Good Day,

A return to under the 75 mark on the index by the US dollar overnight sparked fresh waves of buying in commodities and other risky assets as speculators continued to bet that current conditions give them an open window of opportunity. An ample supply of Federal Reserve officials' words was made available to the spec crowd on Tuesday, and they were -once again- mostly dovish.

Dallas Fed President Richard Fisher said he is aware that the Fed's current stance of keeping interest rates low for an extended period was denting the dollar but that he didn't want to do anything about it, pointing out inflation is likely to remain subdued for some time. Fisher also said the dollar's depreciation has not been disorderly. Yes, unlike the rise in certain commodities, which, has been. Take, for example, rising concerns among oil producers that 'demand destruction part two' could be upon them if funds continue to do what they are doing:

OPEC says demand for crude oil will slip in the industrialized nations next year if oil prices climb and are sustained above their current level. The warning Wednesday came as the Organization of the Petroleum Exporting Countries, supplier of about 35 percent of the world's crude, revised its 2010 global crude demand up to 85.07 million barrels per day - 75,000 barrels per day higher than its assessment last month. OPEC said in its November report that if prices climb and are sustained at higher levels, it would result in a 1 percent decline in demand in industrialized nations.

Back in the gold trading pits, the midweek action shaped up as follows at the opening bell: Spot bullion opened with a $9.70 per ounce gain, quoted at $1115.50 after having touched the $1119.10 spot offer mark ahead of the NY open. At the time, the USD index was off by 0.16, quoted at 74.85 and the euro climbed to $1.5048 against the greenback. Crude oil was up as well, touching $79.45 per barrel.

Silver started with a 33 cent rise, quoted at $17.63 but remains the laggard that is absent from the 'record' flavoured financial media headlines, despite its progress. Platinum added $17 to $1367 per ounce, while palladium rose $6 to $336 the troy ounce. Rhodium moved to nearly $1900 per ounce. Base metals recorded gains across the board, ranging from 1.5 to 2% on the day. Market cycles still point to a nearing pullback.

Prices are bumping up against key resistance areas in concert with key cycles being also due. Resistance at $1,105-$1,110 having been overcome, it is now followed by $1,132-$1,150. The possibility of a high to be put into place during this week and a  correction subsequently taking place is growing with each passing day. But, see Bob borrow zero-cost dollars. See Bob 'carry on.' See India importing 15 tonnes of gold last month, when more like four times that much would be the idea. See market analysts at sum it up as follows for the early morning action:

Gold was seen hitting fresh record highs early on Wednesday as equity markets in Asia rallied, rising for the fourth consecutive session on the back of better than expected Japanese machine orders, which pressured the dollar index which measures the U.S. dollar's performance against a basket of currencies to a 15 month low, while the EUR/USD pair rose to a near one-year high. Buy stops were seen being hit in the futures market just above the previous high around $1,112 an ounce said Carl Johansson, pointing to a volume peak to over 4,500 benchmark Dec COMEX gold contracts (around 14 metric tonnes) that changed hands on the 5-minute chart . This is quite a lot for the market to absorb without moving prices in current thin overnight trading, he said, but added that This is getting a bit over-excited. Charts are now well into overbought readings and prices have nudged up towards their short-term channel high, indication that technical selling or profit taking could increase. What we're currently seeing is mostly buying of a very speculative nature.

Meanwhile, over in Japan, TS Tim Geithner paid lip-service to his country's currency and promised that the US is not turning Japanese.

Treasury Secretary Timothy Geithner said on Wednesday he believes strongly in the need to maintain a strong dollar and said the United States was determined to get its budget deficit down. The dollar's decline has been a source of concern in the export-heavy region, especially since top exporter China keeps its currency's value closely managed against the U.S. dollar and so felt less impact on prices for its exports than other Asian nations that let their currencies float freely. I believe deeply that it's very important to the United States, to the economic health of the United States, that we maintain a strong dollar, Geithner said in a meeting with Japanese reporters at the U.S. embassy. 

