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Commodity Conversation



Good morning,

A pretty nasty Friday in the metals markets with wild activity across the board. I was lucky enough to be bed-ridden with a case of "Bali-Belly" and, quite frankly, that was enjoyable compared to being long metals in that sort of environment. Gold pushed down to the low $394 area before recovering somewhat and closing just sub $400. Silver came off pretty hard again as well and I was impressed by its resiliency, even while gold was getting crushed. The $395-7 level in gold has been tested to the downside now on three occasions this past month or so and appears solid in its support.

So what precipitated the shakeout? Was it the serious increase in CPI numbers as reported on Friday? Higher inflation has not sent the gold price down many times in history. It's all talk about the dollar. "Feb. 20 (Bloomberg) -- The dollar rose to the highest in more than a month against the yen in New York after the Japanese government said it plans to add to record sales of its own currency" ..... Call me crazy, but the gold price fell on the news that another government (not the U.S.) is gonna run the printing presses full tilt and then buy dollars. This is no different than the Fed saying the same thing, and that's not dollar friendly. This is INFLATION. More paper in circulation without the corresponding productivity increases will eventually send prices up without doubt (and the value of a currency, lower).

India has been buying up big time the past 36 hours with gold sub $400. Premiums indicate India's comfort with gold down here. Reuters has the following story.... "Jewelers and investors, who had held back purchases over the past two weeks because of a sudden rise in prices, stepped up bullion buying after gold prices fell below $400 an ounce. 'We have had a busy weekend, there was a lot of buying and even today business has been good,' said Rajesh Khosla, a New Delhi-based dealer. In the western city of Ahmedabad, 600 kg of gold was being traded every day, up from 200-300 kg two weeks ago. 'The current rate of less than $400 an ounce is very attractive. Even investors are putting money in gold at this level. Our demand will continue to remain bullish as along as prices are between $398-$400 an ounce,' Suresh Hundia, president of the Bombay Bullion Association, said." .... Hmmm, keep an eye on the money flows, watching for any sign of demand pullback from the world's largest buyer. Shanghai premiums are indicating strong demand as well and we will monitor this.

Gold/silver equities have been bashed hard the past couple weeks as well. The HUI (Amex Gold Bug Index) is off some 10% in the last couple of days. Some very appealing levels on some stocks out there and in my opinion, the downside risk is negligible comparative to the upside potential. Some of the silver stocks are looking very nice, being down 15% from last week. Just my humble opinion.

To keep the finger on the pulse of inflation and therefore gold/silver, I'm watching: Oil, Nat Gas, Copper, Freight/cargo rates (especially tankers), scrap steel, live cattle, soybeans.

For the week going forward, I would be surprised to see Gold trade below $390-88 and silver below $6.15ish but, then again, nothing would surprise me these days. I certainly expect some more fireworks in gold as the central bankers keep friggin' around with the dollar. It is my contention that they are peeing into the wind trying to make strong something that is intrinsically worthless.


No positions in stocks mentioned.

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