Spot gold surged above the $1,000 level in early NY trading, a day behind the futures moving through this key psychological barrier. News that Bear Stearns had arranged for emergency funding from JPMorgan and the NY Fed prompted the latest gains.

US investment bank Bear Stearns' announced today that they had arranged for emergency funding from JPMorgan and the NY Fed due to a significant deterioration of their liquidity position. This announcement comes in the wake of Bear's vehement denial earlier in the week of rumors they were in trouble. The market has been anticipating something along these lines, and worse, for some time. Now the market will be waiting for the next shoe to drop. The stock market has dropped significantly.

With the stock market looking pretty vulnerable, we look for gold to benefit from money coming out of equities seeking a safe haven.

The recent acceleration in downside momentum for the dollar has resulted in mounting expectations of coordinated central bank intervention to prop up the ailing greenback. Both Morgan Stanley and Goldman Sachs made note of the potential for intervention in a Bloomberg article yesterday. An editorial in the FT today also calls for intervention to stabilize the dollar.

The dollar fell to new all-time lows against the euro and Swiss franc today and set a new 12-year low against the yen as well. The dollar also remains soft against the British pound. Sterling appears poised to regain the 2.0400 level. A breach of 2.0465 would lend considerable credence to the scenario that calls for a retest of the record high in sterling at 2.1137 from late last year.

US Treasury Secretary Paulson's reiteration of the United State's "strong dollar" policy has fallen on deaf ears. The truth of the matter is that a strong dollar policy has got to be backed up by...well, policy. Just saying that a strong dollar is in the best interest of the country does not translate into a strong dollar.

The truth of the matter is; we haven't seen any remotely dollar positive policy since 2005 when the Fed continued to raise interest rates from historic post-9/11 lows. This led to a yearlong rally in the dollar, but even that was viewed by most as a correction within the long-term downtrend, which has been evident since just after WWII.

Interventions in the FX market have historically not been terribly effective. For one thing, it takes a lot of money to move a market that trades over $3 trl a day on average. The global FX market is far and away the largest market in the world, dwarfing its nearest competitor, the global bond market. Think about it; the unprecedented $200 bln capital injection announced this week by the Fed equates to around 6% of daily FX volume. A mere drop in the bucket.

It would require coordination on the part of the world's central banks, backed up by strong policy on the part of the US to result in any kind of sustained turn-around in the dollar. The central banks can certainly fight a delaying action, effectively slowing the decent of the dollar by making speculators more cautious when establishing short positions. However, the trend is decisively bearish at this point and the central banks throwing a couple billion at the FX market at a crack will likely just be viewed as selling opportunities.

Gold is the classic hedge against a declining dollar. With the greenback under persistent pressure, we look for gold to continue to trend higher. Broad-based economic concerns, worries about systemic risks within the global banking system along with record oil and inflation, all conspire to keep the yellow metal underpinned. Given the breach of $1,000, sights are now set on $1,078.13 and $1,148.60 based on Fibonacci projections.

Gold Market Movers:

US CPI For Feb unchanged, well below market expectations.

Michigan sentiment dipped to 70.5 in Mar.

Bear Stearns gets Fed funding as shares plummet

Fed funds fully pricing 75bp cut with growing odds of 100bp cut and inter-meeting move.

WaMu downgraded to near junk, but rumors of capital infusion from UK hedge fund supports shares.

Fed is monitoring market developments closely and will continue to provide liquidity as necessary.

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, 14 March 2008 | Digg This Article