Gold
Gold was up $4.00 to $811.60 per ounce in New York yesterday and silver was up 3 cents to $14.67 per ounce. Subsequent to the Federal Reserve's 25 basis point interest rate cut gold fell in the less liquid New York Access market and erased the earlier gains. In volatile trade gold then fell as low as $796 but then rallied strongly and again erased the short term losses and in Asian and early European trading gold has been strong was at $807.50 at the today's London AM Fix. Gold was largely flat in pounds sterling and euros and at the London AM Fix gold was trading at £394.77 GBP (up from yesterday's London AM Fix at £393.79) and €549.21 EUR (up from yesterday's London AM Fix at €549.15). http://www.lbma.org.uk/statistics_current.htm

Gold's action yesterday was very counterintuitive and confusing with a sharp rally, a sharp sell off and then another sharp rally to finish largely unchanged from London AM Fix to London AM Fix. Gold may have rallied on the rumour of the Bernanke interest rate cut and then sold on the news as often happens in the markets. The fact that gold remains above $800 shows that the cash market is well bid with international physical demand remaining very robust. Gold looks very well supported at the 50 day moving average as per below. Meanwhile supply continues to fall with South African gold output falling 5.8 percent in volume terms compared with the same month the previous year, official data showed yesterday. In September, year-on-year gold sales fell 27.1 percent to 3.099 billion rand.

Merrill Lynch and Morgan Stanley have issued reports stating that they expect a US recession in first half of 2008 and this will lead to increasing risk aversion. We predicted a US recession months ago and viewed it as an inevitable consequence of the sharp deterioration of the US housing market. The question then as now is not whether the US and UK economies have a recession rather the question is how long and deep will the recessions be and whether the US and UK economies suffer a depression which is a severe or long recession.

There is increasing fears that the world's major central banks (particularly the Federal Reserve and Bank of England) have lost control of monetary policy and the monetary system. Residential and commerical property prices continue to fall and the credit crisis appears to be deepening and spreading to consumer and wider economy.

 

The Telegraph reports that in the UK, Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "The fact of the matter is that the market rather than the Bank is now dictating monetary policy - and not from the point of view of controlling inflation, but from the point of view of a random walk. It is behaving in a way which is totally rational for individual banks but adds up to a major deflationary issue.

"I think this is a very grave situation indeed - and not just for the 1.5m [households due to renew their mortgages next year]. If this problem is not sorted out in the next two to three months we are looking at major insolvencies in UK plc."

The sense of fear in the City was compounded by the severity of the Bank's brief accompanying statement, which said: "Conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead."

Inflation of the money supply causes economic booms and asset bubbles and the inevitable consequence of economic booms and asset bubbles is recessions and the bursting of the bubbles. Recessions are not the "end of the world" rather an integral and unfortunately necessary part of the economic cycle. They are necessary as they are the market and economies natural mechanism of undoing the misallocation of resources present during the boom or inflationary phase. Mishandling of the money supply, wholesale credit creation and money printing on an unprecedented scale (not too mention highly irresponsible lending and banking practices) have caused the problem and the notion that simply reducing interest rates will solve it is bogus. It is akin to giving a heroin addict further daily injections when what he really needs is a period of cold turkey which while painful in the short term will likely save his life in the long term.

Silver
Silver is trading at $14.64/66 at 1200 GMT.

PGMs
Platinum was trading at $1464/1469 (1200 GMT).
Spot palladium was trading at $346/350 an ounce (1200 GMT).

Oil
Oil rallied above $90 a barrel in US trade yesterday and remains above $90 today.