Gold
Gold was up 60 cents to $880.50 per ounce at the close in New York on Friday and silver was up 19 cents to $16.09 per ounce. It has sold off in trading in Asia and early European trading and breached support at $870. Gold’s sell off is most likely due to strength in the dollar which has rallied to 1.4475 against the euro (see FX below) and the continuing fall in oil prices which are down nearly 2% today.

Fears of a U.S. recession are increasing and Asian and European stock markets are under severe pressure this morning. The FTSE tumbled nearly 4% to stand at 5,673 by 1130 GMT, while elsewhere in Europe the Frankfurt DAX plunged 5% as did the Paris CAC. Earlier, Asian markets closed much weaker with Hong Kong's Hang Seng down 5.5%, Tokyo's Nikkei losing almost 4% of its value and stock markets in China and India plunged by over 5% and 7% respectively. While in the short term this may lead to some speculative longs liquidating positions in gold over the medium to long term this will create safe haven demand for gold. This is graphically illustrated in the last 30 days with gold up some 8% and most major stock markets down by 10% and more.

Gold breached $900 an ounce for the first time last week and rose to a new all-time high of $916.10 on Tuesday of last week. It subsequently sold off and reached a low of $870 on Friday prior to the President Bush endorsement of a $145 billion economic stimulus plan designed to fend off a U.S. recession, whereupon gold rallied into the close. It has soared during the past year on its appeal as a hedge against inflation and as a safe investment in times of political and economic uncertainty. Bush’s announcement failed to calm nervous investors, adding to gold's appeal as a hard asset known for holding its value.

In recent months when there have been sharp sell offs in stock markets gold has also sold off initially but by far less. So if major indices are off by 3% or 4% gold might only be down by some 1% to 2%. Subsequently, stocks have tended to drift sideways before recovering but gold has rallied more quickly and has outperformed stocks in the days following sharp sell offs. A similar pattern may be repeated again.

The London AM Fix was at $874.25 (up from $872.25 on Friday). Gold again rose in GBP and EUR and fixed at £448.47 (up from £445.74 on Friday) and €603.67 (up from €596.92 on Friday).

Gold Ignored by Much of Financial Media
Much of the financial press of the western world ignored gold’s new record high above $900 last week which is bullish from a contrary perspective. Bizarrely, what coverage there has been, has been negative. An executive of one financial firm cautioned that the price of gold could soon ‘collapse’. Another opinion article cautioned that speculators have ‘piled in’ to gold and thus the price may have ‘peaked’. The uninformed and one sided article said that “the fundamentals supporting demand for gold are turning. Slower economic growth will inevitably take pressure off inflation and there are real signs that wholesale money markets are beginning to return to normal.” This is simplistic in the extreme and naive and wishful thinking of the most dangerous kind. Conveniently ignored were falling property prices and likelihood of recessions in major western economies, concerns regarding the U.S. dollar, oil prices remaining extremely high, serious possibility of stagflation and continuing geopolitical risk.

When this is what passes for financial opinion on the gold market you can be sure that you are in the early stages of a bull market.

When gold becomes front page news in a broad cross spectrum of the press and is the headline story and it is covered in a bullish manner then we will likely be near an intermediate top in the price. Many financial professionals and journalists continue not to understand gold and how essential it is to have an allocation to gold in each and every single investment portfolio. The fundamental and most important tenet of investment theory is to be properly diversified. Too often investment experts merely pay lip service to the merits of diversification. Continually there is a focus solely on stocks, property and to a lesser extent cash and bonds. Diversification cannot be properly achieved solely with these asset classes. An investment portfolio is not properly diversified unless gold and commodities are included in the portfolio, especially in a more uncertain inflationary or stagflationary macroeconomic climate with increasing and real systemic risk.

Most fail to understand that gold is not a commodity rather it is money – it is a universal finite currency that cannot be printed and debased by incompetent and fiscally imprudent politicians. It has been a store of value for 5,000 years and remains an important element in our global monetary system.

One of the most influential economists of the 20th century, Joseph Schumpeter said that "The modern mind dislikes gold because it blurts out unpleasant truths." The glaring unpleasant truth of our time is that we have a global economy and financial system based on fiat paper currencies which can and are being printed and abused by most governments internationally and particularly in the U.S. The major asset classes are denominated in fiat paper currencies and thus have a considerable currency risk which is often overlooked by many.

Telegraph’s Editor-at-Large on Gold
The Telegraph’s editor-at-large Jeff Randall (and presenter of Jeff Randall Live on SKY News) wrote an excellent article in which he quoted Schumpeter and brilliantly explored this most important of ideas:

"If you don't trust gold, do you trust the logic of taking a pine tree, worth $4,000-$5,000, cutting it up, turning it into pulp, putting some ink on it and then calling it one billion dollars?" - Kenneth J. Gerbino

The price of gold tells us a lot about ourselves. It holds up a mirror to the way we are governed, our economy and its prospects. It reflects not only the physical dangers of floods, famine, terrorism and war, but also the financial perils of systemic addiction to debt and budgetary incontinence.

. . . .

At some stage, the recent price surge will cool. When? No idea. But I do know that, to equal the last peak of $846, in November 1980, the price today would have to reach $2,500.”

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=NVQFT301102FFQFIQMFCFFOAVCBQYIV0?xml=/money/2008/01/18/do1801.xml

FX
The Greenback continued to strengthen against most of the major currencies over the weekend. There is no overwhelming fundamental reason for this strengthening but could be considered a pull-back from the recent overbought levels. Against the euro, the dollar fell to an overnight low of 1.4475 and against sterling it is trading at its low of 1.9500. The euro has broken below a medium term trend line at 1.4540 which could trigger a move lower to the December low of 1.4305. Meanwhile the move lower in sterling is set to continue down to the February 07 low of 1.9185.

Against sterling, the euro is going through a period of consolidation after a strong move higher and the long term trend in the strength of the euro against sterling remains intact for the time being.

The theme of carry trade unwinding continues as the Japanese yen appreciated across the board overnight. While short term stops have been triggered against the euro, sterling, U.S. dollar and commodity currencies, a sharp pull-back cannot be ruled out. However the long term trend of carry trade un-winding/yen strengthening/safe haven buying looks set to continue. However, traders will be ever mindful of the Bank of Japan sitting on the sidelines, especially watching the effect that a weakening economy and a strengthening yen is having on the Nikkei.

Support and Resistance
A close below recent lows at $870 could result in retrenchment to strong support in the $840 to $850 range which was previous resistance.
Gold is likely to remain above $840 and given the macroeconomic climate gold is likely to reach $1000 sooner than many market participants expect.

Silver
Silver is trading at $15.94/$15.90 at 1130 GMT.

PGMs
Platinum was trading at $1552/1556 as per above (1130 GMT).
Palladium was trading at $367/372 an ounce (1130 GMT).