Good Morning,

Gold prices started their first March session on the rebound, following their worst slippage since December. After touching the $944 mark overnight, and trading as high as near $960 per ounce in the wee hours, the metal opened with a $6.90 gain in NY. A rebound after five straight declining sessions was largely expected, but its magnitude will depend on external factors. It has now been posited that gold is basically reacting to ETF inflows, absent other positive prime movers (fabrication demand, for one). Spot prices were shown at $946.50 bid, as participants geared up for potential disruptions in the business day, courtesy of an expected snow dump of record proportions in the city.

For the moment, the action will be linked to ISM manufacturing data, the Dow's Monday performance, the perceived strength that the dollar is likely to further benefit from, should the inward-looking trend in the US continue to lend a 'protectionist' flavor to the currency. Americans turned (somewhat) Japanese once again, bumping the household savings rate to a 14-year high in January. Yes, 5% is not 13%, but coming from a negative-savings rate environment, this constitutes...progress of sorts. Not that Warren Buffet fully approves...(see below)

Conclusions drawn at Toronto's PDAC mega-event include further upside potential for gold in light of the fact that it could remain at the centre of the quest for wealth preservation. Not that its buyers will necessarily seek capital appreciation by setting some of it aside. The price premium vis a vis other commodities, which has built up in the precious metal is subject to significant erosion however. Especially, given circumstances such as the death of fabrication demand, and the mushrooming of gold ETF holdings - many tonnes of which could head for the exit doors when (not if) sentiment undergoes a realignment.

Silver opened with a one penny gain, quoted at $13.12 per ounce, and platinum rose $19 to $1091 an ounce. Palladium climbed only $1 to start at $195 per ounce. The metals were trading against a background showing a sharp fall in crude oil (off more than $2 to $42.66) and a still-rising dollar (up 0.31 on the index, at $88.85) but also against a potential sub-7,000 Dow. Losses in overseas equity markets, the lowest level of European inflation in a decade, and expected troubling job-loss number later in the week also played into this morning market mood. Let's just leave the overall tenor to be described as 'dark.'

Approval, not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns. Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.

No, we did not write any of the above. The quote comes straight from Warren Buffett's open letter to Berkshire Hathaway's shareholders. You would be wise to scrutinize every nuance of what W.B.'s message contains, as it comes at a crossroads in the timeline of the global crisis. Warren, for one, sees America's best days ahead of it.

Mr. B. does caution against the illusion that cash (and its equivalents) are to be thought of as anything but a short-term shelter. In other words, cycles have not gone away - this one just appears more intense. However, so will its winding down and subsequent recovery. Gold-is-money (and nothing else!) advocates, take note:

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim cash is king, even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

The first market day of March appeared to contain all the makings of a terrible, horrible, no good, very bad day - at least for global stock markets. Oh, and the foot-and-a-half of snow that could blanket Wall Street (possibly breaking an 1896 record) did not help spirits either. Well, at least it will cover some of the blood still flowing down its gentle slope.

A quick news roundup finds AIG having lost another $61 billion and getting half of that refilled by Uncle Cash-Pump Sam, HSBC shuttering branches and basically exiting consumer lending, Eurozone manufacturing slipping yet again, Asian exports falling by the most in a decade, and the Swiss banking model still being quarantined in the ICU after having caught a massive dose of American strains of a strange virus. Enter the third chief executive in a very short time, and debates as to whether tax evasion is the same as tax fraud.

Europe, specifically Italy, has a few other problems however. Marketwatch's Rex Nutting explains how Italy's massive gold holdings may or may not play into the current paradigm:

A passionate debate has broken out in Europe on the pros and cons of modifying the so-called no-bailout clause in the Maastricht Treaty that prohibits states within the economic and monetary union from propping each other up through reciprocal balance of payments support. German Finance Minister Peer Steinbrück is under pressure from widening yield spreads on euro area government bonds and the perception that Eastern Europe, in particular, could bring disarray to the union.

In view of the widespread feeling that only Germany is strong enough to help the disadvantaged states in Europe, Steinbrück has been toying in public with the idea that the Germans may have no alternative but to help out more troubled states. This is partly a question of self-interest: Germany has greatly profited from its increasing competitive position on euro area export markets since 1999.

The problem is that the worldwide downturn has hit Germany harder than many other countries precisely because of a sharp decline in the exports on which it has traditionally built its strength. Advocates of economic stability complain that changing the no-bailout clause would completely undermine the EMU's anti-inflationary foundations. Former Bundesbank president Karl Otto Pöhl said it would open a Pandora's box and throw the entire future of the project into doubt.

