Good Afternoon,

Gold prices rose for the first time in three days on Wednesday, albeit the gains were modest and were basically tracking the dollar and oil.New York spot gold dealings remained in the green column as the afternoon hours rolled around,with the metal adding $5.00 to $898.50 per ounce. The $900 mark remains mainly a psychological obstacle as the real hurdle to overcome is nearer the $920 area.

That target may prove to be a bit more difficult as Indian buying is now mothballed for a while, and as Mother's Day jewelry purchases are on the horizon, but are expected to drop nearly 20% this year. Sorry Mom, Godiva and FTD for you this year - but we still love you.

Although being long ahead of Fedspeak day had its immediate merits andsmall intra-dayrewards, gold continues to exhibit structural problems after the head-fake run on the Chinese buying news. CBGA and IMF worries continue to plague speculativebuyers' minds and little in the way of fresh positive news has emerged of late to make for a quick run to $920, or $950.

Scotiabank economist Patricia Mohr opines that while gold prices may remain relatively high this year,the likelihood of investor interestgradually shiftingto equities (mining ones as well?) and then on to industrial commodities (copper?) in the next several years, is rising. One of the stocks they will likely be taking a long hard look at, is Barrick. Reuters reports that:

First-quarter profit at Barrick Gold Corp. dropped 28 percent due to weak copper prices and rising costs, but company executives said on Wednesday that new developments in the pipeline should help reduce costs and widen profit margins down the road.

Barrick, the world's top gold producer, saw costs per ounce rise to $484 in the quarter from $395 a year earlier, due in part to mining of lower grade ore. The company also said hedges it has in place have kept it from realizing the full benefit of falling oil prices and the rising U.S. dollar.

But progress on new developments should see the company opening mines with progressively lower costs, particularly Pascua Lama on the border of Argentina and Chile, a project that could one day produce ounces at less than $100.

In other news, US Rep. Barney Frank said he would support the US Congress' authorizing IMF gold sales, but only if an earmark provision was made to hand out $4 billion from such sales proceeds to go to loans for poor countries. Nice gesture, Mr. Frank, butthe world's poor need a lot more than $4 billion at the moment, and not quite in the form of...loans.

We have little doubt thatUS lawmakers will green light the 403 tonne IMF sale. The real question still remains how much more of the 3200-plus gold tonnes in the IMF's coffers will be up for grabs in light of current global economic conditions and fast-deteriorating poverty thresholds. Some 100 million people face serious problems according to IMF and World Bank estimates.

Silver prices gained28 cents to make it back up to $12.77 per ounce,while platinum showedonly marginal improvement, rising$4to $1095 an ounce. Palladium rose$5 to $219 per ounce. The noble metals were somewhat aided by the on again/off again marriage of FIAT and Chrysler being on again. This, despite the near certainty that Chrysler will first go into Ch. 11 very soon. Not the same as liquidation, but tenuous lifeline situation nonetheless.

The US dollar fell today,but moreassertions that the American economy has bottomed out were offered from various quarters. To be sure, the 6.1% contraction in GDP was as abysmal (and more) than economists had expected. It was nearly a match for the Q4 shrinkage of 6.3%. Taken together, the two back-to-back quarterly figures amount to the worst such freefall in half a century. Inflation? What inflation? Rinse. Repeat.

Thus, the Fed left things alone and did not fiddle with monetary policy. It did note that it believes the storm surge has passes and that the chilly waters in which the economy has been drowning may be receding. At the other end of the spectrum, US consumers are apparently echoing the feeling of doomsday having passed overhead, and are humming a contraction schmontraction tune as both confidence levels and spending have experienced a countertrend pop.

On the banking front, embattled BofA chief Ken Lewis may be handed his walking papers after the firm's shareholders meeting this morning. Former Merrill head John Thainclaims the bank lied about its role in the giant bonuses and losses at Merrill that cost himhis job back in January, after Bank of America bought the troubled brokerage firm.

On the bank stress-test front, more news leaks. Such as the story that about one third of the tested institutions might require additional capital. Citi and BofA keep making the list of suspects, but we will have to wait it out until the 4th of May to learn the who's whoand the what's what of these 'tests.' Remember, the scenarios that were simulated entail unemployment levels that are unmentionable in print.

While we are on the subject of banks, let's take a look at exploding another recently popular myth being propagated (as in propaganda) in various metallic headgear leagues; that of the 'massive' printing of money being the catalyst for equally massive inflation to follow. Inevitably.

Someone is choosing to ignore the facts. For the sake of a sales agenda, evidently. Let's see what Barron's dug up on these matters of expansion and contraction. It turns out that we have just gone through the Mother of All Bank Runs globally, and that as a result of such a phenomenon, some of the expected (hoped for by some?) effects have not, and will likely, not materialize:

THE FEDERAL RESERVE has been roundly castigated in some quarters -- even former high officials of the central bank -- for its aggressive and unprecedented steps to combat the credit crisis.

