Good Afternoon,

Gold prices meandered within a ten dollar channel on Monday but worked hard to maintain gains in the wake of once again record values in crude oil ($119.93) following a UK pipeline shutdown and an attack on oil facilities in Nigeria. Black gold is still showing an 82% gain over the past year, while gold is currently having difficulties maintaining a 30% gain over the same period. Investment funds have taken note of the fact and have been drifting out of bullion since it peaked near $1034 last month (see below). Demand from Dubai and India was on the lukewarm side, but it was better nonetheless than in the previous days. Locals we surveyed expect a bounce in offtake as May 7th approaches but see that overall demand remains lower than a year ago and buyers are still apprehensive about market volatility.

New York spot trading was ahead less than 1% at last check, quoted at $893.20 bid on this, the first day of the final week of what has been quite a turbulent month. Today's action consisted largely of some speculative positioning as there was no economic data release to take into account and as players geared up for a busy week of US statistics as well as the all-important Fed meeting. The dollar was drifting near 72.65 on the index and near 1.564 against the euro while crude oil was still showing a 40 cent gain at $118.93 per barrel. Silver was up 17 cents on the day, quoted at $17.01 while platinum rose $14 at $1971 and palladium fell $5 at $437 per ounce.

Platinum prices continue just under $2000 per ounce and although declines in sympathy with gold are possible, analysts see them as limited to the $1700/$1800 area as the metal's supplies continue to be tight and as a near half million ounce shortfall is still seen as the eventual tally for the current year. South African power issues remain a background supportive factor while buoyant automotive demand adds to the equation. London research group GFMS envisions the possibility that the noble metal may spike to $2400 later in the year.

Evidently, no such luck for silver at this juncture. The market's fundamentals are seen as less than auspicious, despite a lot of noise coming from casual observers trying to sell you newsletters. Mineweb reports this morning that:

Investment money flooding into silver has overwhelmed poor fundamentals and helped it to outperform gold, but the tide could be turning for precious metals and the probability of large losses is rising. Silver's price falls in percentage terms are likely to dwarf those seen in gold, which some fund managers say has stronger supply/demand fundamentals.

History shows that when you get a substantial correction in precious metals, silver falls more than gold ... It's a more volatile market and smaller in value terms, said Stephen Briggs, analyst at Societe Generale.

One big reason behind surging prices has been the tumbling dollar, making commodities priced in dollars cheaper for holders of other currencies. The weak dollar also prompts producers to raise prices to protect profit margins. Last week the dollar fell to record lows against the euro, to beyond $1.60, an event which has caused many to question whether further losses can be sustained and whether it has bottomed.

The dollar is not going to keep on depreciating forever, Briggs said. He expects gold prices to average around $900 an ounce next year from $1,025 this year and silver to average $15.50 compared with $19.20.

Financial uncertainty, which has underpinned precious metals since last August is to some extent becoming less important to investors seeking the higher returns stocks and bonds offer. With a weakened case for holding precious metals, prices have started to slip. Spot gold is now around $893 an ounce compared with a record high of $1,030.80 on March 17 and silver at $17 from a 27-year high of $21.24. Goldman Sachs recently said it expects to see gold prices at $835 an ounce in 12 months and silver at around $15.50.

From the end of last year to March 17, silver prices surged by more than 40 percent, while gold was up more than 20 percent. Silver's heftier gains were built on investor flows.

Silver is probably going to fall more than gold in percentage terms, said Wolfgang Wrzesniok-Rossbach, head of sales at German metals trading group Heraeus.

From an industrial and jewellery point of view, there has clearly been a decline in demand. There has been a lot of additional material coming to the market in the form of scrap.

The surplus in the physical silver market is expected by some analysts to rise to around 2,500 tonnes from a surplus of around 900 tonnes in 2007. The physical gold market could see a surplus this year of 600 tonnes from 500 tonnes last year.

Fundamentals come into play when prices are coming down, said John Reade, analyst at UBS. Silver doesn't have gold's fundamentals.

Silver is often a byproduct of other metals such as lead, zinc and copper, where miners are trying to ramp up production with some success. That means more silver on the market and together with scrap recycling, supplies are set to jump this year, while overall demand, including that from ETFs is expected to fall.

Silver is very dependent on one source of demand -- ETFs. You can't get excited about silver in the same way as gold. Silver doesn't really have the same cachet, Briggs said. Demand from the photographic sector has been falling fast ... It's no longer an important source of demand.

As for gold, we noted last week that when the tally is in on the gold liquidations that really started in earnest around the 18th of this month from the ETF, the picture will be a bit disconcerting. Mineweb now has that tally, courtesy of Royal Bank of Canada Capital Markets. Here is the complete picture:

In a regular weekly valuation tables report on precious metals & minerals, analysts at RBC Capital Markets have noted that the Streettracks Gold ETF (NYSE:GLD) recently experienced its largest ever three-day decline in its physical bullion holdings. The fund, an exchange traded fund (ETF) that offers investors a proxy investment indirectly into physical gold bullion, is the largest of its kind in the world. The Streettracks Gold ETF was launched late in 2004, and, since then, has maintained a totally dominant stature among gold ETFs listed and traded around the world.

For some time, RBC CM has monitored the aggregate gold ounces under management - the so-called OuM - at the five largest gold ETFs, with the latest finding pointing to a holding of 26.3m ounces of gold. Streettracks holds 19.0m ounces of this total. According to RBC CM analysts, its was between April 21 and 24 that around 1.63m ounces of gold was redeemed by the Streettracks Gold ETF, marking the largest ever three-day decline in the fund's gold holdings. The redemptions, note the analysts, represented 6% of the total gold held by the five major gold ETFs.

