Good Afternoon,

The mid-week New York gold session showed that the bulls still have plenty of lifeblood left in their veins (as well as money in their pockets) and that when it comes to bad news, the metal will surely make a good newsday of its own. After testing as low as $902.40 overnight, the trade turned things around with a buying spree extending from crude oil to copper. Precious and base metals benefited from a fresh (and by now familiar) influx of speculative funds as participants raised bets that the Fed will ease in three weeks and that it may give more than the minimum quarter point given the economic environment.

At last check, gold was ahead by $19 at $934.20 amid some hesitation above the $935 level but the June contract finished with robust gains at $937.50 per ounce. Some analysts still see a declining tops pattern unfolding here and caution remains a feature of the trade as few know when one fund or another might pull the profit trigger and bail. A money-making day, nonetheless. For some.

Silver added 54 cents to $18.21 and the noble metals either minimized their earlier losses (platinum was down only $2 at $2026) or turned them into gains (palladium rose $6 to $460). The real fireworks and catalyst for today's action was the knee-jerk rise in crude oil to well past $111 on the heels of a slumping US dollar (which fell .58 to 71.78 on the index).

As the IMF warning that total losses from the credit debacle might come close to one trillion dollars ($945 billion to be precise) was issued, so did a series of countermeasures make their debut. Canada's Report On Business fills us in on the details:

Finance ministers and central bankers of the G7 nations meet in Washington on Friday to plot their next move in response to the crisis, based on a list of recommendations from the Financial Stability Forum, a body they created.

The FSF sounds much like the new role that the Fed and the Treasury will play with regard to US market conditions going forward. Among the measures the FSF could mobilize is: the deployment of an international team to keep closer tabs on the world's big banks while demanding better risk management and information disclosure across financial markets.

To put things into perspective, the $1 trillion hit is to be measured against a $14 trillion US economy and a $32 trillion dollar global one. The problem is that the nature of the losses can snowball into loss of confidence and deflate various economies and related markets as the contagion spreads. In its recent minutes, the FOMC expressed justifiable worries that the US contraction might actually end up being prolonged and severe. A possible result? Bloomberg says that:

Commodities, rising for a seventh consecutive year, aren't ``immune'' from slower economic growth, Fitch Ratings Ltd. said. Commodity prices are unlikely to escape a demand-led slowdown resulting from the anticipated global economic downturn,'' Fitch, a unit of Paris-based Fimalac SA, said in a report yesterday.

Also along the same lines, ShareCast reports that the IMF said: The mortgage crisis in the US is the largest financial shock since the Great Depression and warned that the global risk of recession is rising. The IMF set the odds at 25% for this to happen.

The US economy will tip into a mild recession in 2008 as the result of mutually reinforcing cycles in the housing and financial markets, it said. It slashed its growth forecasts for both the US and Britain, warning that there is one chance in four that global economic growth will drop to recession levels in the next 12 months.

The financial shock that erupted in August 2007, as the US sub-prime mortgage market was derailed by the reversal of the housing boom, has spread quickly and unpredictably to inflict extensive damage on markets and institutions at the heart of the financial system, it said.

The rest of the world will not stay far behind in this contraction. Already, forecasts have been issues for Canada to go into at least a two-year slump as its neighbor to the south drags it in the same direction. The IMF also called for the ECB to ease rates to avert a significant slump in the Old World.

Many other commodity prices will be weak in the next several years as the U.S. housing decline sires a global recession and inflation fears turn to deflation worries. And those commodity price declines will be enhanced when all the investors who have jumped into commodities stampede out at even faster rates. It will be a global recession, since U.S. consumers will retrench and curtail the imports the rest of the world depends on for growth. I continue to believe that the domestic spending in China and other Asian lands principally results from the spending of export earnings and direct foreign investment money. Their middle classes aren't yet big enough to generate domestic-led economic growth. So, a U.S. recession will create severe problems in those countries.

The noteworthy part of this quote from Gary Schilling in Forbes was that he wrote it in November of 2006. Way before the word subprime was fashionable and credit was flowing freely.

CPM Group's London-based counterpart, GFMS opines that despite the above, gold could well have a second spike later this year or early next year, and that such an achievement could bring it up to perhaps as high as $1100 per ounce. This, in their annual survey, released today:

Many of the drivers behind this investor push after all - dollar weakness, skeletons in banks' closets - are still very much with us, the GFMS's Philip Klapwijk said. But quite where [gold will] top out is a difficult call - maybe $1,100 is achievable this year but $1,200 plus could be going a bit far. Timetable for this? late 2008, early 2009.

GFMS, which provides data to the World Gold Council, said its outlook remained cautious because of the rapidly growing gap between mine production and jewelry demand, the metal's fundamental support. Jewelry demand has been hit by the surge and volatility of gold prices, which leads GFMS to predict a drop in demand of over 200 tons this year. - Critics should now direct their jewelry don't matter don't you see? e-mails to Philip. Actually, don't bother him. He is a nice man. He just happens to speak the truth.

In its 2007 survey, the group found that the interplay between investors and the jewelry sector had largely determined the course that prices took. During the first half of last year, western investment fell but gold remained supported mainly by jewelry demand, GFMS said. But investment was the key driver for prices from September onwards, as the credit crisis flared up globally. -

The GFMS conclusion is the same as the one we reported from CPM earlier last month. The key question is whether investment demand will remain robust or fall victim to its largely speculative hedge fund-flavored state in evidence today. We would feel a lot better if the these markets were overwhelmingly dominated by individual investors' funds.

Mr. Klapwijk cautioned that this latest correction in gold will not be the last one nor perhaps the deepest one, as the involvement of large speculators adds a new dimension to gold's ballgame.

On a final note (actually two): 1) The man who saw the Dow and gold eventually crossing price paths, Richard Russell, issued a call for an epic bull market in stocks earlier this week. 2) NYMEX non-commercial net long gold positions fell to a 6.5 month low as of April 1. Now there's food for thought in both of these factoids...

Happy Trading.