Depending on who you believe and how you measure, the US economy is either in a recession, or teetering on the brink. While there are some maintaining that the US can still avoid a recession, its been a while since we've seen any data remotely positive to bolster their case. Usually a downturn in the world's biggest economy will pull the rug out from under commodity prices as demand wanes. However, this downturn appears significantly different. As the US economy worsens, commodity prices from grains to oil, from cocoa to gold, have gone nowhere but up.

The global economic dynamic has changed drastically in recent years. Emerging countries such as China and India, with their voracious appetite for all commodities, have effectively offset the slackening demand here in the States. This is something I have witnessed first hand in China, where a building boom like nothing I have ever seen is in full swing. Construction drives demand for concrete, copper, lumber and a host of other materials. Demand for labor also increase, growing the working and middle classes and creating disposable income. As one looks out over the Beijing skyline, you'd swear every construction crane in the world had to be in that one city.

Wealth is being created at an astonishing pace in China, and displays of this new found wealth are everywhere in the eastern gateway cities, including Beijing. The neuvo-riche class is now growing in western cities as well, particularly the provincial capitals. However, it is the growing middle class in these emerging countries that has the greatest potential and is likely to drive the broad-based commodity boom well into the future, no matter what befalls us here in the US. It is also worth noting that both China and India have a cultural affinity toward gold.

US stocks are poised for another lower open on Tuesday after stocks lost additional ground in Asia and Europe. The NIKKEI 225 managed a slightly higher close after a sharp drop of nearly 4.5% on Monday. US stock indexes are looking technically vulnerable as a result of growing economic concerns and risk aversion plays. The S&P 500 is down more than 9% so far this year. As money comes out of the stock market, a lot of it is finding its way into the commodities markets in search of returns. Gold has certainly benefited from this trend.

Platinum surged to another new all-time high in earlier trading, just shy of the $2,300 mark. Platinum has been boosted by strong fund interest and is up 50% already this year. Inflation concerns and the weak dollar are also playing into this rally, but it is the expectation of a growing supply deficit resulting from the power crisis in South Africa that is the main driver for the white metal. South Africa accounts for 80% of global platinum production and the power crisis is expected to limit production at least until 2012 when new power plants begin coming on-line.

South Africa is also the second largest global producer of gold, having recently lost the top spot to China. Supply concerns are factoring into the gold rally as well, but to a lesser degree. Nonetheless, as goes platinum, so goes gold. That holds true for palladium, which is zeroing in on $600 an ounce, a new 6-year high. And silver too, which cracked the $20 an ounce threshold yesterday, for the first time in 27-years.

Oil has periodically turned corrective on US demand concerns, but remains generally well bid on solid global demand and expectations that OPEC will not increase their output. Gold is the classic hedge against energy-based inflation.

Israel has said that it will reoccupy Gaza if necessary. This word comes as US Secretary of State Condoleezza Rice returns to the region on a scheduled trip and urges both the Israelis and Palestinians to return to the negotiating table. US brokered peace talks were suspended last week by Palestinian Authority President Mahmoud Abbas after IDF troops moved into Gaza to suppress repeated militant rocket attacks against Israel.

Ecuador severed diplomatic relations with Columbia on Monday in reaction to Columbia's military incursion across the border against FARC rebels. Ecuador has sent thousands of troops to the Colombian border, escalating the crisis. Venezuela, a staunch ally of Ecuador, also expelled Colombian diplomats and President Chavez ordered troops including tanks and planes to the Colombian frontier. Heightened geopolitical tensions are another driving force behind the rally in gold.

Gold Market Movers:

Bank of Canada cuts rates by 50bp to 3.5% in widely expected move.

Swiss GDP for Q4 rose 1.0% q/q, better than market expectations. CPI for Feb was steady at 2.4%.

Commodities soar on global demand despite weak U.S.

Buffet says U.S. in recession

Hugo Chavez sends tanks to Columbia border

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 Tuesday, 4 March 2008 | Digg This Article