Good Afternoon,

A second bank suddenly found itself to be profitable after Citi's announcement the other day. Bank of America's expectations for a year in the black in 2009 encouraged a second rally of large proportions in the Dow this week, lifting it 247 points higher. The clear winner of the day however, was black gold. An 11 percent rise in the liquid commodity took place ahead of the OPEC meeting scheduled for the weekend. Clearly, someone is expecting a round of fresh output cuts from the cartel.

New York spot bullion continued with a gain of $17.60 this afternoon, and was quoted at $925.50 per ounce. Players were tallying a weaker US dollar which edged back towards 87.50 on the index, while crude raced higher, rising $4.55 to $46.88 per barrel. Silver climbed a 20 cents, quoted at $12.97 per ounce. Platinum at $1051 and palladium at $196 acted as if the market was on holiday, and remained as static as the new cars in your average dealership's showroom. While Ford's maneuvering and cash/credit situation gave rise to some hopes yesterday, BMW's run into a brick wall on news it lost nearly $1 billion in Q4 dashed hopes of an imminent automotive sector rebound.

European (and Asia) equities fell following news that German industrial production plunged, Spanish inflation turned into major disinflation, and Japan's economy contracted at the highest rate since 1974. If there were a market in courtroom stocks and litigation futures, it would be doing very well indeed.

Mr. Madoff was packing them in in Manhattan while refusing to admit to conspiracy and thus drag his aides into the Big House. Eventually, he was the one who packed and headed for his new residence. The one where the butler sleeps in the bunk above you.  

Sir (!) Allen Stanford invokes the Fifth - in essence saying Good Luck to investigators, and someone at Merrill will need to drink a fifth, now that the firm's misleading the US Congress on bonuses has come to light. Ah, to be an attorney today! Or a jailkeeper...

Now that practically every publication has been featuring shiny gold bars on the cover, a few words of advice from Interactive Investor International's Ceri Jones , over in the UK:

The price of gold broke through the magic $1,000 an ounce barrier at the end of February, and although it fell back this week to $890 after investors took profits, the world and his dog are advocating that gold prices will continue to rise over the long-term.


One big driver of demand is gold's perceived value as a hedge against inflation at a time when money supply in the western world is soaring and threatens to shrink the value of currencies in circulation. Last week's move by the Bank of England will amount to £75 billion of easing in the next few months, part of £150 billion sanctioned by the Chancellor, which is equal to some 10% of UK GDP. The US has doubled its money supply in the last seven years, and in Europe it is at a 30-year high.


The other big driver is that new sources of gold are genuinely scarce. The leading gold mining nation, South Africa, has halved its annual output since 1998. The days of finding marble-sized nuggets in California are long gone, with most of the world's remaining gold existing only as traces in difficult regions.


Gold bulls therefore have a lot to support their argument that metal's price will continue to rise - as well as circumstantial evidence such as record withdrawals from banks, runs on supplies of gold coins, record volumes of trade in exchange traded funds and the sheer tangibility of the metal at a time when banking products can seem opaque.


There are two huge flaws in the bull arguments, however. The first is the contention that growth in demand will continue to come from jewellery sales in emerging markets.


Jewellery still accounts for two thirds of all gold demand, with India the world's largest consumer, devouring about one fifth of the world's supply, twice as much as China and the US. It is central to the 10 million weddings that take place in India every year, mostly in April and May, as part of the transactions that take place between families, and this accounts for the regular, annual pattern of price rises early in the year before falling back later in the summer.


This year, however, Indian imports have ground to a standstill. Figures from the Bombay Bullion Association figures reveal that gold imports to India dropped to 1.8 tons in January 2009 against the 18 tons in the same period last year, and fell back to almost zilch in February. Overall, demand for jewellery plummeted by 17% between the third and fourth quarters of 2008, according to the World Gold Council, and this trend will likely intensify in the coming months as the recession deepens.

The reality is that the combination of high prices and the effects of the credit crunch encourages people to sell precious items they already own, and in many cultures have put aside explicitly as a store of wealth. Less significantly, there are also the beginnings of a trend for Asian upper classes and younger people to switch to diamonds and platinum.


The second flaw in the bull argument is that demand will continue to be driven by investors seeking a safe haven asset. This is not the all-important factor commonly thought, as ten times more of the gold mined is used for jewellery than is hoarded in bars or exchange traded funds.


Demand for gold as an alternative safe investment has anyway probably passed its peak. Fear that the US Government will nationalise some of its largest banks is now receding, and this has manifest itself for example in a slowdown into gold exchange traded funds. The big New York-listed SPDR Gold Trust (GLD) remained static for a fifth consecutive session last week.


