Good Morning,

Gold's recovery continued for a second day on Wednesday, but the pace was seen as extremely cautious and advances were small in scale and tentative in nature. While the metal tried of a breach of overhead resistance in the overnight hours, the trade soon backed off from $885-$890 and was seen as awaiting more resolve from NY participants following the opening of that market.

The start of reports related to earnings season was seen as the primary driver of markets as the midweek trading sessions prepared to get underway. Thus far this week, very little was noted in connection with the 'stress test' that was administered to 19 of the largest US banks.

One thing that was noted however, was the TARP oversight panel's recommendation that shaky and/or de facto failed US banks should be liquidated, and so should their executives - in the employments sense. We know that populist rage would like to see the other meaning of the term being exercised, as the ire attempts to find the best effigy to burn in this stretched-out saga.

New York spot gold opened with small gains this morning, quoted at $882.50 (a gain of $1.40 per ounce) amid conditions that were best described as fuzzy: the US dollar advanced, but by only a tiny amount (@ 85.33 on the index), oil fell further (reaching $48) as demand difficulties persisted, and as stock index futures showed probable declines in the making today.

Silver added 4 cents, opening at $12.26 per ounce, while platinum gained $9 to $1172 and palladium climbed $2 to $225 per ounce. Certainly was not the NY Auto Show that had the complex rising this morning. The atmosphere at the event was even more subdued than that seen at the average car dealership of late.

Seasonal tallies show that Abu Dhabi's gold sales declined by 20% in Q1 (high prices, low demand = principal suspects), and that China is on track to gains in gold sales for 2009. Thus, and considering all of the other recent developments in this market, even the most optimistic forecasts being offered at this juncture do not envision gold getting to much beyond the $1K to $1.1K mark - and even those are 'ifs.' If the big bad D takes hold on the other hand, well the 5 and 6 hundreds will appear quite appealing - considering how much other assets might lose in value.

Our late December projections offered a $100 'bonus' beyond $980 per ounce, IF certain conditions (read: baaaad economic or geopolitical news hitting the markets) materialized. London's GFMS launched its 2009 Survey yesterday, and the immediate deluge of ultra-optimistic e-mails started to come towards this inbox. Not so fast, amigo. So says...GFMS itself:

Gold consultancy GFMS Ltd. is maintaining a solid outlook for bullion this year, but also warning of a potential retreat not far down the road . In its closely-watched annual gold survey, released Tuesday, London-based GFMS said that gold could quickly rebound back above US$1,000 an ounce in 2009, and a move to US$1,100 is possible as well as investors seek a safe haven amid the ongoing economic turmoil.

But contrary to the popular views of the gold bugs, GFMS does not see the boom lasting indefinitely . It reiterated a long-held view that this rally is entirely driven by investment demand and is not backed by jewellery demand or anything else . The result is plenty of short-term volatility as investors jump in and out.

How long [the rally] is sustained will be a function of what happens in the financial sphere. Specifically the U.S. dollar, inflation, oil prices, and what happens in the equity markets. Some of that is very difficult to predict, GFMS research director Neil Meader said in an interview after a presentation in Toronto. If the global downturn moderates, inflation is held in check and the U.S. dollar maintains its strength, Mr. Meader said a retreat is possible in 2009 or early 2010. But if the dollar collapses, inflation runs wild and the world plunges into depression, he expects a sustained phase of gold investment that will run into 2011.

And even when the gold market does weaken, he is not anticipating a total collapse.

We do expect that the retreat from investment could be very slow. People do seem to take time to become convinced that the game has changed, Mr. Meader said.

The gold survey also showed that mine supply in 2008 took another dip, falling 62 tonnes to 2,416 tonnes. That is the lowest production level in the industry since 1996, and proof that mining companies are having trouble boosting production as they deal with high costs, geopolitical risk, and a lack of new discoveries. The biggest weakness continues to be in South Africa, where production is falling at the fastest rate in more than 100 years.

However, total demand also fell about 1% to 3,880 tonnes, as the 75.5% increase in investment demand could not totally offset the 10.2% decline in jewellery demand. GFMS expects that the weakness in jewellery demand will continue throughout this year, although some buying on price dips is quite likely. Gold briefly topped US$1,000-an-ounce barrier in February, but fell back below US$900 in recent days as the equity markets rallied. In inflation-adjusted terms, gold is still nowhere near its high of more than US$2,200 an ounce in 1980.

Thus, the tug-of-war goes on. Some see the proverbial (and in this case golden) Grail as half-empty, while others see it half full. Kind of like our friends below. All of which leaves Mr. Elmer Investor as confused as ever.

We say, relax. Ensure that the 10% core gold insurance has been set aside and is backing your financial life. Following that, you can simply go to the movies and watch the funnies. The outside world is anything but.

Th-th-th- that's all folks !