Good Afternoon,

Things turned really ugly, really fast in the commodities complex today, and as much as we would have all preferred a brief respite after the tumultuous two weeks we have had, the markets set out to give plenty of reason for juggling phones and keyboards all at once. While it was not very comforting that gold did not take the Fed's gift at face value and rally back past $1,000 an ounce, the overnight trading patterns held out some hope for those who expected the next leg up in the metal's epic adventure of 2008. Alas, once the dollar started eking out small gains this morning, and crude oil started losing serious ground, the sell-off in precious metals gathered steam and left a wide swath of damage in its wake. Albeit the dollar did not gain in spectacular fashion, the drop in hitherto 'hot' commodities was anything but pretty. Crude oil lost 6% to $103.25. (And it remains expensive by many accounts, despite its biggest loss since 1991).

Briefly, here are the numbers at last check (4:00 eastern time): Gold, down $44 or 4.5% to $937.30 bid (after a low seen at $936.50 earlier). Supports at $985, $975, $960 all gave way, and their failure raises the possibility of revisiting the $915 area -where

the latest ascending phase had begun back in mid-January. Should that level not be maintained, there is very little in the way in terms of real brick and mortar until the mid $800's. Silver, down $1.37 or 7.2% to $18.30 per ounce. Platinum lost only 2.5% or $46 to $1905 as deficit fears linger on despite the power crisis having blown over for now. Palladium dropped 4% or $19 to $456.

So much for the raw numbers. Now, for the psychology of the event that will now be recorded as the most significant loss in gold since May of 2006, and, in fact, according to Bloomberg - the $59 decline the metal experienced today will be chalked up as its worst ever. Make no mistake, the Dow was not any better off today either, as a 300-point drop almost wiped out the post bailout/Fed euphoria from the other day. Stock traders have a new scapegoat this time: commodity-related issues. They dragged the index down brutally and have given rise to fears of further margin calls. Nothing much was spared today. Perhaps cash.

A tremendous amount of speculative fund money had inundated the commodities complex following the Fed's incessant rate cutting campaign that started in September, and the mounting pile of bad news since the start of the year on Wall Street. We warned just a couple of days ago that some traders had affixed the label sector rotation to metals and other commodities. Yesterday's Fed accommodation was to be of epic proportions if these markets were going to sustain the buying frenzy of dollar alternatives. Add to that the fact that the incoming inflation missile had become quite visible on the Fed's radar. As soon as small doubts about the Wall Street domino theory were quashed after the Bear bailout, the climate changed, and noticeably so. Our colleagues at Mineweb wrote just overnight that:

Bank Credit Analyst was quoted as being of the opinion that:, gold now appears overbought and our commodity & energy strategy service warns that the rally is in a late stage. Thus, we are not making a bold new target at this point. Instead, we will look to take profits on our long/overweight positions in the coming weeks.

Also looking ahead, analysts at Royal Bank of Canada Capital Markets point to the risk that without any follow-on physical demand for gold, particularly out of India, the Far East and the Middle East (which in aggregate account for ~70% of annual physical demand for gold), significant physical selling could occur, as was observed in mid-2006.

There, investors will no doubt recall, gold bullion spiked to $735 an ounce and then sold-off to $550 an ounce. The analysts believe that a similar correction could see the gold price retrace back to the mid-$800 an ounce level during the seasonally weaker demand northern hemisphere summer months.

A few brave souls dared to utter the heretic words correction and bubble and such over the past several days. The writer recorded a Marketwatch TV segment one week ago, titled Gold Due for a Correction? - All of these opinions fell on deaf ears. Emotion was just too intense amid the maelstrom that felled the fifth largest investment bank in the US. And the latecomers piled in in a classic replay of 1980. Namely, the longs took it in the shorts. The day after $2,000 gold was forecast.

There is much to digest now, and market psychology could be due for a realignment. In the bigger scheme of things, a $100 drop from record highs within the week is small damage. The problem is, that when it comes to the type of money that has been responsible for most of gold's latest ascending phase is not your average buy-and-hold dollar. And now, the metal is being cast aside in the same rush for the exit doors as oil, hogs, corn and orange juice. Just another 'trade.'

Repair work would have to begin almost immediately here and thus far there does not appear to be much in the way of bullish news out there save for a small ($3 billion) hiccup over at Merrill. If there is some good news in all of this, it may be that Indian demand may finally break out of its freeze and start mopping up some metal finally. We cannot count on it, but it would surely be welcome.

Happy Trading.