Good Afternoon,

Gold commenced its first full trading week of 2009 under renewed selling pressure. Profit-taking liquidations in the precious metal were brought on by the surge in the US dollar (up 1.50 to 83.82 on the index). Gold fell for a third day as a convention of US economists over the weekend rejected the idea that a recovery in the economy is around the corner from anything other than the end of 2009, or mid-2010. President-elect Barrack Obama's $675 to $775 billion economic stimulus package, along with the Fed's explicit backing of an all-out effort to revive the US economy, drove the greenback to highs above 83 on the index. Concurrently, the euro hit a three-week low against the dollar on perceptions that the ECB is far behind the curve in slashing interest rates.

Last week we reported that gold demand in India took a 47% hit for 2008, mainly on too rich of a price level. Never mind December, when India's imports cratered by 81% to a 3-tonne low. As suspected, another traditionally price-conscious market came in with statistics not far behind those seen in India. The volume of gold jewellery sold in Abu Dhabi fell 40% last month, as higher gold prices put a dent into purchases. January sales could improve, should prices retreat sufficiently to attract buyers. A local industry source was quoted as saying that: People view current prices as an appropriate time to cash in. An inauspicious gold-buying period in India will draw to a close only after mid-month. As for gearing up for Chinese New Year, the buying patterns at the moment are less than conclusive.

Spot gold prices recovered some of their early losses and turned up from lows at the $845 support area to trade nearer to $858 in the afternoon hours. Participants remain on dollar-alert, but are evidently also keeping an eye on crude oil, as its rebound on the day (mainly on Gaza violence and Russian natgas disputes) helped gold from turning in a worse performance on the day. Silver lost 34 cents to trade at $11.19 in the afternoon, while platinum actually eked out a $4 gain to $944 as December car sales were deemed as 'not as bad as expected.' Palladium dropped $7 to $184 per ounce.

We do not have an idea of what 'bad' car sales numbers would have looked like, but the 30 to 37 percent drops at Ford, Honda, Daimler, Toyota, GM (its sales at a half-century low!), etc. are anything but 'good.' Consumers are obviously acting as if deflation has taken hold, postponing purchases in anticipation of sharp price cuts, or in the realization that they have no money (something that did not previously present a problem for running out and buying 'stuff') or have no jobs that are secure. Hyundai Motor went one step further, and in a prophetic marketing move, promised to take back any vehicle whose owner lost his income within 12 months of a purchase. Dude, where is my car? Back at the dealer's lot. I could not afford to make the payments. If this is not the stuff of sci-fi, we don't know what is.

The world's central banks have obviously shifted their focus from inflation combat, to bailing out the deflationary ballast from the fast-listing global economic boat. Words we had not heard since the good old days of Japan's deflation were blatantly uttered over the weekend: Undesirable Inflation Levels - Evidently, targets are targets, and anything below 2% on the inflation front is seen as less than palatable and calls for heavy fiscal artillery. Mr. Obama's plan is larger than was expected by markets, and it leans heavily towards including a near-$300 billion tax cut for individuals and for businesses.

St. Louis Fed Pres. James Bullard was quoted as saying that an explicit inflation target would help policy-makers prevent either deflation or inflation from taking hold in the United States. His colleague, Janet Yellen was even more precise, alluding to the 2% inflation target as the one to attempt to maintain. Mr. Bullard also said that as interest rates are nearly at zero, such an inflation target signal policy to the private sector which would normally be communicated by changes in official borrowing costs.

Maybe now would be a particularly good time to do that because you have this possibility of expectations drifting off to deflation or a lot of inflation. ... I think it would help, said Mr. Bullard on Saturday.

Well, whatever it is that the Fed and Mr. Obama have in mind, it seems that speed and depth will be of the essence. Why? Because -according to the latest from Bloomberg's Rich Miller - we can no longer count on traditional remedies for this ditch to be successfully negotiated. Namely:

The engines that have lifted the U.S. economy out of every recession since World War II will be of little help this time around.

Inventory rebuilding, household spending, home construction and payroll growth -- the forces that powered, to a greater or lesser extent, each recovery since 1945 -- may remain missing for much of 2009. A glut of unsold properties may keep housing depressed, while shriveled savings will discourage consumers. Companies may be reluctant to restock and rehire while their profits are squeezed.

There are no obvious drivers of growth from the private sector, says Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York.

The result: A recovery, whenever it comes, may be anemic and heavily dependent on low-cost lending by Federal Reserve Chairman Ben S. Bernanke and stepped-up spending by new President Barrack Obama. Short-term interest rates might have to remain around zero throughout the year, while the federal budget deficit stays at or near record highs into 2010.

If we don't act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment, Obama said in his weekly radio address on Jan. 3. The jobless rate stood at 6.7 percent in November.

