Gold
Gold was up $2.20 to $1003 per ounce in trading in New York yesterday while silver was down 30 cents to $19.89 per ounce. In illiquid electronic trading after the Federal Reserve cut interest rates by 75 basis points, very counterintuitively gold fell in value by nearly 2%. With gold already up by more than 19% so far this year (some 10 weeks), consolidation is healthy and to be expected.

Gold has subsequently risen somewhat in Asian trading and again in trading in London this morning, showing that the initial increase in risk appetite (as seen in the increase in the value of the dollar and in the surge in stock markets) is likely to be short lived. It would be wise not to be seduced by short term movements in markets and continue to focus on the all important macroeconomic ‘big picture’ which remains poor and extremely uncertain.

Gold remains well supported with oil remaining close to $110 a barrel and the dollar falling again overnight in Asia and early trading in Europe (see FX Commentary below). Gold is the only asset that is not someone else’s liability or promise to pay. In a world where there can be a $400 billion default by a company with $1.5 billion of capital, gold’s hard, tangible and extreme rarity make its safe haven and finite currency qualities more important than ever.

The London AM Gold Fix at 1030 GMT this morning was at $995.25, £497.376 and €632.146 (from $1005.75, £499.13 and €635.786 yesterday).

Already European equity markets are under pressure with increasing concerns regarding the health of some British banks.

Ignore the siren call of the complacent as this looks more than likely to be another dead cat bounce in equity markers and another brief sojourn of financial calm prior to the next act in the epic unfolding global financial crisis. Unfortunately, the drama looks soon to increase, intensify and degenerate from high farce to tragedy.

FX Commentary
The markets are not always right but they are always the markets. In the wake of the Federal Reserve’s 75 basis point rate cut the dollar rallied hard across the board. It posted its ‘largest single day gain in 9 years’ against the Japanese yen, notes one commentator. On Monday we saw that annualised inflation is running at a rate significantly higher than the current (and still falling) interest rate.

The greenback’s rally is still mystifying, why anyone would want to hold a currency that is guaranteed to buy you less this time next year (due to very high inflation), beggars’ belief. This rally will more than likely be short term and presents nothing more than an opportunity for profit taking and post pull back, it will be used by the long time dollar bears to re-establish short dollar positions.

The FX market’s short term knee jerk reactions are the stuff of legend but alas there is hope, those clever people trading U.S. Treasury Bonds understand the implications of the Fed actions. Ten year Treasury yields jumped by up to 15 basis points post Fed yesterday. Low interest rates, high inflation and a crumbling dollar is not the combination of characteristics that make a 10 year bond investment look attractive when it yields a paltry 3.30%.

The bond markets of the UK tell a similar tale. The post budget sell off in UK Gilts was fuelled by the need for significant increased issuance by the Treasury. The Gilt markets don’t like that and neither does the currency market. Sterling fell to a new all time low against the euro around 0.7900 and has had a modest pullback since. The upward trend in euro/sterling is well in place and long term looks set to continue. The rollercoaster moves seen in sterling against yen shows the mood swings of the current market. On Monday, post Bear Sterns risk aversion was the only message as sterling fell sharply to a low of 192.60. Post Fed on Tuesday the rally lifted the currency pair to a high of 201.80 as the Dow, with all the problems of the world now solved and the outlook for the U.S. economy doing a miraculous 180 in 24 hours, jumped by 420 points.

After a good night’s sleep and a little rational thought while they slumbered, traders have decided that maybe this is not the time to go risk seeking and have sold sterling against the yen again this morning, sold the Greenback against the Yen, sold everything that they have against the Swiss Franc and reconsidered the wisdom of selling their gold and silver yesterday. The dust may have settled but the fallout is yet to be seen.

The euro continues higher against sterling and the greenback and the commodity currencies return to their uptrend after their brief sojourn yesterday. The markets are not always right but they are always the markets.

Support and Resistance
Gold’s support is now between $960 and $970. Resistance is at the recent new record nominal high of $ $1030.80.

Silver
Silver is trading at $19.84/20.90 at 1100GMT.

PGMs
Platinum is trading at $1957/21967 (1100GMT).
Palladium is trading at $474/481 per ounce (1100GMT).