Gold closed at $884.40 in New York  yesterday and was down 17.30 cents; silver closed at $16.76, down 57 cents.  Gold rallied in Asia and in early European trading to recover some of yesterday’s sharp losses. Oil has risen to near record highs, above $138 a barrel again this morning and the dollar has given up much of yesterday’s gains (1.557 to the Euro) and this is likely leading to gold buying. All eyes are on the Federal Reserve’s interest rate decision tomorrow and this could lead to traders being reluctant to take large positions - long or short. Markets are expecting no change as the Federal Reserve grapples with its most challenging environment since the stagflation of the 1970s. Thus, the Fed is widely expected to hold rates at 2% (leaving real interest rates negative) with market participants hoping the accompanying statement will provide clues on future interest rate policy. . Credit Crisis to Escalate on Credit Derivative Debacle Further confirmation that we are in the early to middle stages of the credit crisis and that a new more severe phase may soon begin was seen in the latest downgrading of the bond insurers, Ambac and MBIA, and the attempts by these bond insurers to try and ‘wipe out’ $125 billion of insurance of risky debt securities in order to try and protect them from possible collapse. The FT reports that “discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps (CDS), have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector.   . . .  The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralized debt obligations (CDOs), complex debt securities often backed by mortgages that have plunged in value amid a wave of foreclosures.” Overnight, Moody's became the last of the three major rating agencies to downgrade Ambac and MBIA , the embattled bond insurers, citing their limited ability to raise new capital and write new business. Bond insurers guarantee a range of complex debt products held by many financial institutions with the result that changes to their ratings have broad and negative consequences for the wider market. Another very real systemic risk being ignored in the latest bout of wishful thinking is the huge threat posed by what is being termed the ‘shadow banking system’. Marketwatch reports that “a network of lenders, brokers and opaque financing vehicles outside traditional banking that ballooned during the bull market now is under siege as regulators threaten a crackdown on the so-called shadow banking system. Big brokerage firms like Goldman Sachs and Merrill Lynch are the biggest players in this non-bank financial network, may have the most to lose from stricter regulation. The shadow banking system grew rapidly during the past decade, accumulating more than $10 trillion in assets by early 2007. That made it roughly the same size as the traditional banking system, according to the Federal Reserve. Unless radical changes are made to bring this shadow network under an updated regulatory umbrella, the current crisis may be just a gust compared to the storm that would follow a collapse of the global financial system, experts warn.” Credit derivatives and the now quadrillion dollars worth (yes a new number to contend with – a quadrillion is a thousand trillion !)  of derivatives as evaluated by the Bank of International Settlements (BIS) and the shadow banking system will soon lead to the next stage in the credit and systemic crisis. As usual much of the media will largely ignore these risks until they become glaringly obvious and be wise again in hindsight. With the U.S. banking and financial system the epicenter of the current systemic crisis, the dollar is likely to come under further serious pressure in the coming months and with stagflation becoming entrenched in economies internationally, gold is set to continue to outperform all other asset classes and investors should remain overweight gold. Today’s Data and Influences U.S. data due this afternoon are expected to show consumer confidence slipping below last month’s 16 year low. The Conference Board's confidence index fell to 56, the lowest level since October 1992, from 57.2 in May, according to the median estimate in a Bloomberg News survey. A separate report may show home prices dropped at a faster pace. Falling property values, rising unemployment and higher food and fuel bills have shaken consumers and may cause purchases to slump once the rebate money is gone. This raises the risk that Americans will retrench after spending their tax rebates. Silver Silver is trading at $16.86/16.88 per ounce (1200 GMT). PGMs Platinum is trading at $2033/2053 per ounce (1200 GMT). Palladium is trading at $466/472 per ounce (1200 GMT).