Jon Nadler: $1000 Falls. Quo Vadis?

$1000 Falls. Quo Vadis?

Good Afternoon,

The countdown to $1,000 gold finally ran out at 10:35 am New York time today as spot bullion reached a historic high of $1,000.25 bid amid the global market conditions that had emerged overnight. The final push to the peak came on the heels of a slump in US retail sales and following a lack of reassuring words or offer of aggressive remedies for the credit black hole by the Mr. Paulson this morning. This was an achievement of a lofty objective, as well as a long-standing one. Very long.

Gold prices appeared to be all primed to finally achieve the $1K mark as early as last night, when background market conditions shifted from bad to worse overnight. Today's spike will likely become known as the "Carlyle/Drake Rally" (or cave-in, depending on your preference). The imminent doom of the Washington-based bond fund and probable demise of the hedge fund sent icy shivers through the financial markets that way overshadowed the (nanosecond-brief) cheer we witnessed following the Fed's term facility plan the other day.

Today, the Treasury's Mr. Paulson offered the President's Working Group on Financial Markets no more than lip service by concluding his remarks with platitudes such as: " We will continue to re-assess conditions, monitor progress, put forward new recommendations and take additional steps as necessary." US President Bush himself managed to say about the current predicament of the greenback only that it was not 'good tidings'(?!)

However, a retreat in the commodity complex emerged shortly after cues from the Dow (previously down 215 points) showed a reversal in sentiment and the index went into positive territory by 60 points. Stocks erased all of their earlier losses after Standard & Poor's suggested that the "bulk of write-downs linked to bad home loans may be behind for banks." As we said earlier, every bit of news counts these days, and has twice the impact it may normally have. Bad news, as well as good news. We have also opined that once the credit vortex is assigned a final dollar figure, the markets will not feed off of uncertainty like pirahnas anymore. They will have to take into account fundamentals as well. Tall order these days...

A quick scan of values recorded at gold futures closing time in New York revealed crude oil prices at $109.76 per barrel and the dollar off of the 72 mark on the dollar index. New York spot gold was up $6.90 per ounce, showing at $990.30 bid per ounce ( a full $10 under the historic high seen earlier) and related metals were still rising in concert, albeit with more moderated gains of their own. Silver was up 29 cents at $20.30, platinum was up $17 at 2088 and palladium rose $7 to $510 per ounce. Commodities markets continued in a state of disarray, with huge sums of fund money being thrown at them, while still trying to absorb the pyramid of long positions which has already been piling skyward in previous weeks.

Keep an eye on the Dow and on gold's closing levels. Dollar-denominated commodities have all benefited from the intense fund attention. It has taken an estimated $600 billion credit debacle and six months to lift gold from $730 to $1,000. The same funds will now become increasingly conflicted on whether to push the envelope further based on potential further billions being added to the problem or whether to scale back from the sector as some corners begin to be turned. At such a juncture, we may expect volatility of a much larger order of magnitude in these markets and every single news item to matter much, much more. Keep very alert and take nothing for granted. Even on a day of such celebration. We already know how we got here. The bigger/better question is: "Whither Goest Thou?"

Happy Trading,

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal