Good Day,

An eighteen-month high of $1028.80 ($5.10 under the March 2008 high) in gold prices was recorded in trading ahead of the NY opening this morning. Polled sources cited an amalgam of dollar weakness and Australia's hike in interest rates as the prime catalysts for the spike in prices that followed yesterday's already robust move in values.

However, a good dose of gold's strength and the dollar's swoon also came from intrigue and innuendo. Swirling rumours that oil-producing nations were, or are, secretly plotting to dump the dollar as a settlement vehicle for oil payments, lit a giant bonfire under the gold bug crowd, as they almost saw a tangible manifestation of their wildest dream come true. Underscore : almost.

Bloomberg News threw some well-deserved ice on the white-hot bedtime story, and it reads something like this:

Saudi Arabia hasn't held talks with China and other countries on dropping the dollar as the currency for pricing oil, Saudi Central Bank Governor Muhammad al-Jasser said, denying a report in the U.K.'s Independent newspaper.

The Independent report is absolutely incorrect and there has been absolutely nothing of that nature discussed between Saudi Arabia, the world's biggest oil exporter, and other countries, al-Jasser told reporters in Istanbul, where he's attending an International Monetary Fund summit. The dollar pared losses after his remarks. The London-based newspaper said today that Gulf oil producers and nations including China, Japan, Russia and Brazil had held secret talks on a nine-year plan to phase out the dollar in oil trade, and move toward pricing the fuel in a basket of currencies plus gold. It cited unidentified Gulf officials and unidentified Chinese bankers.

I don't give credence to this story, said Simon Williams, a Dubai-based economist at HSBC Holdings Plc. Short- term, it's highly unlikely that oil will not continue to be priced in dollars. Saudi Arabia, a key U.S. ally, pegs its currency to the U.S. dollar like most other oil-rich Gulf nations, and has resisted calls for a move away from the dollar in oil pricing as the U.S. currency lost value in recent years.

Other countries cited by the Independent as being involved in the secret plan also denied it. Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he doesn't know anything about it, when he was asked about the newspaper report. Russia's Finance Ministry isn't holding talks on replacing the dollar for oil sales, Interfax news agency reported, citing Deputy Finance Minister Dmitry Pankin. Kuwaiti Oil Minister Sheikh Ahmed Al-Abdullah Al-Sabah told reporters today in Kuwait City that Gulf Arab states have no plans to drop the dollar for oil pricing.

Even the most dollar-pessimistic sources cited in this morning's media blitz about the topic do not envision a possible estrangement from the US currency as the price benchmark for oil before 2018 (!) rolls around, if then. So, if anyone thinks that the IMF meeting in Istanbul is but a ruse for euthanizing the greenback, we say - think again. If anything material ever becomes manifest, it might be an alternative to settle payments in one's currency of choice, rather than a wholesale replacement -at all of a sudden- of the hitherto dominant payment method. Trade the rumour, if you like. We will stick to facts -when/if they see the light of day.

One such fact is cited by Bloomberg this morning, and it reads - plain and simple: Stocks rose around the world and commodities rallied as Australia unexpectedly increased interest rates, the first Group of 20 nation to do so since the recession began, amid evidence the recovery is gathering momentum. The Aussie dollar thus instantly became a quarter of a point more attractive vi a vis the US dollar and garnered traders' attention.

If this move however is a precursor to the eventual and inevitable round of interest rate hikes in other currencies as well, then it becomes a question of at which point the Fed also pulls the trigger that the Aussies pulled last night - and, at such a juncture, there may not be as much cheer emanating from the equities and commodities trading pits. In the interim, for so long as the dollar's management team lags behind the rest of the central banks in doing what is needing to be done, the trade to be made will remain obvious. Lest currency market intervention by one bank or another takes precedence.

New York spot precious metals dealings opened Tuesday's session with further gains, building on Monday's rise after the aforementioned Aussie rate increase and dollar replacement rumours filled the financial press. Spot gold climbed and additional $9.50 and came to within striking distance of the all-time high it etched into the record books during the March 2008 Bear Stearns crisis. Silver added 36 cents to Monday's closing values, rising to $16.98 per ounce. Platinum gained $15 to $1309 an ounce, while palladium lost $1 to open at $298.00 per troy ounce.

The obvious question that arises now, is: Did gold really rise by $9.50 at the opening of today's session? In today's particular case, the answer is: Yes. Somewhat.

However, as you will note after referring to the following link, only $4.00 of the upward move is US dollar weakness-based. The remainder, $5.50 is attributable to predominant buying versus selling in the marketplace. Kitco has devised a new index -the Kitco Gold Index - and you, in the financial media, are the first ones to see it live before it debuts on our homepage very soon.


Please take a moment to study the details of how this index was constructed, and how it functions (by hitting F5 on your keyboard, you can refresh the 24-hour live chart at will). One of the most relevant conclusions this index will reveal, is that the 'real' price of gold (taking the USD out of the picture) finds itself very near $783.00 per ounce, and that such a number is far beneath the dollar-based nominal prices that everyone obsesses about, on a daily basis. You can take the index out, up to 1 year, 5 years, or 10 years, in addition to studying the more recent price action.

You may call such a figure (in blue) the 'fair value' or currency basket price of gold for all intents and purposes. It may also provide for interesting days, when we will see an increase in the dollar price of gold, but an actual decrease in the 'fair value' price as employed by this new index. We will advise all of you as to the debut date, in the event you wish to direct your readers to the link. In the interim, you may make references to it, if you wish, and you may feel free to use it for your own edification.

Best Regards,

Jon Nadler

Senior Analyst