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Recovery to $900
By Jon Nadler

After a five-day string of losses, gold prices recorded a 1.6% percent gain on Wednesday, as the light bargain hunting that emerged overseas during the night continued into the New York session. In addition, some flight-to-safety purchases were also seen today. Asian markets are out of the picture for the moment as the focus over there now shifts to New Year celebrations. Indian buyers are seen purchasing on a 'must-do" basis, but are expressing hopes of being be able to accumulate more metal when/if it reaches $865 per ounce. The US dollar eased to near 76.10 on the index as the rate cut expectations re-emerged, while crude oil recorded more losses, dropping over $1.30 to $87.11 per barrel after US inventory levels came in higher than forecast.

New York spot bullion concluded the mid-week session resolutely in the plus column, adding $13.90 per ounce, but closed about $8.00 away from the day's highs, and remained extremely close to the psychological round figure, settling at $900.50 bid. The metal is possibly on a course that could put it back on track for a renewed test of the $915 resistance zone. Downside risk (targets from $865 to $880) remains a concern given the relative ease with which values slid during the near six percent or so mini-correction we have seen. It may be too early to call it 'case closed.' Silver added 20 cents to $16.51 while platinum continued to break ever higher, gaining $35 to $1811 as continuing electricity delivery problems continue to fuel larger and larger deficit estimates for the noble metal for this year. This, despite Anglo-American's CEO having described the situation as "not a disaster" just yesterday.

Expect a lot of talk to hit the airwaves later today, and not just from the post Super Tuesday pundits. There are several Fed figureheads slated to speak this afternoon, and investors will attempt the ritual reading of the tea leaves after the officials leave their podiums. We will hear from the team of Plosser, Poole, and Kroszner today and listen to their take on the state of the US economic patient. One Fed member whose words were anything but unclear, spoke yesterday and here is what FXStreet.com had to report about his words:

"Richmond Fed governor Lacker, traditionally a hawk who dissented in the past in favour of rate hikes and whose Richmond Reserve Bank did not ask for a cut prior to the last week’s FOMC, capitulated and admitted that further rate cuts might be needed. He sees the possibility of a mild recession similar to the last two we have had, the first governor to say it so clearly, and puts the economic risks on the downside meaning that "further easing ultimately may be warranted". In the past, he didn’t consider the housing woes as a threat to economic growth, but now he said that his business contacts indicate that the outlook for business investment had soured dramatically in a short period of time, especially in commercial construction. He now only concedes that the outlook for housing is quite dire and doesn’t see housing construction bottoming out this year."

Today's data releases contained the weekly mortgage applications (their volume last week rose to the highest level in four years) and the Q4 non-farm productivity results (those figures revealed a higher than expected level of productivity at 1.8% annualized, as opposed to a forecast of only 0.5%). These types of reports are generally not significant market movers, but these days the markets will welcome any bit of good news on the economic front. Not to mention the Fed, which would really like to see that some thaw in the ice is taking place after the machete rate cutting extravaganza in force since September. In the interim, all was quiet in Euroland until tomorrow, when we can expect words of wisdom from the ECB regarding interest rates and such.

Speaking of currencies, Marketwatch reports that perhaps perversely, perhaps ironically:

Worries that the subprime-related credit crunch could spread has provided support for the dollar, analysts said.

The dollar "is expected to develop further gains as investors move out of peripheral markets in light of rising risk aversion," wrote analysts at BNP Paribas. "Equity markets look technically and fundamentally vulnerable and are poised for further weakness with the price of credit and its availability determining the pace of the equity market decline." Standard & Poor's said on Tuesday that it may downgrade bank ratings because of trouble in the $2.4 trillion bond insurance business.

The BNP Paribas analysts said downgrades would make it increasingly difficult for the banks to re-capitalize struggling bond insurers, creating a chain reaction that would serve to underpin the U.S. dollar and other key currencies.

"Unless private equity or [sovereign wealth funds] step in, the Western financial system will have to de-leverage further, putting capital markets under stress," they wrote. The dollar, Japanese yen and Swiss franc "benefit from this development as de-leveraging creates demand for the world's main transaction and surplus currencies."

Thus, for the moment, the trading focus shifts to US dollar/euro and Dow-watching and to hopefully repairing some more of the damage sustained over the last week. Tomorrow, we may try for some more upside, especially if the ECB remains of the opinion that there is not need to tweak rates at this time. Back to watching the Fed speakers on our monitors.

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