Good Morning,

Fresh three-month lows of just above $860 were set in bullion prices overnight as decent physical offtake was negated by long liquidation ahead of today's Fed rate decision. A combination of weak euro zone sentiment and a greenback gunning for - and hit - the 73 mark on the index sent the euro to a four-week low near 1.553 against the dollar. April will turn out to be a month of net gains for the dollar - the first one this year against the euro, and the largest in four years against the Japanese yen. On the other hand, gold, which started the month with a bad April Fool's $33 decline from $915 to $882 will close out this stormy month with a net loss.

Perhaps nowhere is the evidence of the turn in sentiment as vivid as in the fast-melting holdings of the much-vaunted gold ETF - it has now lost another 10.7 tonnes of metal just yesterday. That drop, coupled with last week's largest exodus of gold in the fund's history made for central bank-sized amounts coming onto the market and have very likely contributed to the avalanche of sliding prices. We had expressed concerns that the vehicle was an untested entity and that while it may well have contributed to the ascent in gold in a substantial manner, it remained an unknown in periods of price declines. We can now begin to see what the effects may be during such a phase in bullion prices.

New York spot trading opened the session with a small $0.70 loss at $870.00 as players awaited a slew of economic statistics (including advance numbers for Q1 GDP) and the results of the Fed meeting at 2:15 NY time. Consensus indicates that the Fed will indeed lower rates by 1/4% in order not to disappoint markets (though it really does not need to do either) and that the post-meeting verbiage is where the substantive policy position shift indicators may be found. If the Fed is counting on easing oil prices to obviate the need for a defensive stance against inflationary pressures, T. Boone Pickens has a message to send. He sees oil trading between $125 and $150 later in the year. Silver gained 6 cents to $16.58 while noble metals diverged once again, with platinum rising $7 to $1933 while palladium fell $11 to $415 per ounce.

Minyanville's Todd Harrison paints the best picture of the Fed and its mindset at the present time in an article on Marketwatch, titled Playing Chicken with the Fed

With the FOMC meeting upon us, the kitchen sink has been brought to the forefront of our collective psyche. Inflation in things we need, deflation in things we want, credit dependency, cumulative imbalances and the notion that we must choose between asset-class deflation and dollar devaluation all seems to come down to a singular question.

After the Federal Reserve cuts interest rates by 25 basis points -- which is less aggressive than what we've seen since the financial crisis began -- will the collective perception be that they're proactively operating from a position of strength or defensively posturing as a function of need?

The fed funds rate has already been slashed by 300 basis points since September. Assuming an implied floor may reside at 1% due to the stated desire to remain above levels last seen in Japan, when will conventional wisdom begin counting the bullets left in the gun?

To be sure, interest rates are simply one weapon in Ben Bernanke's arsenal. We've spoken at length about how the interwoven market machination has passed the point of no return and the stakes are such that policy-makers can't afford to fail. The Fed's closed-door meetings to discuss expediting their ability to pay interest on bank reserves speaks to that point.

Through that lens, the magnitude of this week's rate cut pales in comparison to the influence of auction facilities, lending windows, working groups and other policies currently in play. Therein lies the subtle yet important distinction when weighing the reaction to whatever the Fed says on Wednesday afternoon. While the structural metric will be in the spotlight, the psychology surrounding it will tell the tale.

A few random observations as we get ready to exhale at 2:15 p.m. Eastern time:

Liquidity will be thin and volatility fierce on either side of the announcement. Keep that in mind if you're trading and reduce the size of your positions in kind.

The first move following the FOMC's announcement is typically the false move.

The path of maximum frustration in equities may include a false breakout by the S&P 500 above 1,405 before supply begins to fill in.

The rotation out of commodities should continue, particularly if the dollar catches a bid due to the perceived pause in the Fed's rate-cutting cycle.

The oil drillers and gold miners may have double jeopardy as a function of underlying commodity weakness and retail traders often using them as a proxy for exposure to the space.

The financials enjoyed a relief rally after the market machination didn't completely seize up. At a point, investors will shift their focus to the massive issuance in the sector and its dilutive effect on earnings.

With the structural, technical and psychological metrics ready to collide, volatility is about to tick upward in a major way. The current juncture is akin to a giant game of chicken, with powerful agendas on one side and cumulative concerns on the other. Something is going to give and it'll likely happen this week.

Thank you, Todd. Now, back to holding our breaths for the rest of the morning.

Happy Trading.