Geithner said the United States was well aware it must work to keep investors' confidence in U.S. economic policymaking. We bear a special responsibility for trying to make sure that we are implementing policies in the United States that will sustain confidence ... in investors around the world that as growth recovers and growth strengthens that we're going to bring our fiscal position back to a sustainable balance, he said.  Signaling that 'deep beliefs' are far from convincing, carry-traders, of course, ignored the Geithner dollar nod and gave their own nod to continuing the construction projects they have been busy with: bubble-building. Confidence among them (about a successful completion of the spherical objects they are busy inflating) is at an all-time high. Make that new highs, every day.

However, creeping signs that someone else is sharpening the needles with which to pierce such objects, is also manifest amid the inebriation: Confidence in the world economy dipped in November as central banks' actions to withdraw some stimulus measures sparked concern about the strength of the recovery, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index fell to 60.3 from 61.7 in October, the highest level in the series that began two years ago. The index exceeded 50 for a fourth month, which means there were more optimists than pessimists. The survey follows steps by central banks including the Federal Reserve to start unwinding emergency measures, seeking to avoid market distortions that may spur bubbles in assets from stocks and commodities to real estate. The shift comes at a time when unemployment is still rising in the U.S. and Europe, threatening a nascent recovery as consumers limit spending.

Hardly any such concerns among those who are (still) jumping into gold at this stage of he game, hoping not just for the extraction of another $15 to $35 from the honey pot, but for at least ten times as much - by some counts. Matt Walls over at the Wall Street Journal finds that

The rally in gold may be reined in by options selling sometime in the next four to six months, if hedge funds and other institutional investors begin to view the rally as overstretched, some market observers say. Options in Comex gold and the over-the-counter market are predicting the precious metal has a 25% chance of being above $1,400 a troy ounce by the end of 2010, even though few market participants will make such bullish predictions, said J.P. Morgan managing director Neil Clift.

At last week's annual London Bullion Market Association conference in Edinburgh, a poll of audience members found the average forecast for gold's price in September 2010 was $1,181 an ounce. On Monday, spot gold topped $1,100 an ounce. The disparity between the high prices predicted by options and much lower consensus price forecasts could be an opportunity for investors to sell gold options, which could trigger a significant correction in gold prices within the next six months, Clift said.

I'm in the bullish camp. At the moment the market is in bullish mode and I actually am probably more a bull than most, Mr. Clift said. [But] at some point we'll see people coming in to sell options. There is potential value to be had in selling away the topside. It may be a long time before that happens. But at some point it will. Gold's dramatic ascent since July, without any significant correction, may tempt some longs worried about a short-term correction to sell options to protect their gains.

In the gold market, options markets are normally larger than gold futures and forwards markets, giving them a significant influence on prices. In the Comex gold market, for instance, the amount of call options on Nov. 4 totaled 42.96 million ounces, or 1,336 metric tons, nearly half the 2,416 tons produced by gold miners in 2008. Some observers said large institutional investors who have long positions in gold futures, physical gold or gold exchange-traded funds may decide to sell call options or buy puts as a hedge to protect the profits they made on this year's bull run. The amount they collect in premiums will offset losses they may incur on their long positions if gold prices correct or fail to rise as high as options predict.

Mr. Clift said sovereign wealth funds, hedge funds, pension funds and ETF holders that already own a lot of gold may want to sell options to hedge the gains they have already made and thereby maximize their returns. Raymond Key, global head of metals trading at Deutsche Bank in London, said in coming months there will be growing use of options trading, particularly in gold ETF markets. High net-worth individuals, who may be long on gold, either in physical metal or in ETFs, may sell more shorter-dated options with the expectation that gold prices will correct before resuming a longer-term uptrend.

Such strategies grow in popularity when the market is going up in a straight line and investors who are long on gold want to take advantage of corrections or consolidation phases, Mr. Key said. It would temper the rally, he said. Another choice available to these investors is to buy puts, betting that prices will fall and again hedging their long exposure, said Jeffrey Christian, managing director of U.S. based commodity research and consultancy CPM Group. Even if the gold price doesn't decline to the specific price of the put, the value of the put will increase as the gold price draws closer to the option price, and the investor can sell his put back for a profit, Mr. Christian said. While this may not necessarily push prices significantly lower, it could stimulate options trading, and this often exaggerates price movements, he said. If they did sell, they will accentuate the decline in prices.

Until tomorrow,

Jon Nadler

Senior Analyst