The Streettracks Gold ETF is currently trading 12.5% below its record price, seen in mid-March. Commodity ETFs have become a popular investment among investors, by offering a way to avoid risks inherent in listed commodity stocks, such as risks over the performance of management, possible geopolitical dangers, potential natural disasters, and so on.

Earlier this month, the Bank Credit Analyst, in noting the role of futures contracts and related speculative activity in commodity markets, pointed out that since 2001, speculators have only rarely been net short, even during sharp pullbacks.

A record increase in the net speculative long (bullish) gold bullion futures position on New York City's COMEX coincided with the run in the price of gold, to a record $1,030/oz early last month. On February 22 2008, the net long position in gold bullion futures reached an all-time high of 25.3moz before pulling back; the reversal in gold ETFs has been more delayed. RBC CM analysts anticipate that the high positive correlation between gold bullion and the speculative futures position will continue, and are looking for the long position to decline possibly as low as the 8-10m ounce level, before gold consolidates and makes another run at $1,000/oz in August-September 2008.

So, will the Fed offer one more rate accommodation, or won't it? Many analysts are now convinced that the only remaining excuse to lower rates by the minimum quarter point that is expected is to prevent disappointment in the markets that have become dependent on the cuts. Others feel that the rate cut campaign has already gone overboard and is not the cure for what ails the US at the moment. The jawboning that will come after the meeting will be dissected word for word as that is where most players expect to find the substance of the Fed's stance as we go forward. Nevertheless, here are both sides of the argument as we approach this pivot point in policy. Thereafter, you may roll the dice and wait for them to land:

Jack Crooks, editor of Weiss Research’s latest investment offerings, World Currency Alert and World Currency Options and founder of Black Swan Capital and Ross International Asset Management gives us his take on the two sides of the dollar debate:

The FOMC is meeting tomorrow. A lively topic of conversation that can be expected from currency traders is the direction of the infamous Fed Funds rate. The obvious question leading up to the interest rate decision: What are the implications of this FOMC meeting on the U.S. dollar? More specifically, has the Fed Funds rate found a bottom, or does the U.S. central bank have more work to do?

Dollar pessimists believe there is still no positive argument in favor of the U.S. economy. The Federal Reserve's dual mandate, maintaining economic growth and price stability, has become quite popular in currency circles. Much of the dollar's demise has been attributed to the Fed's obligation to sustain growth, even when inflation isn't necessarily contained. And keeping the U.S. economy ahead hasn't been an easy task for them. Some of the problems catching up with the economy and infecting the core are:

An unstable manufacturing sector;

Deteriorating business conditions;

Sluggish consumer spending;

Serious slack in the labor market;

And a widespread feeling that money isn't so easy to come by anymore.

All of the aforementioned troubles have been initiated or exacerbated by the ongoing U.S. housing market collapse. The impact of the housing debacle on U.S. consumers has been swift, sudden, and severe. American Express recently told analysts that financially stressed consumers are making fewer payments less often.

Conversely, dollar optimists believe intense commodity inflation will force an adjustment to Fed policy. The Fed's dual mandate has left them somewhat attached to a sinking economy, but they sometimes recognize that inflation risks exist. The fear of inflation and inflation are two different entities and the Fed has the job of keeping both under control. Imagine what the Fed is thinking right now.

Crude oil recently topped $119 a barrel. But beyond the heavily monitored energy prices, food has also been in high demand. Riots have broken out in Haiti because of food shortages. A handful of countries that include China and India have pulled back on their rice exports in order to sufficiently meet domestic demand. And the U.S. recently learned that Sam's Club and Costco are monitoring the amount of bulk rice purchases they allow customers to make.

Dollar optimists believe that inflation on commodities will ultimately warrant some kind of adjustment to Fed policy. Consequently, this would be good news for the greenback because few analysts will argue that the Federal Reserve needs to hike interest rates. But the possibility that the Fed may halt its easing campaign is growing among analysts.

A monetary policy revaluation could spark a legitimate dollar rally.

If Fed Chairman Ben Bernanke and Co. were to carve out a bottom-turn in their easing campaign, it just might give buyers enough reason to come out in support of the dollar. And a legitimate dollar rally would likely impact commodities, considering the extreme negative correlation that's existed between the two parties,

If you’re looking for some currency specific advice heading into Tuesday’s FOMC meeting, have a look at the chart of the U.S. dollar index. It may offer up some guidance. Given the way things stand, I’d say a rate cut of 25 basis points or fewer likely won’t kick off an extended dollar decline. And if the Fed does opt out of rate cuts this time around, it would be a huge departure from expectations leading up to the decision.

That, of course, could kick off a sharp dollar rally.

The bias remains slightly positive as we start the week, but do not expect the trading to be on a one-way street in various markets. There are some who are holding dice that say No rate cut. Remain nimble.

On a final note, if you are interested in silver (and the today's Mineweb findings may give some additional reasons to be even more interested in it) and want to get the real picture of what is going on in that market, do yourself a favor and make a small investment into the CPM Group's 2008 Silver Yearbook, set to be released tomorrow. Rather than trying to decide which particular silver pundit may be in possession of the correct set of facts regarding current market conditions, you now have the opportunity to go straight to the source that actually gathers and dissects data for a living and learn the hard numbers and actual trends in the metal. Kitco is a proud sponsor of this quality research and we believe you will benefit from delving into its contents. You will find the book available here:

Happy Trading.