Gold was down $1.80 to $970.20 per ounce in trading in New York yesterday and silver was down 44 cents to $19.28 per ounce. In Asian trading gold traded sideways but in early European trading gold and silver have again rallied strongly. The London AM Gold Fix at 1030 GMT this morning was at $980.50, £485.47 and ‚¬633.40 ($973.15, £481.52 and ‚¬633.03 yesterday).

While stock markets have rallied overnight in Asia (except for the Australian and New Zealand indices) and in early trading in Europe, risk aversion remains the order of the day in the foreign exchange markets with the dollar continuing to sell off aggressively and this is very supportive of gold. It has fallen to new record lows against the euro at 1.5490 and 0.7247 on the trade weighted U.S. Dollar Index and gold has rallied close to its recent record highs.

Rumours of an emergency rate cut ahead of the Federal Reserve's March 18th policy meeting were given credence to by a Goldman Sachs research note. Signs that the monetary authorities appear to be panicking will not reassure markets. Participants in the gold market sense that the inflation genie is well and truly out of his bottle and the Fed is incapable of getting it back in the bottle for the foreseeable future.

U.S. trade figures for January are released today and despite the sharp drop in the dollar they are expected to be negative. Surging commodity and particularly oil prices are exacerbating the trade deficits which in conjunction with the worryingly high and increasing budget and current account deficits are likely to put even further pressure on the dollar.


Oil prices have again surged to new record highs at $109.15 and this is very inflationary. Geopolitical tensions and long term concerns regarding the security of supply and peak oil are providing fundamental support which is supporting gold. As are comments from the President of OPEC that the oil spike was to continue and remain through 2008.

Surging oil prices, inflation and slowing economic growth is very stagflationary and there is a definite feeling that this is the early stages of stagflation € akin to 1973 or 1974. An important distinction is that in the 1970s there was not the spectre of a liquidity and solvency crisis. Fannie Mae, Freddie Mac and Bear Stearns were all hit hard yesterday on fears that the property crash may be leading to a liquidity crisis and some massive government bailouts may be necessary.

Liquidity concerns will soon be added to with far more serious solvency concerns. A recession is here but this is not likely to be the typical mild recession of recent years rather a far deeper and more malignant kind of recession. Prudence and caution should remain foremost in all investors minds € both individual and institutional.

Support and Resistance

Support is now at $960 and below that at $930. We are very close to resistance is at the recent high at $987.15. With oil surging and the dollar plummeting gold at $1,000 seems very likely in the coming days.

FX Commentary

Fear and risk aversion remain the common themes in the FX markets as the dollar sank further against the yen, trading through the lows set in January 2005 and hitting new lows not seen for eight years. Yen bullishness is not the rationale behind this move but rather it proved the path of least resistance for dollar weakness in yesterday's trading. The ECB's attempt to counter the recent aggressive moves in the euro are sure to be short lived and the single currency will return to its uptrend against the dollar. Risk aversion saw further carry trade unwinding with the high yielding currencies falling against the yen too. The death rattle of the carry trade is surely now being heard.

Against the British pound the euro is consolidating ahead of its next assault on 0.7700 and beyond. The rhetoric from the ECB about interest rate expectations are sure to underpin and support this move, that is until eventually the ECB are forced to cut rates along with the FED and the Bank of England. The European stubbornness is guaranteed to ensure that this happens too late for the ECB to remain credible.

Important to Focus on Long Term

Those who call a top in gold or think it is overvalued or a bubble simply because it has reached record nominal highs in the dollar (nearly the weakest currency in the world) show a fundamental lack of knowledge of markets and long term financial and economic history.

Gold today is akin to the Dow Jones Industrial Average in 1954 when it had recovered to the same price that it had been prior to the Wall Street Crash in 1929 and the subsequent Great Depression. The DJIA fell from over 400 in 1929 to as low as 50 in 1933 prior to increasing in value by some 800% in the next 20 years. Those who called a top in the DJIA in 1954 were very wrong despite the DJIA having risen some 800%. Subsequently it rallied from 400 in 1954 to over 1000 on 1966.

Gold too is likely to double or treble in value from its record nominal highs of $850 set some 28 years ago.

Simply because a market has surpassed a very old nominal high or reached a new record high does not mean it is overvalued. Witness the DJIA in recent years. Was it overvalued when it reached new record highs in the 1980s (after the brutal bear market of the 1970s) and then again reached new record highs in the 1990s.

Calling a top in gold today and calling it a bubble is akin to calling a top in the DJIA in 1990 (DJIA was at 2,600) or earlier. All markets experience long term cycles of bull markets and bear markets and periods of undervaluation followed by periods of growth and then overvaluation. Gold is likely in the intermediate stage of its new secular bull market.



Silver is trading at $20.24/20.29 at 1200GMT.


Platinum is trading at $2050/2060 (1200GMT).

Palladium is trading at $480/486 per ounce (1200GMT).