Good Morning,

After selling off in the hours immediately following the Fed rate cut, precious metals prices stabilized and worked their way back higher as Asian trading pondered the half-life of the central bank's latest measure and decided that not all is well in the world of finance yet. Gold prices had dipped to near $975 shortly after the rate cut was announced but traded in the $985-$998 range during the overnight hours. The biggest rally in five years' time in equities looked set to be replaced by continuing worries about the health of the financial system. We may recall the 400+ point rally early last week that turned into a wash by the end of the trading on Friday.

New York gold opened the mid-week session barely on the plus side, gaining $1.60 to $982.90 per ounce as participants remain focused on news flows from the street and were watching earnings and back-channel talk coming from other institutions. The gains soon turned into losses as fund selling emerged across the board in commodities. The Fed's focus on liquidity and playing its lender of last resort role has put renewed pressure on the US dollar and the currency declined once again, to 71.60 on the index. Its subsequent bounce to 71.80 was not very strong, yet it took gold down quite a bit this morning. Crude oil was off $2.75 to just above $106.50 per barrel, a move which contributed to the malaise in the metals pits. One seasoned NY trader pointed to the recent commodity bubble and opined that you cannot expect a balloon to deflate slowly when you prick it with a pin.

A slight revival in Indian demand on a local level was observed overnight as a few buyers whose matrimonial plans include gold ventured out to make purchases when presented with a nearly $50 cheaper metal than had been the case at the start of the week. Silver rose 7 cents to $19.74 on the open, but those gains turned into a 66 cent loss to $19.34 as the morning wore on. The noble metals remained under some selling pressure owing to statements from S. Africa that the power situation is not at critical levels at the moment. Weather-related concerns had heightened apprehensions about electricity supplies earlier and pushed the metals group higher. Platinum fell $47 to $1904.00 and palladium lost $11 to $464.00 in fairly nervous trade. Industrial metals were down significantly.

So, what happened yesterday? As usual, we also bring you observation by others in addition to relaying our own findings to you. Money Week's Dominic Frisby chimes in on yesterday's drop in prices:

It’s too easy to jump in and say that the gold market is fixed every time gold sells off.

Of course, there’s no doubt the Fed and its allies would not have wanted gold rocketing upwards just as they made their next interest rate cut. A rising gold price tells investors that something is rotten in the state of Denmark (as if Bear Stearns wasn’t evidence enough). So I’m sure the Fed will have been at least pleased to note yesterday’s falls, even if they didn’t cause them. But let’s look at some other possible reasons for the $50 sell-off.

Perhaps it has more to do with trader and investor psychology. Fear seemed to peak over the weekend - there was that emergency ¼ point cut in the Fed’s lending rate, and gold spiked above $1,020. For all the fiscal irresponsibility of the Fed’s move to lower rates, it has, for the time being, calmed markets – until the next bank goes belly-up. Nevertheless, a calmer market has less need of gold.

To add to the fear there is a certain amount of disappointment. Many speculators seemed to have been expecting a full point cut. When their expectations were frustrated, they sold off. This has been a prime example of the power of expectation management. Under normal circumstances, the dollar would have plunged and gold soared on a .75% cut. But, thanks to the way this has been spun, the Fed can almost say that this was a prudent, inflation-fighting move, just because they didn't go all out with a full 1%.

Some of this disappointment is spilling over into today's trade as gold tries to consolidate and probe support from $970 to $980 while still anticipating crisis-flavored news to emerge from the office towers on Wall Street. We see some of this reflected in bullion's subsequent losses this morning, with prices falling as much as $20 to $961.50 per ounce, despite a lower greenback. The metal was set to revisit the $958 area it had sunk to just last week, before it headed to new highs. Deja Vu.

In the interim, Paul Volcker was seen on financial television sternly warning the Fed not to let inflation take root and devastate wealth down the road in a manner far worse than the current write downs for some unlucky shareholders.

This being an abbreviated trading week, we can expect a wind-down of activity after today's mid-point and unless the wires flash red on another corporate name, tomorrow will see even less in the way of business. Just remain prepared, as these are days full of surprises. Some of them are scrolling across those price tickers right

Happy Trading.