The predicament of rival safe havens, notably the Swiss franc and the yen, also conspired to push gold up recently. These currencies traditionally benefit from low interest rates, but as rates have been slashed around the globe, they compare less well with the precious metal.


Aggressive interest rate cuts around the world have weighed on these currencies, and cut the opportunity cost of purchasing and holding gold, says Fredrik Nerbrand, Head of Global Strategy at HSBC Private Bank. Also, as Japan and Switzerland have economies that rely heavily on their banking systems, it seems that their defensive qualities appear diminished during this financial crisis where banks have come under pressure, as opposed to an international political crisis, for example.


One of the oddities of the lust for gold is the mistaken belief that it is relatively stable. In fact, it has a similar level of volatility as equities - a 30-day volatility of 20.6% compared with 30% for equities, according to Nerbrand's analysis of the MSCI World Index.


By and large, investors have been waiting for President Obama's financial reforms to deal with the crippled economy, parking money in gold simply until they direct it back into equity markets. The super-wealthy sheikhs and hedge funds will be first to identify better ways of using their cash. The price could then drop dramatically, just as last year oil collapsed from $147 a barrel in July to $40 in November.


Arguably, too, while the fiscal stimuli may be prompting fears of inflation, concern should be focused on deflation, which will drag gold down. Workers everywhere are accepting reduced working hours and even reduced wages to make firms competitive and ward off redundancies as unemployment rises. Several forward swap markets show expectations of deflation, while Fed Chairman Ben Bernanke last week told the Senate that a fall in consumer and producer prices is expected to last a few years.


All this, of course, assumes that the markets and the financial system will recover in the next few years. If that takes decades, then the price may fall back this year, only to resume a long-term upward trend.


Meanwhile, the next few weeks will be well worth watching. The Hindu festival of Akshaya Tritiya is considered the most auspicious day to buy gold in the Hindu calendar. Anticipation of this day usually nudges up the price, and this year the festival falls on 27 April.

To the above, we would add the emerging trend towards the end of de-hedging (a phenomenon which has helped gold notch large gains in recent years). While the current year might not witness much fresh net hedging, the risk of mining firms switching trains and going in the opposite direction is larger than before and could be but a matter of time. Not far behind, the idea that gold mining shares might just end up doing better than the metal itself in 2009. Now there is something novel for mining co. executives to be touting, the next time they get in front of a mike. Their own shares!

Just one day after 'bonus-problem child' Merrill gushed over gold's stratospheric prospects (it's amazing what stockbrokers will say these days!), the parent, BofA, came out with its own outlook on the precious metal. While still distributed under the ML label, the research note bears the clear imprint of the bank's take on matters:

Gold is still an attractive portfolio diversifier for long-term investors, despite the risk of lower prices in the short term, Banc of America Securities-Merrill Lynch said in a research note on Thursday.

There are significant risks to the yellow metal in the near term, in our view, but gold's history of diversification continues to support a small allocation for longer-term-oriented portfolios, the bank said. Investors often hold small amounts of gold to hedge against risk, which tends to affect the precious metal differently to other assets.

Analyst Francisco Blanch said gold could rise to $1,500 an ounce over the next three years, from just over $900 currently. Gold has been the third best diversifying asset to a U.S. equity portfolio in the last five years, after art and long-term treasuries, according to the bank's analysts. They said investors seeking longer-term diversification should include a small allocation of gold in a portfolio.

But risks remain to prices in the near term, they warned.

The stronger dollar, the high number of long positions held by large speculators -- which they said have historically signaled a 'crowded' trade -- and strong buying for gold-backed Exchange Traded Funds all suggest high prices are not fundamentally justified, they said. A slide in inflation expectations has also coincided with a slowdown in gold's price rise, the bank added. Gold is often bought as a hedge against inflation.

However, in the longer term, gold's prospects are positive.

The bank's chief North American economist Dave Rosenberg said while gold tends to perform poorly in times of peace, prosperity and price stability, the odds of all of these occurring together may be decreasing. He said rising protectionism coupled with deflating balance sheets may make gold look more attractive.

There is no doubt that gold is hot, the bank said. Even supposed all-equity mutual fund managers have begun to hold significant weightings of gold.

The near-term risks seem plentiful to us, especially as inflation expectations are subsiding, it added, however. Risk-averse investors should probably be patient.

Could not have said it better, had I worked there. Wait, I did - a decade ago. Plus ca change...

All that said, there is more reason than in three decades for astute individuals who have not yet done so, to purchase the financial insurance policy that gold can constitute. Forget where prices have been, where they are, or where they might go. Do the math and ensure that your ten percent solution for the health of your financial life is in place. Do not hope for cashing in on life insurance - it is usually an undesirable payout for the insured. Now, go out and enjoy the imminent arrival of spring.