The stock market was encouraged on Monday by JPMorgan's revised bid of $10 per share for Bear Stearns. Wall Street also liked the headline rebound in existing home sales, which suggests that the housing market may finally be seeing some relief. While existing home sales for Feb were up 2.9%, sales are still down 23.8% y/y. Nonetheless, the DJIA closed up 187 points.

There are growing concerns that central banks will be forced to buy mortgaged backed securities to ease the credit crisis. While such a move would offer relief to the banking sector, that such a plan is being discussed is indicative of just how bad things have become. The Fed has already backed about $30 bln of Bear Stearns riskier assets and has been accepting some rather sketchy securities as collateral for some time. The out-and-out purchase of these securities may be the next radical step in ongoing efforts to prevent a collapse of the US/global banking system.

However, the Fed, Bank of England and the ECB have balance sheets too. There are going to be valuation issues with any securities the central banks buy. Assuming the central banks buy at a reasonably discounted market price, the selling banks may still be required to take writedowns. Once these questionable assets have been offloaded on the central banks, they carry the risk, or should I say we carry the risk.

If the global housing market remains under pressure (as the just released S&P/Case-Shiller home price index suggests), there is the risk that the central banks will ultimately have to take writedowns as well. The best way for a central bank to deal with any such writedowns would be to simply print more money. If we see a broad-based debasement of the major currencies, gold prices will soar. In my opinion, the prospect of the central banks buying massive amounts of mortgage backed securities is the strongest case yet for $2000+ gold.

Renewed weakness in the dollar may be in anticipation of some sort of disappointment in today's economic data, perhaps in consumer confidence or the home price index. However, it could just be a return to more normal market conditions and the dominant trends in the wake of last week's deleveraging and the long holiday weekend.

If the dollar index slips back below 72.00, it would be a rather bullish signal for gold. We might expect the yellow metal to be trading back in the 950/960 zone upon such a move. Look for continued worries about the health of the US economy and the likely necessity of further liquidity infusions to weigh on the greenback. Another rate cut of 25-50bp is also considered likely for the 30-Apr FOMC meeting, lending credence to the scenario that highlights the downtrend in the dollar and the uptrend in gold.

EUR-USD is threatening to push back above the 1.5600 level. A break of the halfway back point of the recent decline at 1.5651 would return a measure of credence to the dominant uptrend, shifting focus to 1.5711 and back to the all-time high at 1.5905. Further out, 1.6000 and 1.6200 remain valid objectives as I still think the market wants to find the ECB's threshold of pain, where they will intervene.

We made note of the return of solid jewelry demand last week on the pullback. Jewelry demand remains robust this week. We're looking for at least one more day of strong demand, particularly out of India to confirm jewelry interest below $950.

We also thought that platinum jewelry demand would give an early signal that the corrective lows for the metals are in place, given the tighter supply dynamic in this market. UBS reported today that high-end European jewelry companies bought "unprecedented amounts" of platinum on the recent pullback. Platinum has surged back above the $1900 level and sights are set on $1989.65 (38.2% of the recent correction). Penetration of the latter would be a bullish signal that would shift focus to $2047.

Such a recovery in platinum would bode well for further retracement in the gold market as well. Look for the base building phase in gold to continue for the short term, but emphasis should remain on buying strategies in anticipation of an eventual resumption of the bull trend.

Gold Market Movers:

US consumer confidence for Mar at 73.5. Market was looking for a steady reading of 74.0.

S&P/Case-Shiller home price index for Jan -2.4%, versus -2.1% in Dec.

Canada retail sales for Jan +1.5%, better than market expectations.

Economist forecasts central bank action

Gold provides safe haven

US home prices drop 11.4 pct. in January

Stocks opened lower 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, 25 March 2008 | Digg This Article