Good Afternoon,

Firmer gold prices were the order of business today, as most market participants returned from the long weekend hiatus in the markets. The metal rose in anticipation of, and in the aftermath of, the poor US consumer confidence numbers (worst since 1973) and mirrored a drop in the dollar index to 72.20 during the day. The rebound ran into resistance near $935 but if gold manages a couple of sustained closings above $915/$925 it may yet try for an eventual run to the $960 zone. Absent a swift, successful, and sustained breach of higher levels, the general tilt in the market remains negative for the time being. There remain strong apprehensions among participants that a possible sea change is unfolding out there in the world of finance and that the Great Unwind will result in less than friendly conditions for many a hitherto white-hot commodity. For more on this issue, please read today's special focus below.

New York spot gold was trading at $935.20 recording a 2.25% gain, eyeing a very small rise in crude oil to just under $101 per barrel and the digestion of the aforementioned economic data. Silver added 79 cents to $17.78 and the noble metals really shined, with platinum rising $109 to $1980.00 and palladium up $20 to $453.00 per ounce, respectively. Players are now once again refocusing on the expected deficits in the pgm complex are exhibiting confidence on assumptions that the US slowdown may be shallower than first estimated, and that this could therefore result in continued healthy automotive demand for the catalytic metals.

Investors are maintaining an intense spotlight on the credit markets and on the mortgage situation, as the Fed pulls out all the stops and electable politicians join the in the fray against the nine month-old subprime implosion. Data released ahead of the consumer confidence numbers revealed that US home prices fell by 10.7% over the past year - a record. Case-Schiller's home price index also showed a record price slippage in January of this year.

More and more is being written about the Big Deleverage these days. We were of the opinion that last year's winding down of the yen carry-trade would have significant long-term effects in various markets. We called it the greatest show on earth at a roundtable presentation made at the end of February 2007. Now, we have the Fed's recent pin in the commodity balloon and a second stage of the abandonment of risky positions unwarranted by fundamentals. Last week's plunge in commodities was fueled by hedge funds and other fast-money players liquidating positions to meet margin calls, according to analysts. We had fingered the hedge funds as being loaded with fickle money for quite some time. The CRB index has lost 8% since March 14.

If you want to see what this all looks like in a graphic way (some of it very graphic) take a look at Neil Behrmann's analysis over at Neil sums the current conditions up as follows:

In equity markets, participants are worried, but are still bargain hunting ahead of a bull trap. Commodity markets are in the delusion phase. UK and European real estate markets are in denial, but fear reigns in the US. Mortgage and other credit derivatives are already in capitulation phase; junk bonds have reached fear range. Investors in high grade corporate bonds are also nervous.

Behrmann's most relevant finding (and mind that it was expressed in February!): CRB Commodity index reaches North Pole, while Baltic freight rates head south. If there were a boom in global commodities demand, shipments and thus freight rates would rise. This is a red light, showing that prices are soaring on speculative hot air.

Cut to last week. The margin calls [in commodities] have been precipitated by the fast-falling value of many assets used as collateral, such as mortgage-backed securities, collateralized debt obligations and other assets battered by the credit crisis. Dr. Gary North ( a familiar name to many) is of the opinion that we have in fact tipped into deflation and that its fallout will be anything but pleasant. Read all about it here:

In the interim, intrepid reporter Polya Lesova over at Marketwatch set out to poll a number of analysts for their opinion on this, the hot topic of the month - perhaps to be the topic of the year as well. Here is what she found:

Powerful performance in commodities over the last couple of years raises the plausibility that aggressive assumptions have further driven up prices that appear to be on the verge of correcting meaningfully as deleveraging in various asset classes continues to play out, wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup, in a research note dated March 20 and released to the media on Monday [today].

Deleveraging refers to the unwinding of trades funded by borrowed money. In his note titled The case for crumbling commodities, Levkovich argued that all credible investment theses have factual basis that tend to get overdone.

The impressive economic development of Brazil, Russia, India and China has spawned a sense of never-ending growth that has stoked speculative juices, Levkovich said. However, he warned that a number of catalysts may be coming together to end the current commodities craze.

A few excerpts from the Levkovich/Citi report are worth some further thought as they may prove valuable in coming months:

1. While economic conditions in Europe already were getting tenuous, the sharp move in the Euro of late could further pressure this export oriented region, with Japan facing similar problems given the rapid appreciation of the yen. In this context, 70% of global GDP could be in recession or heading towards much more challenging times. As Citi economist Steven Wieting points out, European real consumer spending fell sequentially in 4Q07, which has not even happened yet in the U.S. Nonetheless, many investors worry about the American consumer being spent out with no savings and falling home prices.

2. As U.S. industrial trends worsen by mid-year and into 2H08, we would expect the demand for commodities to slide further alongside a likely meaningful fall in commercial construction activity. Furthermore, we could see the ECB trim rates in mid 2008 to help address global credit markets especially if inflation pressures ease as a result of weakening economies. Note that the potential for currency market intervention is growing because the rapid descent of the dollar in 1Q08 has governments and central bankers worried about local economic impact. If they worry and feel a need to step in, speculators do not want to take the risk that central banks might crush their positions. A coordinated effort such as those experienced in the 1985 and 1987 periods (with the Plaza and Louvre accords) is not something to trifle with, and hedge funds could pull back and get out of harm’s way, especially in a de-leveraging world.

3. In summary, the investment theses surrounding commodities looks poised to be tested very meaningfully (as we have pointed out for weeks) and we would prefer to avoid many of the affected stock areas. To be fair, while we get pushback from clients who are overweight the various industry groups we consider to be at risk, we have noted a slight change in attitude over the past few weeks. We think that the January volatility caught many investors (both hedge funds and traditional long-only oriented funds) by surprise and hurt their performance. Thus, a new sense of wariness may be developing and could gather steam. Caveat emptor!

While commodity supercycles have been generally only been associated with periods of global-scale warfare, many a speculator has jumped on the China/India bandwagon over the past few years amid expectations that demand for stuff from these countries and others is effectively insatiable. Ummm, right. Just like the real estate mania in the US made the front page of every magazine one could lay their eyes on in any airport newsstand just last summer. Before that, you may recall the dotcom/biotech/high-tech/IPO stock mania that came to and end as the new millennium dawned. The three ring circus moves from one ring to another as clowns usher in the next act. The most recent trapeze act was also known as The Armageddon Now Trade.

The next act is warming up. Follow the money. It's that simple. But do not venture anywhere without your core gold insurance in place.

Happy Trading.