The markets have quickly shrugged off the initial euphoria surrounding the Fed's new Term Security Lending Facility (TSLF). All of the questions raised in Wednesday's report and many others made the rounds yesterday and the consensus seems to be that the banking sector is in far worse shape than anyone imagined. Talk of a major bank insolvency abounds and many believed the Fed's action was an attempt to avert such an event.

I've heard talk that the bank in trouble is a major US player, and other rumors have suggested a major European bank will be the first to fall. Emphasis on 'first,' as many fear that a major bank collapse would trigger a domino effect that could be devastating to the global banking system as a whole. If the TSLF fails to prevent that first domino from falling, one can be assured that the Fed and perhaps other central banks will take further drastic measures.

The market doesn't like not knowing what those further drastic measures might be, any more than they like the specter of a major bank default. There has been talk of the Fed doing an out-and-out purchase of risky assets from banks in jeopardy. We've seen similar central bank led bailouts in Europe recently. If the Fed takes it to the next level, it's going to require massive amounts of liquidity, even more than we've already seen hit the markets in recent weeks.

More liquidity is going to further debase the dollar, whose decline is already gaining momentum. Another outsized interest rate cut by the Fed is likely as well. A jumbo 75bp rate cut has nearly been priced back in. A half-point ease is all but assured at this point and talk of an inter-meeting cut is making the rounds once again.

The dollar has fallen to new record lows, below 72.00 against a basket of currencies. The yen and the Swiss franc, have benefited from safe-haven flows, are now gaining ground as a result of broad-based dollar flight. USD-JPY fell below 100.00 for the first time in 12-years. Support at 99.25/45 remains intact thus far, but short term potential is now toward 97.10/45.

USD-CHF tumbled to a new record low at 1.0045 before rebounding modestly. Short-term sights remain on 1.0000. The euro also set a new all-time high against the dollar. The EUR-USD hit our 1.5624 objective and has subsequently retreated into the range. A more convincing break of 1.5624 would shift focus to 1.5875 next.

Gold is the classic hedge against a declining dollar. We speculated that gold would be above $1,000 once these levels in the dollar were reached and I think we'll likely push above $1,000 today. Banks may be attempting to defend $1,000 option knock-ins, but I think this defense will collapse in the face of short covering and strong dollar hedging demand. Gold will get an additional boost from buyers seeking protection from broad-based systemic risks.

Gold Market Movers:

US retail sales for Fed at 8:30ET. Market is looking for +0.2%.

US import/export price index for Feb at 8:30ET. Market is looking for +0.7% and +0.6% respectively.

US initial claims for the week ended 08-Mar at 8:30. Market is looking for 355k.

Carlyle Capital in default, on brink of collapse

Dollar tumbles as credit woes batter stocks

US Treasuries riskier than bunds, default swaps show

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, 13 March 2008 | Digg This Article