The principal weak link in the Euro chain, as has been well known for many years, is Italy. It's a country of huge cultural and political attractiveness but one whose already weak economy has been further hit by an unprecedented decline in competitiveness since it joined the Euro 10 years ago. Italy this year faces a severe GDP decline, an expanding current account deficit and widening risk premiums on government bonds. If Italy stays in the euro area on present policies -- and to think the unthinkable, if it were to leave -- damage to the EMU would be severe. How can Italy be stabilized without international political and economic conflagration?

It is impossible that Italian wages and price will adjust sufficiently in the next 12 to 24 months to close the alarming gap in competitiveness between stronger and weaker euro members.

Don't expect export-orientated German companies to commit collective suicide by granting nominal wage rises to their workers of the order of 8 to 10% for the next couple of years -- what's needed to allow Italy to catch up. Germany is beset by falling prices and demand in Europe and the rest of the world.

Unless risk premiums on Italian debt grow further, some form of special Italian financing action is needed. In essence, Italy needs secure financing for the next few years to allow the current account deficit and the gap in wages and prices to close smoothly rather than through the brute force of the markets.

Action by the German federal government to grant a formal guarantee for the Italian national debt can be ruled out for political and legal reasons. It would be tantamount to declaring civil war in Germany, and it would not go down well in Italy, because such a strong affirmation of solidarity would not come without stringent conditions.

One must not forget that one of the reasons why Italy favored the EMU under Prime Minister Giulio Andreotti in 1990-91 was to avoid being bossed around by a supposedly more dominant reunified Germany. Setting up a European debt agency to issue common bonds for euro area countries also seems highly unlikely. The idea has been suggested frequently by bond dealing associations to boost European government liquidity, and picked up recently by Jean-Claude Juncker, the Luxembourg prime minister and president of the Euro-Group of finance ministers, as well as George Soros. But there is no political consensus backing such a scheme, and it would also be costly and time-consuming to set it up.

Present EU mechanisms allow for balance of payment credits for countries in trouble, perhaps accompanied by loans from the International Monetary Fund. But these steps would also take time to enact and might be bogged down by bureaucratic decision-making procedures. One inconvenience is that IMF programs come with strings attached -- usually involving a currency devaluation that is impossible now that Italy has no currency left to devalue.

Italy needs principally to buy time and shore up confidence so that shorter-term liquidity problems are resolved, government policy has a chance to adapt to the new circumstances and interest rates on Italian credit can fall to more reasonable levels. One theoretically propitious way forward is through specific bilateral assistance. Reflecting Germany's significant de facto stake in Italy's future, the Bundesbank could grant the Banca d'Italia a significant dollar-denominated bridging loan tied to part of Italy's massive gold reserves -- 2,450 tons with a current value of around $75 billion.

There is a precedent. In 1974, German Chancellor Helmut Schmidt, together with his close friend Bundesbank President Karl Klasen, pushed through a gold-backed loan for Italy of $2 billion. It was to ward off balance of payments difficulties after the Italians left Europe's currency stabilization scheme, known as the Snake.

Showing the limits of the Bundesbank's fabled independence, Schmidt and Klasen cooked up the idea without consulting the decision-making Bundesbank council. There are several large question marks, though. In today's more rigorous climate, sidestepping such formal mechanism would be unthinkable.

Even if Angela Merkel's government decided such a rescue plan was fundamentally sound, pushing it through today's decision-making mechanisms, including the European Central Bank, would be very difficult.

In 1974, the loan was used to support a country that was on the way to improving competitiveness through floating -- not the case today. Additionally, would mobilizing part of Italy's gold reserves, even at close to $1,000 an ounce, really make much difference if there were a full-scale speculative attack on Italian state paper?

So Italy's gold probably will remain deep down in the vaults, unused but not unloved -- ready for the day when, ultimately, it's needed.

Perhaps the rainy day asset in the basement will not be touched. Much like a long-term asset-allocating investor ought to be playing it, Italy holds the gold with the hope it never has to sell. On the other hand, the finger-pointing which has made its presence felt all over the Old World of late (Look, Germany dominates! Look, Italy needs help! Let Eastern Europe fail!) has raised further apprehensions about the common currency. And, perhaps, about some other 'currencies' as well.