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Mar 31 2009 4:37PM

Good Afternoon,

The dollar gave up some of Monday's gains today as the euro held above pivotal support near $1.30 and as oil prices recovered about a quarter of yesterday's deep declines. Albeit these are short-term (and some say month-end related) moves, participants find them broad enough to make a play intended to dress the otherwise messy logbooks that have defined March in many a market.

Don't look now, but the Dow has had its best showing in nearly six years, this month. The index rose 8%, while the closely related watch-item called the NASDAQ gained 11%. This, of course, after predictions of 5K Dow made the rounds over recent weeks. Bear market rally? Perhaps. On the other hand, investors were hard-pressed to find alternatives that ended up with near 10% gains on the period.

New York bullion trading was rather indecisive during the course of the session, but was still seen ranging from $911 to $925 per ounce. Gains encountered decent selling into, while declines were halted just above Monday's lows. A break of some sorts could be in the making later this week, one would hope. The greenback was last shown at 85.50 on the index, while oil rose $0.92 to $49.33 per barrel. The aforementioned euro was trading at $1.3289 against the dollar. We had expected higher- and possibly much higher-gold values for the week. Thus, far, no dice. Spot gold was ahead by $2.20 at last check, quoted at $918.00 per ounce.

While contract-related delivery notices and trimester-end book squaring may yet give us such a rise, the metal still appears poised to finish March with a 'first monthly loss since October' label being applied to it. We are happier with the "best quarter in one year" label if it comes down to having to choose. It's just that it was two-months' worth of a 'best quarter.' For now, gold remains "home on the range" and that range is being seen as the $895-965 acreage in values.

Silver slumped today. It lost 13 cents and broke down to $12.93 (must be those darn manipulators at work again!), while platinum rose a modest $10 to $1123 and palladium remained unchanged at $214 an ounce. "Survival - The Automotive Edition" continues to be the rerun of the day on the noble metals' traders' 'must-watch' agenda. Such suspense.

No suspense on the US economic front. Home values got pummeled to the tune of nearly 3% in January and are now down 29% since their 2006 peak. 19% of that decline came in 2008. The crater is more than 20-cities' markets worth wide. At the end of the day, the global economic scene is now still the focus of many a speculative position-taker - be they dollar, or equity, or commodity ones. The London G-20 summit and the World Bank's guardedly pessimistic diagnosis of the world economy are playing the gorilla's role this day, this week, and at the close of a tumultuous first trimester.

The World Bank sees a global economy in shrinking mode for the year, and it also sees 'emerging' nations as looking more and more like 'emergency' nations. The sideshow continues, with Mexico now ready to accept a $40 billion credit line from the IMF. This, of course, because it has its internal house in perfect working order. Save for the all-out war of the drug lords unfolding from coast to coast and border to border. Speaking of tumult, witness the angry hordes of protesters in London. Populist rage on an increasingly global scale, that. London's Bobbies are in overtime mode and then some. Rage against the Wall Street Machine. In full bloom.

Gold market participants with an actual presence in the market (as opposed to sidelined spectators) remain mindful of a number of potentially deleterious undercurrents in development behind the proverbial market curtain. One such (largely unnoticed) bit of news concerns China. Again. Why, just last week, the perma-bull gold scribes were elated to be able to misinterpret words from China, Russia, and Tim Geithner and conclude that a call had been issued for the replacement of the dollar as the world's reserve currency.

Today however, Harvard economist Jeffery Frenkel (also a member of the NBER) revealed that China has now in fact gone back to a dollar-peg as regards the yuan. In a major case of "talk loudly and carry a small stick" China quietly turned away from the euro+dollar model it had adopted back in 2005, and has apparently embraced the idea that when push comes to shove (and there has been untold pushing and shoving since 2005) the dollar is still the widest, and coziest blanket to have over one's head. At this time. And maybe not just at this time.

Another troubling sign for the "one-way gold price" fan section continues to be the tectonic shift in Indian (and regional) attitudes towards the yellow metal. Never mind that gold imports (for a second month) were followed by a question mark and/or a zero in any article referring to India. The emerging reality is that the country is turning into a net exporter of the metal (in the form of coins) at this juncture.

Similar situations have been the subject of reports from Pakistan, Dubai, and pretty much the whole part of the world that we normally look to for underlying core gold demand. Hard to put a spin on such news. Does not mean that someone will not try and minimize the findings' degree of importance.

Something that is usually neither minimized or over hyped is the Mark Hulbert gold market pundit pit's temperature reading - as a contrarian indicator of things to possibly come. Marketwatch brings us the latest such bedside visit's results:

"Is gold's glass half full or half empty?

For most of the last several months, gold timers were inclined to see the glass as half empty. But in recent sessions they have begun to change their tune, seeing it instead as half full. And, from a contrarian point of view, that is not an encouraging development.

Chart of 38099902

Consider: Two weeks ago, when I last wrote about sentiment among gold timers, gold bullion was trading for around $920 per ounce. That's essentially where it is trading today. And yet, the editor of the average gold timing newsletter is markedly more bullish today than then.

Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold-market exposure among a subset of short-term gold timing newsletters tracked by the Hulbert Financial Digest. As of March 30, the HGNSI stood at 30.2%.

Two weeks ago, in contrast, it stood at minus 16.5%. So, in just ten trading sessions, during which gold bullion on balance went nowhere, the editor of the average short-term gold timing newsletter has increased his average recommended exposure level by nearly 47 percentage points.

Why the marked shift in sentiment?

The biggest single development in the gold market in the last fortnight was the 8% jump in bullion's price in a single session, March 19. That came in the wake of the Federal Reserve's announcement that it would purchase as much as $1.15 trillion in U.S. bonds and mortgage-backed securities.

Impressive as that one-day surge was, however, the market hasn't been able to hold onto that day's gains. Yet, in recent sessions as gold gave back some of its ground, the gold timers have not dampened their enthusiasm that developed after the Fed's announcement.

And, typically, gold does not thrive when the gold timers are stubbornly holding onto their bullish positions.

The last two weeks do underscore another trend I have noted before, however: A marked compression in reaction times between extreme sentiment readings and the expected contrarian reaction in the market place.

Prior to the last several years, for example, the HGNSI's greatest forecasting power was at the three-month horizon. In the econometric tests I have conducted, the correlations with subsequent one-month performance, though statistically significant, were somewhat weaker. At the two-week horizon, there was no statistically significant correlation at all -- which meant that, up until 2003, we could draw no conclusions from gold sentiment about what the XAU would do over the subsequent two weeks.

In recent years, in contrast, the correlations at the shortest-term horizons were the most significant. Now there is no statistically significant correlation with the three-month horizon. And not only have correlations at the two-week horizon become statistically significant, they now even exceed those that prevail at the one-month horizon.

This suggests that contrarian analysis, to the extent it is valuable in the gold market, is for an even shorter-term horizon than it was already. So even though my analysis of gold market sentiment leads -- at least for the moment -- to a bearish conclusion, that bearishness is most likely to last a matter of a week or two rather than months."

The question, of course, is what happens after late April. Akshaya Tritiya will have come and gone, brides will have been wed, and jewelers in the rest of the world will be eyeing their typical summer hiatus.

GM's new chief - Frederick "Fritz" Henderson let it be less than equivocal that a bankruptcy filing for GM could be in the cards. Especially considering the 60-day deadline the automaker faces to re-write its birth certificate.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.