Gold Volatile to Start the Week

by Peter A. Grant

March 07, a.m.

(from USAGOLD.com) --

Gold established a new record high at 1444.60 in early New York trading, driven by ever-rising tensions in the Middle East and North Africa. Silver reached a new 31-year high of 36.732 before intraday corrective pressures surfaced. The metals retreated on a rumor that Libyan strongman Moammar Gaddafi was negotiating with anti-government rebels. This rumor seems rather implausible given the territorial gains pro-Gaddafi forces made over the weekend and given that one opposition leader called today's attacks against rebel positions the most violent yet.

BREAKING: Reuters just reported that President Obama said NATO is considering military options against Libya.

Oil prices have been quite volatile today as well, but the bias remains definitively to the upside, despite the Obama Administrations indication over the weekend that they would consider tapping into US strategic oil reserves. Investors are keenly eying events in Libya and Bahrain, but are also increasingly concerned about the so called Saudi Arabian "day of rage" that was originally scheduled for Friday, 11-Mar. After the Kingdom announced a ban on all protests over the weekend and top Saudi clerics condemned demonstrations as "un-Islamic", organizers attempted to launch their popular uprising today. Saudi security and intelligence forces reportedly raised their alert status to the highest level as they continue to attempt to prevent contagion.

The dollar remains under pressure amid continued erosion of its safe-haven status. The EUR-USD regained the 1.40 level and the single currency seemed nonplussed by the latest downgrade of Greek sovereign debt. Moody's slashed Greece's rating by three notches from Ba1 to B1, citing rising concerns about an eventual default. Credit spreads throughout the EU periphery jumped on the news. The latest developments should make for some interesting conversations at the eurozone summit that commences on Friday, but generally speaking political will to provide additional EU support for the PIIGS has waned considerably in recent weeks. The euro is only off modestly from the recent 4-month highs, perhaps due its growing cachet as a safe-haven...earned at the expense of the dollar.

Atlanta Fed President Dennis Lockhart warned today about the risks associated with an oil shock, saying $120 oil is manageable, but "around $150 it becomes a much more serious concern." Mr. Lockhart seems to be aware that sharp rises in the price of oil tend to proceed recessions in the US (see The Daily Market Report from Friday), suggesting that the Fed might "respond with more accommodation." He said he would favor "another round of large-scale asset purchases and an exit to a less accommodative policy stance." That's a not-so-veiled indication that QE3 might become necessary if oil prices remain elevated. Meanwhile, Richard Fisher of the Dallas Fed expressed concerns about the effectiveness of the present QE2 operation, saying that he'd vote to curtail or end QE2 if it proves "demonstrably counterproductive" between now and the end of Q2. I would call that pretty wishy-washy, but Fisher is about as hawkish as the Fed gets these days.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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