Good Morning,

Gold prices stalled about $10 short of their $965 objective overnight and dropped back into the $940-$950 range as the US dollar gained slightly. The trade was slower-paced and appeared to await US GDP data for a better sense of direction. The GDP figures came out in line with expectations this morning, while jobless claims came in well under the estimates of analysts. The unemployment figures are significantly lower than they were in the recession of 2001 and point to a contraction that appears shallower than its predecessor.

Possibly the best news in the data release was the fact the consumer spending rose 2.3% in the quarter. Markets are frequently looking to the US consumer as their barometer of what is really going on in the economy. Thus far, the US consumer is telling them that things are not quite as bad as they are being told they are. However, the subprime debacle has thus far racked up about $180-$200 billion in losses and has engendered fears that consumer wallets will seize up as badly as the credit markets have.

With anywhere from $150 to $200 billion in losses still possibly in the pipeline and with banks hoarding cash in lieu of lending it to would-be home buyers we can see why every penny spent by consumer in this environment can give rise to loud cheer. We reckon Ford might have hung on to Jaguar and Land Rover had its crystal ball shown that Wall Street hedgies were going to continue to keep gobbling up their $80K cars with the abandon they had shown during good times.

New York spot gold went into a sharper decline shortly after the GDP/jobless figures were released, while the dollar gained .18 to rise to 71.65 on the index. Spot gold was quoted down $10.00 at $944.00 bid per ounce as participants deemed the US data to be dollar-positive while at the same time finding another excuse to sell-off in the 0.6% fourth quarter growth rate which is slim enough to stoke fears of recession-driven lackluster demand for commodities. Supporting background factors were seen in rising crude oil (motivated by an Iraqi pipeline explosion) but not much else. Silver headed towards the $18.00 figure, losing 37 cents while platinum added only $2 to $2002.00 and palladium dropped $4 to $451.00 per ounce.

Risks remain everywhere. A fine line separates the quest for inflation-proofing and safe-haven orienting portfolios from the preference for risk aversion and liquidity that a deflating price environment can yield. Investors want more Fed action and they appear prepared to put some (of their own) taxpayer money at risk if they can be reassured that the wild boys will be better regulated and that their own way of life is preserved. Therefore, the recent obsession with Fed action/inaction and its position relative to the curve. The Wall Street Journal observes:

The clear and present danger that the virus in the housing, mortgage and credit markets is infecting the overall economy is too great to ignore. The Great Depression was worsened because the initial government reaction was wrong-headed. Federal Reserve Chairman Ben Bernanke spent an academic career learning how to avoid repeating those mistakes.

Is it working? It is helping. One key measure is the gap between interest rates on mortgages and safe Treasury securities. A wide gap means high mortgage rates, which hurt an already sickly housing market. A lot of recent activity, including Wednesday's previously planned auction in which the Fed is trading Treasurys for mortgage-backed securities, is aimed at increasing demand for those securities to drive down mortgage rates.

The gap remains enormous by historical standards, but has narrowed. On March 6, according to FTN Financial, 30-year fixed-rate mortgages were trading at 2.92 percentage points above the relevant Treasury rates; Wednesday the gap was down to 2.22. Normal is about 1.5 percentage points. Money markets are still under stress, as banks and others hoard cash and super-safe short-term Treasurys.

Is it enough? Probably not. Although it's hard to know, the downward tug on the overall economy from falling house prices persists. The next step, if one proves necessary, is almost sure to require the explicit use of taxpayer money.

The case for doing more is twofold. One is to cushion the blow to families and communities, even if some are culpable. The other is to disrupt a dangerous downward spiral in which falling prices of houses and mortgage-backed securities lead lenders to pull back, hurting the economy and dragging asset prices down further, and so on.

In ordinary times, a capitalist economy lets prices -- such as those of homes, mortgage-backed securities and stocks -- fall to the point where the big-bucks crowd rushes in, hoping to make a killing. But if the big money remains on the sidelines, unpersuaded that a bottom is near, the wait for bargain hunters to take the plunge could be very long and very painful.

So the next step, no matter how it is dressed up, is likely to involve the government's moving in ways that put a floor under prices, hoping that will limit the downside risks enough so more Americans are willing to buy homes and deeper-pocketed investors are willing, in effect, to lend them the money to do so.

If the Fed is likely to employ such measures on the downside, could it also resort to placing a cap on certain other prices as well? Nothing would delight the manipulation clubs more. Finally, they could have the proof they have been unsuccessfully seeking since time immemorial.

Remain on alert for perceptions of a turn in markets and how they square with apprehensions that any such turns are in fact small bounces at the bottom of a deep barrel. Early equity market gains were already giving way to a retreat as the effects of latest set of economic numbers wore off this morning. Back to dollar watching.

Happy Trading.