But data just released by the Bank for International Settlements suggest that, if anything, the expansionary measures taken by the Fed (and in concert with the Treasury) were dwarfed by the record contraction in the global banking system brought on by the crisis . According to the BIS, which acts as a central bank for central banks, total bank claims shrank by $1.8 trillion in the fourth quarter, or 5.4%, to $31 trillion. This was the largest decline ever recorded.

In other words, there never was a global run on the banking system such as the one seen in the final three months of 2008 , which followed the bankruptcy of Lehman Brothers and the near-collapse of American International Group in September. The numbers serve to confirm the extent of the tsunami the swept through the world's financial system.

As the balance sheets of the global banking system threatened to shrink like a dying star and create an economic black hole that could suck in the world's economy, central banks and treasuries around the world responded in kind. In the U.S., the Fed doubled the size of its balance sheet, to about $2 trillion from $900 billion in the fourth quarter, and is in the process of adding another $1.15 trillion to its assets through the purchase of Treasury and U.S. agency obligations and mortgage-backed securities. Meanwhile, the federal government established the Troubled Asset Relief Program to pump $700 billion into the banking system.

Meanwhile, authorities abroad have established similar programs, notably in the U.K. Central banks from Japan to Canada have embarked on similar quantitative easing plans, effectively printing money to offset the credit contraction that has taken place in unprecedented proportion. Unlike in the 1930s, when central banks actually aided and abetted the collapse of the banking system, today's leaders responded to the unprecedented crisis in the fourth quarter with equally unprecedented force.

Yet, Fed officials find themselves uncharacteristically on the defensive for their actions, even from former, highly respected officials of the central bank. As with former presidents, retired Fed officials generally have followed the protocol of not criticizing their successors. Former Fed Chairman Paul Volcker, who saw through the fight against inflation in the late 1970s and early 1980s against fierce opposition from all quarters, has not been so reticent of late. While he kept mum during the term of his direct successor, Alan Greenspan, he has taken to task the Bernanke Fed, as well as the Treasury, for their aggressive counter-attacks against the credit crisis.

I don't think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken, Volcker said a symposium on monetary policy in Nashville, Tenn., last week.

Similarly, Bloomberg News quoted William Poole, the monetarist former president of the St. Louis Fed, as complaining that the central bank's actions threaten inflation. Fed officials are dramatically underplaying the risks and the liability side of the balance sheet, said the economist who now is a consultant to an investment group.

Yet, the effects of the shrinkage of the private banking system's balance sheet are unequivocally evident. It's now history that fourth-quarter gross domestic product shriveled at a 6.3% annual rate. What's become apparent is that the real output of the finance industry shrank last year at nearly twice the previous record rate of decline, according to JP Morgan Chase economist Michael Feroli.

Real output in the finance industry fell 3.0% in 2008, compared to the previous record of a 1.6% decline in 1958. Because finance looms much larger in the economy, last year's contraction shaved a hefty 0.24% from GDP, compared to just 0.05% in 1958. From 1997 to 2000, finance typically kicked about 0.5 percentage points to GDP growth, Feroli notes. In 2008, only construction and manufacturing detracted as much or more than finance from GDP, 0.24% and 0.32%, respectively.

Construction and manufacturing are directly affected by the collapse in credit, so the financial travails extend far beyond Wall Street. Now, however, policy makers are accused of being too solicitous of Wall Street. To be sure, banks, including the I-banks, have benefited from the actions of the Fed and the Treasury. But that is separate from the question of the macroeconomic impact of their actions.

Those who contend that the expansion of central bank balance sheets is inflationary ignore the contraction of balance sheets in the banking system, as well as the so-called shadow banking system of assets and liabilities not recorded on banks' books. This analysis is very different from arguments that appeal to the output gap, the difference between the economy's potential output and actual production. That analysis effectively says that high unemployment will hold down wages and prices, which manifestly did not happen in the stagflationary 'Seventies.

Inflation, as Milton Friedman taught, is always and everywhere a monetary phenomenon. Yet the current central-bank expansion is offsetting the contraction in the banking system -- which Friedman criticized the Fed for failing to do in the 1930s.The new BIS data bear out the justification for the Fed's actions, notwithstanding the critics' claims.

So, before you go cashing in on those wax-sealed promises of the US as Zimbabwe any day now, or the US as the new United States of Weimar any day now, why not sit back and watch what actually happens? We received a call from a client in an unnamed country last night. The client had read all of the promises of Armageddon we have all been bombarded with since (insert your favorite date here) and had run out to place 90% of the portfolio into gold.

Kind of the inverse ration of what we normally recommend. At costs exceeding $890 in some instances. What could we possibly say? Well, for one, we could say to others who are contemplating such strategies, to read more. For starters. And to remove emotions from the equation. The marketing machines out there employ some very convincing writers. Too bad they have no knowledge of the real world and can tug at readers' heartstrings so easily. The power of words.

Until tomorrow,