Gold's recent surge to new record highs came at the expense of the dollar, which has reestablished its long term downtrend after several months of consolidation. The dollar index fell to a new all-time low yesterday, negating the 74.48 low from 23-Nov-07.

The dollar tumbled earlier in the week on growing expectations of another oversized interest rate cut by the Fed. Fed Chairman Bernanke, speaking in front of the House Finance Committee on Wednesday, echoed the dovish comments made by Vice Chairman Kohn on Tuesday. It was Mr. Kohn's comments that triggered the initial slide in the dollar.

Mr. Bernanke seemed conflicted at times during his testimony. He clearly fixated on risks to growth, yet noted that soaring commodity prices and recent inflation data "suggest slightly greater upside risks" to prices. That strikes me as a bit of an understatement in light of what the commodities have done lately and given this week's PPI data that showed inflation at the wholesale level was running at 7.4% y/y, the hottest pace since 1981.

Mr. Bernanke expressed particular concern about the housing and credit markets, lamenting the inability to lower long term mortgage rates through Fed action. He conceded that the five successive rate cuts since Sep-07, that brought Fed funds down from 5.25% to the present level of 3%, has only had a limited effect on the overall financial condition.

The take-away line of yesterday's testimony was that the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." With that, traders bid up the Fed funds futures, fully pricing in a 50bp easing at the 18-Mar FOMC meeting. The implied yields on the deferred contracts moved closer to 2.0%, while Sep dipped to 1.98%.

The expectation of lower interest rates decreases the appeal of US treasuries, thereby reducing demand for the dollars it takes to buy them. Consequently, we've seen the greenback tumble this week. Dollar losses make gold increasingly attractive as an alternative asset and makes the yellow metal less expensive to holders of foreign currencies.

The greenback also fell to a new record low against the Swiss franc at 1.0611. Potential in the USD-CHF rate is toward 1.0355, which would bring the franc within striking distance of parity. The low yielding CHF has benefited from safe haven buying lately, and this trend is likely to continue. When the SNB holds their quarterly policy meeting in March, they are expected to leave the target rate for 3-month Libor unchanged at 2.75%. SNB President Roth anticipates that a moderate slowdown in the economy will help to reign-in inflation.

EUR-USD surged to new record highs midweek, clearing the long standing objective at 1.5000. The secondary objective at 1.5200/18 has already come within striking distance. Further out, 1.5624 is looking increasingly attractive based on a range extension. As dollar losses mount, look for gold to continue trending higher.

Gold Market Movers:

Q4 preliminary GDP 0.6%, slightly worse than the market was expecting, versus 0.6% in Q3-07. Core PCE 2.7%.

Initial claims for the week ended 23-Feb jumped to 373K, greater than market expectations, versus a revised 354k in the previous week.

German unemployment for Feb dropped 75k, versus -89k in Jan. This brings the unemployment rate to 8%, down from 8.1%.

Sweden Jan retail sales fell 0.2% m/m, but grew 4.8% y/y. Jan PPI was up 1.3% m/m and 4.6% y/y led by food and energy costs. These data bolster expectations that Riksbank will keep rates steady in March at 4.25%.

Dollar remains under interest rate thrall

Soaring euro threatens European jobs exodus

Another day, another crisis for the dollar

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 Thursday, 28 February 2008 | Digg This Article