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Slip Sliding Away
[On Oil]
By Jon Nadler

A marked slowdown in activity and a narrowing of the trading range characterized Wednesday's gold session following yesterday's drama. Prices oscillated between nearby support at $875.00 and a high of near $887 per ounce. Participants remained mindful of yesterday's Fed signals on the dollar's value targets as well as of the still slipping crude oil price (last seen at $122.42). The best thing to be said for gold today is that it maintained this range despite a $2+ slide in oil and a (still) rising (following earlier profit-taking) dollar.

The dollar's dips could well be contained despite possible unwelcome economic data over the next two days, as concerns about possible direct Fed action have now replaced the perception that the only ammunition the central bank had was in the form of words. Case in point, the US currency did not run for the hills on the heels of a Moody's downgrade of MBIA and AMBAC and amid continuing weakness in financials (BofA, Lehman). The word on the street is that Lehman may not turn out to be a candidate for a mid-March-like Bear package, and thus Merrill issued a 'buy' on the firm (it has lost a third of its value over the past month). Also helping the dollar were ISM figures showing a rise in non-manufacturing orders as well as an index number that still points to growth (albeit at a very sluggish pace).

New York spot gold prices were last seen at $878.90 bid, showing a $2.50 loss as the greenback remained fairly firm at 73.48 on the index. The trade saw mortgage applications decline last week, and an ADP jobs survey that reported the addition of 40,000 (unexpected) positions in the private sector. All of this came ahead of Thursday and Friday's more impactful statistics. Taking on significant positions still appears dicey and the developing tone in the complex is noticeably more subdued. Silver rose 4 cents to $16.81 while platinum fell $9 to $1994 and palladium dropped $4 to $426.

While he may have recently taken on a fresh gold position after having been out of the metal for about a month, noted advisor Dennis Gartman sees the Fed's body language as not particularly beneficial for the hitherto ultra-hot commodities complex. Mr. Gartman opines in a Bloomberg story that:

" Commodities will become "much, much weaker" after Federal Reserve Chairman Ben Bernanke signaled support for the U.S. dollar, Dennis Gartman, economist and editor of the Gartman Letter, told clients.

"We are facing a tidal wave of selling," Virginia-based Gartman wrote in his daily newsletter today. Even agriculture prices "may come under pressure following Dr. Bernanke's dollar support."

Crude oil, gold and copper fell today as the dollar traded near a two-week high after Bernanke yesterday said that interest rates are "well positioned'' to promote growth and stable prices. He also said the Fed is aware of the effect of the dollar's decline on inflation."

Many will, of course, argue that this is too little as well as too late, and that the fuse has been lit on inflation, and that no amount of talk or action can stop the cannonball from flying. As far as that goes, one might do well to take a look at previous such liquidity extraction exercises which proved successful for the Fed. We fully acknowledge that this will be quite a climb to undertake (rates need to go up by about 200 basis points just to get real rates to zero) but, election year or not, the Fed appears not only cognizant of the alternatives, but also not at all in the mood to let them become reality.

Since I last mentioned Ned Schmidt (publisher of the Value View Gold Report) in practically the same sentence as I did Dennis Gartman, I thought it would be fair to give Ned equal time once again and bring you his current take on gold:

"As is readily apparent, the Gold market had been living this past year in those rare best of times. Federal Reserve was on a determined course to lower interest rates. That encouraged selling of U.S. dollar, pushing it down in value. At the same time, a mini mania developed in paper oil market. While no shortage of physical oil could be found, the paper oil market moved higher. Those factors emboldened Gold traders to bid the metal higher. At the same time some connection was made between commodity prices and the value of the dollar. Together these forces pushed $Gold to an unsustainable level. That rally reversed itself, and $Gold continues to consolidate in a trend toward lower prices.

With the Federal Reserve moving to a neutral position on U.S. interest rates, few are motivated to sell the dollar. Paper oil prices have apparently peaked, at least for short-term. And yes, even small children in Tibet have heard the consensus view that oil supply is 85 mmbd and demand is 87 mmbd. If that were true, the news media would be filled with stories of riots over oil shortages. Since none of these reports exist, we must assume that the consensus oil view is in error. That leaves $Gold in the position of having no reason to not finish the consolidation in which it is caught. The longer term, yes, is extremely positive, for the dollar's essential problems remain. Investors would be better served by waiting for price weakness to add to their holdings, rather than chasing Gold when it moves higher on some day's hot news."

While I may not agree with Ned's ultimate targets for gold, or with scenarios that envision the death of the dollar, I have always advocated accumulating gold (especially on weakness) for long-term "life insurance" purposes for one's assets -provided the allocation does not exceed 15% or so. However, since our dailies are primarily read by the trading segment of the gold-oriented crowd, consider the above a freebie (but probably valuable) opinion by an independent voice. Now, if Paul Van Eeden would just write more often as well...

Remain on alert for the next two sessions' worth of econ data. Watch that support at $875.

Happy Trading.

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