Wednesday's surprise drawdown in oil stockpiles triggered a sharp reaction in the oil market, resulting in new record highs. Gold is closely correlated with oil, so the yellow metal got a nice boost as well. I think the market was just looking for an excuse to resume enthusiastic buying of gold and oil provided that excuse. The truth of the matter is that the fundamental and technical pictures for gold remain very favorable despite the recent correction.

Mike Kosares wrote a brilliant article earlier in the week highlighting some of the key fundamental factors for the gold market. I told Mike that my reference to his article in yesterday's morning report was undoubtedly the reason gold was rallying. If you haven't read Golden Gut Check yet, I encourage you to do so.

Okay as already implied, the resumption of the uptrend in oil probably played a role in gold's recovery as well. Additionally, we seem to be seeing a return of broad-based dollar weakness. This is primarily evident against the euro right now, which has surged to a new all-time high against the greenback. The breach of the previous high at 1.5905 puts the EUR-USD rate back on track for a test of 1.6000 and an eventual push to 1.6200.

The euro got an additional boost today from the expected 25bp rate cut by the BoE, which drove the EUR-GBP to another new record high as well. The ECB held steady on rates today, which was also widely expected. While ECB president Trichet sees both upside risks to inflation and downside risks to growth, the ECB mandate of price stability compels them to focus on the former.

The dollar is seeing renewed weakness against the other major currencies as well. The market seems to be discounting earlier expectations that some great solution to the credit crisis and/or coordinated efforts to support the dollar would come out of this weekend's G7 meeting. It my opinion G7 comments are more likely to reflect a 'more of the same' attitude; meaning the liquidity taps will continue to flow, further devaluing currencies and pushing up the prices of hard assets such as gold.

Dismal earnings along with reports that US financial institutions are holding additional "Level 3" assets that may require writedowns have soured the mood on Wall Street. This has increased expectations that the Fed may announce a larger than expected rate cut on 30-Apr. A 25bp rate cut is already priced in, but odds of a 50bp ease have recently increased to about a 50-50 proposition.

The prospect of still lower interest rates may be seen as somewhat supportive to US equities initially, but Fed funds below 2% would highlight the fact that the central bank is running out of bullets. The bad news associated with growing evidence of a recession is tipping in favor of a protracted bear market for stocks. As money flows out of the stock market, traditional havens such as cash and treasuries are increasingly less appealing. Gold on the other hand is an excellent store of wealth, particularly during periods of economic uncertainty.

Gold Market Movers:

US initial jobless claims for the week ended 05-Apr 357k, better than the market was expecting, versus 410k the previous week.

ECB holds steady on rates.

BoE cuts bank rate by 25bp to 5.00% in a widely expected move.

China revises 2007 GDP up to 11.9% from 11.2%. USD-CNY falls below 7.00.

Golden Gut Check: Why gold is likely to keep moving higher over the long run

S. African gold output falls 28.2 pct y/y in Feb

Oil holds near $112/bbl as market eyes tight fundamentals, weaker dollar

Gold to hit $1,100 in 2008: GFMS

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, 10 April 2008 | Digg This Article