NYMEX crude for April delivery set a new record high at 108.79, while Brent spot surged above the 105.00 level for the first time ever. The 105.20 target in Brent spot is close at hand. Penetration of this level would shift focus to 106.70 and then 111.90 based on Fibonacci objectives.

OPEC opted last week to not increase oil output, despite increasing demand from China. OPEC claims that the supply/demand fundamentals are in balance; that increasing demand from emerging economies is being offset by declining demand in developed countries with slowing economies. OPEC contends that it is speculation resulting from failed US policy decisions that is to blame for record high oil prices. I'm inclined to side with OPEC on this one.

It is the weak dollar that is driving up the price of oil, making it less expensive for holders of foreign currencies. Meanwhile, investors have been buying oil and other commodities to hedge themselves against the declining greenback. Massive fund flows into commodities, in search of returns, have driven up the price of oil even further.

Gold has been a huge beneficiary of such flows as well, and this is a trend that is expected to continue. Gold is also the traditional hedge against energy-based inflation.

Expectations of another significant Fed rate cut have been weighing on the dollar in recent weeks, but gained considerable impetus last week after particularly dismal payrolls data were released. With job growth trending lower since Oct-07, many are convinced we are already in a recession. The Fed will seek to stimulate the economy with an even more accommodative monetary policy, despite growing upside price risks.

The market has fully priced in a half-point rate cut for the 18-March FOMC meeting, with a cumulative 75bp cut to 2.25% anticipated by the end of April. Recent events; including the payrolls data and persistent credit market turmoil has increased the odds of a move by the Fed in advance of next week's FOMC meeting. Rumors of such an event have been circulating regularly.

The Wall Street Journal suggested in an article today that the Fed might have some new tricks to help ease the credit crisis up its sleeve. Direct lending to financial institutions other than banks and direct Fed purchase of mortgage-backed securities are apparently possibilities.

The latter in particular seems like cause for concern: It sure sounds like a bailout and the transfer of risk from financial institutions to the federal government. These securities would almost assuredly include highly risky sub-prime debt. How would the Fed pay for these purchases and what price would they pay? What happens if the securities end up being worthless? It's likely that the Fed's printing presses will be working overtime if any of these "new tricks" actually get implemented.

The Fed recently increased the March TAF auctions by $20 bln each. The Fed will now be offering $100 bln in 28-day funds this month in two auctions of $50 bln each. The first auction was held yesterday and the second is slated for 24-Mar. The Fed has said that they will increase the auction sizes further if conditions warrant. The Term Auction Facility (TAF) was initiated in Dec-07 in an effort to help relieve tight credit conditions. By most accounts, TAF has not been terribly effective.

Rumors of insolvency at Bear Stearns and Fannie Mae sparked a surge in default insurance and added to the speculation about an inter-meeting Fed rate cut. Bear Stearns quickly denied that they were having any liquidity issues, but Wall Street was sufficiently unnerved to the point that they began selling the financial sector once again.

Bank stocks led the broader indexes lower. The DJIA broke a critical support line, suggesting scope for a challenge of the lows for the year at 11,634.82. Penetration of this level would highlight potential for near term tests below 11,000.

With the stock market looking increasingly vulnerable, gold should continue to benefit from investment flows out of equities. With stocks looking less appealing, the recent broad-based fund flows into commodities, including gold, may even intensify. Gold makes a great alternative to going into cash in a declining dollar/inflationary environment. Given the low yields, US treasuries aren't looking particularly attractive either.

The euro set a new all-time high against the dollar in earlier trading, just shy of our 1.5500 objective. ECB hawk Axel Weber (Germany) suggested that inflation precluded any rate cuts and that rate hikes may have to be considered. Interest rate differentials between the US and the Eurozone have been widening for some time, but the prospect of even higher European rates will keep the dollar on the ropes.

Gold Market Movers:

Fed announces new Term Security Lending Facility (TSLF). The Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS.

US trade deficit widened to $58.2 bln in Jan, below market expectations, versus a revised $57.86 bln figure for Dec.

Canada trade surplus for Jan increased to $3.3 bln, versus $2.3 bln in Dec.

WSJ: Will Fed try something new to aid markets?

Gold leads precious metals higher as dollar falls.

Citigroup. Credit Suisse, Barclays add commodity traders and staff.

Stock index futures suggest a higher 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, 11 March 2008 | Digg This Article