Good Afternoon,

Price erosion was once again the feature of the mid-week precious metals trading session. For a change, the precious metals responded to a declining crude oil and rising US dollar value. Gold broke through the $900 level for the second time this month as participants continued to be frustrated by the metal's recent lack of response to outside drivers and by investor apathy. Yesterday's ECB signals that interest rates will remain at least on hold or perhaps be raised in case inflation gets to uncomfortable levels has been somewhat offset by the fact that Fed watchers no longer expect a half point cut next week, and even a quarter point is beginning to look less than certain. Here is why:

According to Bloomberg, it is becoming apparent that: Federal Reserve policy makers, sensing both renewed inflation dangers and a possible economic boost from government rebate checks, may be nearing a pause in interest-rate cuts after the fastest reductions in two decades. In remarks this week, Fed Governor Kevin Warsh, San Francisco Fed President Janet Yellen and three other district- bank presidents voiced concerns about rising prices. Harvard University economist Martin Feldstein, who for almost 30 years has headed the group that decides the dates of recessions, called for an end to Fed rate cuts.

Investors are increasingly taking such talk, along with economic data and company earnings, as signs that the Fed will leave interest rates unchanged for the rest of the year after a quarter-point cut on April 30. The central bank has already reduced rates three times this year, to 2.25 percent.

``We are close to the end of rate cuts,'' said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. ``The economy will be improving. Also, the inflation pressures are only intensifying at this point.''

At last check the dollar was shown at 1.5897 against the euro and at 71.85 on the index, while oil was trading about $2 lower (at $117.87) than its all-time record high seen on Tuesday. New York spot trading was some $11 lower at last check, quoted at $905.00 on the bid side. The low of the day came in at $896.40 in active mid-morning dealings as the metal lost nearly $20. Today's calendar offered only mortgage applications and consumer comfort index figures, While the current pause is still seen as a period of consolidation, the risk of a breach of the $900 level remains in place (as seen today) and could take bullion to the $880/$890 area. We would expect some fresh buying to come into the market at such levels from quarters that are currently holding out on the sidelines. Silver lost 59 cents to $17.01 while platinum was off by $24 at $2001 and palladium slipped $10 to $446 per ounce. Projections from the firm Investec yesterday still put the high in platinum this year near $2400 on the near half million ounce deficit that could be tallied during the period.

We keep getting a slew of correspondence from North American jewelers, designers, and fabricators who are finding it extremely difficult to make a living under current gold price conditions. Herewith, and excerpt from an e-mail just two days ago, from a Los Angeles businessman in the industry:

While retailers on New York's 5th Avenue and Beverly Hill's Rodeo Drive might not feel the impact of the recent rise in the price of the metals, the small scale retailers at the local strip mall and the family owned jewelers are finding it more and more difficult to entice customers to purchase a ring or a necklace they used to be able to buy back in 2000 for $150, but now cost more than $500.

I can tell you now that the gold price, being more than three times higher than it was back in 2001, is severely impacting the jewelry sector in a much more negative way than it is being portrayed by mainstream media. And while most of America is reluctant to use the terms, Recession and Inflation, we, in this market, have been dealing with the reality that inflation over the past four years has led us into this recessionary period.

While my family and company are able to manage through this difficult period by cutting back our expenses and keeping our purchasing to a minimum, we receive weekly, almost daily, reminders of the negative impact of the recent surge in the price of gold when we receive calls from friends within the industry alerting us of yet another closing of a retail store or factory...companies that have been around for generations, here in the US or abroad in Italy, Turkey, Korea, etc...

This is an awful period for those of us in the jewelry sector. With our volume down 50-70% since 2001, it is most definitely not a happy time for us, not just my company, but for the gold jewelry industry in general. I believe the financial institutions recent interest and attraction to the bullion was one of the worst things that could have happened to the jewelry industry.

Mother's Day 2008 might be a trying time for the gentleman.

Well, at least one jewelry trade group wants to do something about this situation. India's The Hindu reports this morning that:

Apex body of the bullion and jewellery traders All India Sarafa Association on Wednesday appealed to the government to ban futures trading in gold and silver on the Multi Commodity Exchange. The association, at its annual general meeting, unanimously passed a resolution asking the government that in the interest of the traders and consumers gold and silver trading should be banned on the MCX.

The association's President Sheel Chand Jain submitted a memorandum to the Prime Minister Manmohan Singh and Finance Minister P Chidambaram to take initiatives to stop futures trading in precious metals. In the last one year from April 2007-2008 prices of gold surged by about 45 per cent from around Rs 9,000 to the over 13,000 recently, while silver rose by around 35 per cent from about Rs 19,500 to over 26,500 per cent.

In view of a vast fluctuation in the gold and silver prices, which created both confusion and panic in the minds of consumers, the government should take an immediate step, Jain said. He said the futures trading ruined bullion trade as prices rose mostly on speculative base with hardly any physical buyer in the market.

There is no reason for such volatile fluctuations in the gold and silver prices where a large number of small traders indulging in the future trading throughout the country, Jain said.

Not sure if the association will succeed with this call to arms. Most likely, not. However, it is well worth keeping in perspective the fact that India has been, and remains the largest gold consumer globally and that its jewelry industry is an essential part of the economic fabric of the country, in the same way that gold has been an essential part of Indian life and culture for centuries. To put it into further context, the 72 tonnes of gold that the ETF vehicle amassed during the first quarter of the year would be about what India should have imported in just the month of January, had there been some value perceived in a $900+ gold price. About five tonnes were actually brought into the country.

Maybe the trade in India can find short-term solace (but not much of it) in the newly issued UBS gold forecast as brought to us by Bloomberg:

UBS AG cut its short-term forecasts for gold on expectations that the worst of the credit crisis is over and that further dollar declines will be limited. The bank, Switzerland's biggest, expects gold to trade at $900 an ounce in one month, lower than the $950 forecast on March 25, London-based analyst John Reade wrote in an e-mailed note today. The three-month forecast was lowered to $850 from $1,000 previously.

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Happy Trading.