Yesterday's Philly Fed Index was the latest data reflecting worsening sentiment about the US economy and bolstered the theory that we are on the cusp of a recession. The headline factory activity index dropped to -24 in February from -20.9 the previous month. The market was looking for a rebound to -12, but the actual figure suggests the economic contraction in the mid-Atlantic region is gaining momentum. This was the weakest print since Feb-01, which preluded the last recession.

The weak Philly Fed number, prompted some leading economists to revise their 2008 GDP forecasts downward. This latest news came on the heels of Wednesday's downward revision of the Fed's own economic growth forecast.

The rather bleak economic outlook, prompted a rebound in treasuries. A 25bp rate cut at the 18-Mar FOMC meeting is fully priced in with odds running around 60%+ of a larger half point ease. Implied yields for the deferred Fed funds futures contracts suggests the market believes we could see 75-90bp in cuts by this summer.

The expectation of further rate cuts, and the possibility that we could see Fed funds at 2.25% to 2.00% later this year has weighed on the dollar. The dollar index fell convincingly back below 76.00, reaching a two week low. While the DX remains within the range that was established late last year, the recent losses return a measure of credence to the dominant downtrend. A retest of the record low at 74.48 is looking increasingly likely and penetration would suggest potential toward 72.00.

A weaker dollar enhances the appeal of gold as an alternative investment and makes the yellow metal less expensive for holders of foreign currencies.

The move in EUR-USD back above 1.4800 returns a measure of credence to the dominant uptrend. While still range bound, renewed upside momentum bodes well for a challenge of the record high at 1.4967 and an eventual push to 1.5000 and beyond.

Surging inflation has been highlighted by recent data as well. Given the worsening risks to growth, the term 'stagflation' has been bandied about quite a bit this week. Gold is the classic hedge against inflation and would be even more desirable in an environment of skyrocketing prices and a slumping economy.

Platinum has turned mildly corrective after establishing yet another new record high, just shy of the $2200 level. Periodic bouts of profit taking have been viewed as buying opportunities of late and given the persistent concerns about a worsening supply deficit, we see no reason to think that this setback won't be viewed the same way. Surging platinum has been adding to the interest in gold of late.

Oil turned mildly corrective yesterday on news that inventories jumped in the week ended 15-Feb, more than the market was expecting. EIE crude oil stocks were up 4.2 mln barrels last week, versus analyst expectations of about a 2.9 mln barrel increase. The tone has turned consolidative today and corrective potential is thought to be limited with good support noted in the 93.75/92.75 zone. The trend remains bullish at this point, with a true test of 100 anticipated for Brent spot crude. Higher oil prices add to the inflation spiral, further increasing the appeal of gold as a hedge.

Gold Market Movers:

Quiet US calendar today

Canadian retail sales for Dec rose 0.6%, below market expectations.

Eurozone manufacturing orders for Dec fell 3.6% m/m, a sharper drop than expected, but rose 2.1% y/y.

Eurozone PMI for Feb fell to 52.3, versus 52.8 in Jan. This was broadly in line with expectations, but the services sector jumped unexpectedly to 52.3 from a 3 1/2 year low of 50.6 in Jan. Analysts were expecting services PMI to come in around 50.2.

Worries About 'Stagflation' Add Fuel to Gold's Rally

Philly Fed's Report, Jobless Claims, LEI All Signal Recession

Gold Breaks New Record - Public Waking Up!

Why Gold Will Soar Over $1000

Stock index futures suggest a lower open on Wall Street.

Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. He has spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. In 1988 Mr. Grant joined MMS International as a foreign exchange market analyst. MMS was acquired by Standard & Poor's a short time later. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. As a manager of the award-winning Currency Market Insight product, he was responsible for the daily real-time forecasting of the world's major and emerging currency pairs, along with the precious metals, to a global institutional audience. Pete was consistently recognized for providing invaluable services to his clients in the areas of custom trading strategies and risk assessment. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

-- Posted Friday, 22 February 2008 | Digg This Article