Gold

Gold was down $5 to $884.80 in trading in New York yesterday. It traded sideways in Asia overnight and again surged to above $900 in early European trading. The London AM Fix at 1030 GMT this morning was up to $891.50 (up from $887.80 yesterday). Gold rose to new record highs in GBP but fell in EUR. It fixed at £456.15 (up from £453.50 yesterday) and €606.91 (down from €609 yesterday).

It is déjà vu all over again with a lower dollar, higher oil and safe haven demand leading to higher gold prices. The dollar has again weakened ( against the pound and the euro - 1.963 and 1.4680) and oil has strengthened (up 1.6% to $88.35 <NYMEX February>) and both have contributed to the surging gold price. Resistance is at the recent all time record nominal high price at $905 and above that we are in unchartered blue sky territory but the drum beat for $1,000 gold (much like $100 oil) will soon rightly begin in earnest.

While oil is down by more than 10% from its recent headline grabbing highs, its 200 day moving average continues to rise and it is important to focus on this rather than the headline grabbing "$100 Oil!". The average price of oil, gas and other forms of energy is continuing to rise and this will inevitably lead to increased inflationary pressures especially with the Federal Reserve slashing interest rates and this will lead to inflation hedging gold buying.

The notion that because stock markets have a short one day rally that the worst may be over is ludicrous, irresponsible spin. Unfortunately we remain in the early stages of this global financial and economic crisis. Massive financial and systemic risk (including those posed by downgrades of the bond insurers) has not gone away despite some very optimistic headlines and vague reporting. The FT correctly reported that there is "widespread concern that more rating agency downgrades of the specialist insurers - known as monolines - could force a fresh round of writedowns by banks, which could in turn damage already battered investor confidence."

The credit crisis is far from over and this was evident in the news that France's second-largest bank by market value after BNP Paribas, Société Générale bank, said they had a fraud that will result in a €4.9 billion loss and that it will write down an additional €2.05 billion in assets related to subprime exposure. The bank also announced that it plans to raise €5.5 billion in capital in "the following weeks."

More informed observers and those who have predicted such problems for some time (unlike many more recent converts who previously dismissed such talk as "fear peddled by doom and gloom merchants") are warning that the problems remain and look likely to get worse before they get better.

George Soros, the hedge fund manager, has said that the global economy faces the worst crisis since World War II and said that the Fed was "well behind the curve". Joseph Stiglitz of Columbia University said the cut would be as effective as "pushing on a piece of string". Stephen Roach of Morgan Stanley said in his FT.com blog from the World Economic Forum annual meeting in Davos that the Fed's policy was "a dangerous and reckless and irresponsible way to run the world economy".

A slowdown in global economic growth (but particularly in the western economies) could result in a stagflationary global economy - akin to the high inflation and low growth of the 1970s or inflationary recessions. A marked decrease in the price of oil is not likely unless there is a serious global recession and deflation. In this scenario oil would be subject to demand destruction but gold's negative correlation to major asset classes and safe haven attributes would likely lead it to rise to its inflation adjusted high of $2,200 per ounce.

Support and Resistance

Strong support now remains at $840 to $850 which was previous resistance and interestingly $840 is very close to the 50 day moving average (DMA) and Fibonacci support. $900 will need to be closed above on a weekly basis before the psychological level of $1,000 is challenged in the coming weeks. Many respected analysts believe that $1,000 could be reached as soon as the first quarter and traders and investors would be wise to ignore those who talk out both sides of their mouth.

FX

The US Government plan to bail-out the mono-line bond insurers seemed to convince the market that all financial ills have been cured! The risk-seekers came out of the woodwork and not only lifted the Dow by 600 points from its low but also saw risk appetite return to the FX markets. The yen was the main loser as high yielding currencies benefitted from 'Carry Trade' appetite. The euro, sterling and even the much maligned Greenback all jumped against the low yielding Japanese yen. These FX crosses are now very much a barometer for risk appetite in the global financial markets and it is no coincidence that as the Carry Trade unwinds the precious metals continue to soar. Be warned though that any attempt of a return by risk appetite in these markets will be short lived and ultimately severely punished.

The euro is again slowly grinding higher against the British pound and continuing and increasing dissatisfaction towards the UK economy will underpin this trend for now. The Bank of England looks set to follow the Federal Reserve in lowering rates but at a markedly slower and more reserved pace.

The commodity currencies such as the Australian, New Zealand and Canadian dollars also continued their appreciation against the U.S. Dollar as the long term bullish sentiment to the underlying commodities continues.

Silver

Silver has surged to new 27 year record highs at $16.35/$16.40 at 1145 GMT.
Fortis Bank released their 'Silver Book' (http://www.thebulliondesk.com/content/reports/tbd/vm/FSB080100.pdf ).

Resource Investor had a good article on silver on Fortis's 'Silver Book':

Silver Outlook

Despite the potential oversupply in 2008, many analysts are staying bullish on silver.

"As primarily a by-product of base metals mining, (silver) remains moderately price inelastic, and it can expect rising mine production based upon increases in production of the host metals, primarily copper," Ross Normal of TheBullionDesk.com said in the London Bullion Market Association's "Forecast 2008".

"Silver's price gains, however, can be attributed to solid demand-side investment, and that appetite looks set to continue in 2008 as the race between the old world and the emerging economies to corner the world's natural resources intensifies... be it a mine or simply physical metal. The fly in the ointment may be the slowing global economy and, more so than in gold, this could signal a more modest increase than in former years."

David Davis, analyst at Credit Suisse, agreed.

"Silver prices only rose 14% year-on-year (2006 -2007), having put gains of 25%, 38% and 42% over the previous three years," he said in the "Forecast".

"We believe silver prices will likely play 'catch up' when compared to the year-on-year increases of the previous years, but also and more importantly, silver prices will likely receive impetus from the upward trend in platinum and gold prices and the investment (ETF) market. In the long term, gold and silver prices have been closely correlated. The fundamentals of the silver supply and demand dynamics are unlikely to have a major effect on driving the price. Silver has the potential to break through $20 by the end of the year."

The iShares Silver Trust ETF [AMEX:SLV] has seen its rate of accumulation slow in the past two years, but new ETFs were launched in the UK and Switzerland this year, which have both experienced steady gains, "The Silver Book" said.

Cross-said she expects silver to trade in the $12 to $18 per ounce range in 2008, with "lots of upside but possible liquidation of longs."

Gold Investments believes silver will reach $20 in the first half of this year and may trade as high as $25 per ounce.

PGMs

Platinum was trading at $1580/1590 as per above (1145 GMT).
Palladium was trading at $367/372 an ounce (1145 GMT).