Ah, the mystique of gold, and the imaginations it fires up.

Anyway, since such bold fortunetelling and pure conjecture is so highly abundant, we thought we'd try (tall order) to balance the equation by citing an equally precise and date-stamped perspective from London-based Capital Economics - a source whose previous analyses on the developing financial crisis were, in retrospect, pretty clairvoyant. CE now opines -via a Marketwatch news item- that: Gold futures will fall below $1,000 an ounce by year-end and fall as low as $800 an ounce next year, said U.K. forecasting firm Capital Economics Monday. New York gold futures Monday hit a new high of $1,174 an ounce. Economist Julian Jessop attributed bullion's recent surge to a desire for insurance against the risks of inflationary bubbles in other assets and a U.S. dollar collapse.

These risks are probably much lower than generally supposed, he wrote, adding his forecast depends crucially on at least a partial recovery for the U.S. dollar. While we do not think that gold is yet in a bubble, the weakness of underlying demand at these record price levels is at least a warning sign, he wrote. Weakness of underlying demand...Where have we heard that on before? Why, right here. No weakness in spec fund 'demand' however. Not as yet.

75, 1.50, 1175 - remain the numbers to place on the big roulette table and see what comes up.

Until tomorrow,

Jon Nadler