Wednesday Kitcommentary from Kitco.com

Good Afternoon,

In case ANYONE missed the news, the Fed did not trim interest rates yesterday. It slashed them, aggressively. These markets got an early holiday gift this year, and then some! But, what is under the wrapper? We will soon find out...

Gold prices cooled their jets a tad in the post-Fed euphoria period today. Spot prices closed at $720.70 per ounce, still gaining $5.70 per ounce, albeit that seems like $10 or $15 from where today's expectations for a rally would have taken them. The US dollar's apparent refusal to roll over and die a prompt death the day after a major rate slash may have put a bit of a damper on things, but the perma bull noise continues unabated. Focus has already shifted to economic data releases, and how they will affect the Fed's future thinking. Today's new home starts are as poor as one would have expected them to be, while inflation figures show....very little of that around. While Lehman earnings caused cheer on Tuesday, Morgan Stanley's billion-dollar write-off today underscores the severity of the credit squeeze. The story is far from over.

The US dollar did touch a record low against the Euro, but was off its 79.06 lows on the index, at 79.25 while crude oil continued to gain, and was quoted at $81.68 per barrel. The Nikkei picked up where the Dow left off and rose 579 points (!). Silver was still lagging, gaining 16 cents to $12.93 but platinum added $7 to $1307.00 per ounce. So, where to, next? Our crystal ball is still out on loan...

Gold has now achieved its some of its loftiest and fervently wished-for short and medium-term targets, yet one of the cautionary features of the current equation in these markets remains the fact that the metal is reaching for 28-year highs while at the same time, the US stock market had its best day in four years, and is now targeting the 14,000 level. This is not the normal order of movement in the gold versus stocks universe, but at times such as these one can crumple up their charts and historical counter correlation tables as well. Emotions rule. A bit of a replay of the summer, in the opposite direction this time.

Thus, we must allow for the probability that the rally could continue until such a level that participants feel that everything present out there is fully priced-in. For the moment, that would appear to be a wide range, extending from $735 to $775 per ounce. Corrections -if they materialize- may only bring dips to $700 ($680 if pushed aggressively). The rest remains open to uneducated guesses, as we are in practically uncharted waters. That this moment of turbulence is best left to the pros, goes without saying. For the moment, the objectives are from $735 to $745 and today could still have traders surfing yesterday's wave, albeit the lack of any pullbacks lately still presents the potential for a dip any day.

And now, for the autopsy report:

Evidently, "Mad Money" Cramer's emotional call (scream?) from August was clearly heard, all the way into the halls of the Fed, as the first helicopter-like money maneuvers by Ben Bernanke manifested themselves on Tuesday. Ostensibly, it implied that the US economy must be saved at all costs, but the Fed effectively jumped to the rescue of the hedge fund elites, the irresponsible lenders and their borrowers alike, and the moribund US consumer. There could be more to come too, as no words of rebuke directed at the gamblers of other people's money were visible in the post-rate jawboning. Let them eat cake, and easy money too. Maybe they will not notice their dwindling wealth...when inflation's effects finally kick in like a morning-after pill's. For the moment, the official bogeymen are the dreaded "D"(eflation) and "R"(ecesssion) words.

Talk about irrational exuberance... We'd like to see Mr. Greenspan take to the talk show circuit again, and analyze this Fed high-wire act, along with plugging his book.

"Eppur si muove" said Galileo once, and now we can add the global economy to that which must also keep moving, and at all costs. But, will it?

US New & World Report explains that: "The stock market soared immediately Tuesday with the Federal Reserve's surprising decision to cut interest rates by a greater-than-expected half a percentage point, and if history is a guide, the boost could continue in the weeks and months ahead. But after the euphoria passes, investors will have plenty of reason to be cautious as they try to capitalize on the likely trend. After all, the economy must still grapple with the issues that led to the Fed's abrupt reversal in course since its last meeting just six weeks ago. The large rate cut confirms the central bankers' view that the economy is weak. "We're no longer fighting inflation," says Alan Skrainka, chief market strategist at Edward Jones. "We're fighting a slowing economy." 

Impressions? We have not seen such loud cheer since Dick Clark last let the ball drop in Times Square. Tuesday afternoon's diary entry says:

"I watched on simultaneous CNBC and Bloomberg screen as TV anchors jumped out of their seats in jubilation. Cramer rolled up both his sleeves and probably his pant legs too. He has fully caffeinated, to put it mildly. Even as the news tickers flashed the 1/2 point fed funds AND discount rate machete whack, all of the markets that had come to a standstill before 2:15 EST leaped forward as if a giant catapult had been released. The Dow added 336 points and had a party the likes of which it had not seen since 2003. Gold vaulted to $735 basis the futures contract. The US dollar promptly caved to near 79.00 on the index. The yield on two-year notes fell 8 basis points. Mass-mailing credit card purveyors opened champagne bottles. Rare coin telemarketers reinstated their Porsche orders. The Countrywide TV ads guy went to sleep, secure that he still had a shouting job for the foreseeable future. Maybe even money for new dentures. And, somewhere, in the shadows of Wall Street, Gordon Gekko was flashing a smile...Good to know that no matter how much mischief you perpetrate, someone will bail you out. Pity the guy who owes a couple thousand on his credit card though..."

Back to reality. Gold knows that the Fed has just thrown the loaded dice and is playing with the fire of inflation. It knows that the Fed blinked and took its eye off of inflation. It knows that trading mania is alive and well. But all of this also could mean that while the cut may ensure nice bonuses for the trading types in the shiny towers come Christmas, it may indeed be too little, too late, to save the US economy from slipping under not only under the 2% target wished for by the Fed, but more likely towards the minus sign in growth numbers, come 2008. If that is cause for celebration, you tell us.

Anyone who was waiting for market reaction (and action) on the sidelines, got their fireworks show free of charge. Trend-followers can now jump aboard knowing that they have lots of company. We hear only a few technical warning calls for a correction (interestingly, one of them comes from a known long-time perma-bull) or warnings of a possible double-top in the making. Their voices are drowned out by assurances that $775, $800 and $850 gold are next in line to fall. Investors will decide, not the pundits. In the meantime, India is turning skittish on fresh purchases and will go on intermission after the 27th until mid-October. Central banks have one week to put gold on the table if they choose to (although it certainly won't be Spain that does so).

We, on the other hand, will instead take to the road, to faraway Idaho and get away from the big city noise to congregate with silver's fans. Our next reports will come to you from the 2007 Silver Summit in Coeur D'Alene.

(This one comes to you from the Denver airport, to put things into perspective....)

Best regards,

Jon Nadler Senior Investment Products Analyst
Kitco Bullion Dealers

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Jon’s gold market commentaries are frequently quoted by the U.S. Canadian and global financial media (MarketWatch, ROBTV, CBC Radio, BBC UK Radio, CNBC, Forbes.com, TheStreet.com, The Wall Street Journal Online, Investor’s Business Daily, Forbes.com, AFX News.com, Bloomberg, Resource Investor, Investor Ideas, Korelin Economics Report, Smartstox, and Reuters).