UBS Securities LLC forecasts that gross domestic product will contract at a 3 percent annual pace this quarter after shrinking 4.5 percent in the final three months of 2008. James O'Sullivan, senior economist at UBS in Stamford, Connecticut, says the economy is likely to stop eroding in the second quarter, thanks to an unprecedented policy blitz by the Fed and the Obama administration. The second-half recovery, though, will be weak, he says: growth of 1.5 percent in the third quarter and 2 percent in the fourth, as tight credit continues to pressure consumers and companies.

That's in contrast to past rebounds, where growth was boosted by a robust revival of private-sector demand.

Inventory swings played a key role in the 16-month recession of 1973-75 and the recovery that followed. Companies slashed stocks in 1974 and 1975 as demand dropped, and then rebuilt them rapidly the following year. That raised 1976 GDP by 1.4 percentage points, the biggest such contribution in 21 years. Consumer spending and housing powered the economy out of recession in 1983, as pent-up demand sent purchases of cars and homes soaring. Payroll growth was also strong, with 1.1 million jobs created in September alone.

In 1992, housing again was a big help. Along with capital spending, residential construction spurred the biggest contribution to growth from investment since 1984. Homebuilding and consumer spending played a more modest role in the economy's revival in 2002, but that's because they never declined in the previous year's recession, which was the mildest since World War II. All those factors may be missing in action this time around. With just-in-time inventory management, the downs -- and ups -- of the stockpiling cycle are more muted than before. Companies are quicker to pare stockpiles when demand wanes, limiting the buildup in unwanted products both at their own sites and those of their customers.

For example, Corning, New York-based Corning Inc., the largest maker of glass for flat-panel televisions, said last month it will cut prices to clear out excess inventories. The downside of this rapid response is that the economy won't get as much of a pop from businesses restocking as demand recovers. There is a lack of a big inventory cycle, O'Sullivan says. Companies may also be reluctant to ramp up production in the face of what many economists expect to be a slow increase in consumer demand.

Allen Sinai, chief global economist at Decision Economics in New York, says households are in hunker-down mode after suffering $10 trillion in losses in wealth from sagging home prices and shrinking investments. They know they have to save more; they have no choice, he says. The Conference Board's index of consumer confidence fell in December to the lowest level on record as anxiety about job losses overcame the beneficial effects of a 60 percent decline in gasoline prices since July.

U.S. companies cut 533,000 jobs in November, the most in 34 years. Economists surveyed by Bloomberg News forecast that figures out on Jan. 9 will show a further 500,000 reduction in payrolls in December and an unemployment rate of 7 percent. Joblessness is likely to continue to rise throughout 2009 and perhaps into 2010. We'll probably have a good chance of seeing unemployment hit 9 or 10 percent, says Kenneth Rogoff, a former chief economist for the International Monetary Fund who's now a professor at Harvard University.

Consumers have also been shaken by the plunge in the value of homes, for many their biggest asset. Home prices in 20 major U.S. cities declined 18 percent in October from a year earlier, the biggest drop on record for the S&P/Case-Shiller index that goes back to 2001. The collapse in property values is damping expectations for an early rebound in the housing market. We're in the midst of a downward spiral and the momentum is building, Stuart Miller, chief executive officer of Miami-based Lennar Corp., which builds homes in 14 U.S. states, said on a Dec. 18 conference call.

A glut of unsold properties is prolonging the industry's pain. The number of previously owned homes on the market at the end of November would take 11.2 months to sell at the current pace. That's the highest inventory level in at least 10 years.

Housing starts and building permits are in free-fall, Nouriel Roubini, chairman of Roubini Global Economics and a professor at New York University, said in a Bloomberg Television interview on Dec. 23. There's no bottom.

Hopes that exports would buoy the economy have been dashed by the spread of the U.S. recession overseas. Japan's economy, the world's second-largest after the U.S., probably shrank at an annual 12.1 percent pace last quarter, the sharpest drop since 1974, according to Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

That's left it up to U.S. policy makers to try to pick up the slack.

The Fed cut the main U.S. interest rate to a target range between zero and 0.25 percent on Dec. 16 and pledged to do whatever is necessary to end the longest recession in a quarter century. The incoming Obama administration, meanwhile, is working on a two-year stimulus package worth as much as $850 billion in increased government spending and lower taxes.

The U.S. is in the midst of a long, deep and severe downturn, Sinai says. When we do recover, the engine will be government spending, not home building or the consumer.

Engine and auto sales are not a particularly pretty combination to talk about on a day such as this one. But, at some point, someone will kick-start one, or the other, or both. Hopefully. Otherwise, demand for 'stuff' of all kinds will be very difficult to imagine.

Stay tuned.