There may have been some delayed reaction to the declining dollar and rising crude prices, or a correlation with equities markets which were off sharply (the Dow dipping briefly below 8000) before staging a late monster rally.

Analysts have no way of knowing just what they’re seeing.

Dale Doelling, chief market technician at Trends In Commodities said that “if this rally is able to sustain itself, the Dow should rally to at least the 9,500 level and I expect gold to be able to rally back above the $900 level.” But, “This is all dependent upon what happens tomorrow. If this ends up being a one-day event, all bets are off.”

There’s even a little guarded optimism out there.

“Markets, all of them, seem to be acting as if the hedge fund liquidation may have hit a cataclysmic bottom,” said Ned Schmidt, editor of the Value View Gold Report.

“With the Federal Reserve pumping funds as fast as they can, gold has extremely good fuel for a run higher [in] 2009,” Schmidt added.

But pessimist Dennis Gartman, editor of the Gartman Letter isn’t budging. “The gold market is telling us that deflation has ravaged the base metals, the soft commodities, the grains,” Gartman says, and also “telling us that depression is possible and even likely, and that deflation is the order for the day.”

Source: Gold, silver rocket up in after hours -  Surging equities help

Platinum rose slowly but surely through the whole day, ending just off its intraday high at $2037/oz., up $45. Overnight, platinum has declined.

Silver followed gold’s lead to a T, closing at $16.84/oz., up 28 cents. Overnight, silver is sharply lower.
(Click here for charts)

The precious metals had a strong day, as well they should have, given soaring oil prices and a declining dollar. Traders may have even been a little disappointed that the metals’ performance wasn’t a bit better than it was

After acknowledging the buck’s influence on the day’s action, the Hightower Report went on the say that “with a sharp upward explosion in energy prices and a host of physical commodities, it is just as likely that classic inflationary buying was being seen in the gold trade. With the US equity market at times under significant selling pressure as a result of the sharp price gains being registered in the commodity markets, it is also likely that classic flight to quality buying was taking place. While the Dollar Index was weak some traders suggested that without a decline below the Tuesday low of 73.31, the currency influence on gold prices might not intensify. In the end seeing crude oil prices virtually explode during the session Wednesday probably rekindled investment interest for gold from a broad range of angles.”

Looking down the road, wrote James Moore, an analyst at TheBullionDesk.com, “short-term direction is still likely to be dollar-driven.”

But Moore added that “with inflation on the increase, longer-term investors should continue to look favorably towards gold, with the metal likely to carry out further base building ahead of $850 before rallying back towards $1,000 later in the year.”

Crude oil, which remains at nosebleed levels, is a primary driver of inflation, and after oil’s meteoric rise, gold has a lot of catch-up still to play.

And Matt Zeman, a metals trader at LaSalle Futures Group in Chicago believes that the difference between interest rates on euros and dollars is paramount, leading him to conclude that, “Traders are looking at the difference between rates. You’ve got to believe that people are going to step in and buy gold right now.”

Source: Precious Metals Surge

According to the paper: “Questioned about a possible rise which would go to $200, the minister did not rule out this eventuality, explaining that this rise is indexed from now on to the fall in the dollar or to the rise in the dollar.”

Peak Oil expert Byron King was ahead of the curve on the role of the dollar in pushing up oil prices. Last week Byron wrote this in his Energy and Oil blog. “A declining dollar hurts all Americans, and every dollar holder in the world. Call it ‘Battered-Dollar Syndrome.’ A declining dollar works against long-term investment. The late economist Kurt Richebacher used to say, ‘A declining currency destroys capital.’ Still, somebody must think it is OK to devalue the dollar, because that is one of the key drivers behind the rising price for oil.

“The world oil supply has become very tight. Demand is rising. The price for oil would ordinarily be going up to clear the market. But with all the ‘extra’ money creation coming out of the US Fed, oil prices are going up even faster. And I should add that just the expectation of loose money is also inflating the price of oil. There is probably $15-20 worth of ’speculation premium’ built into every barrel.

I was in Houston last fall, when the price of oil passed $90 for the first time. I was in the company of T. Boone Pickens, who said, “It’s going through the roof, isn’t it?” Then Mr. Pickens added, “We’ll see $100 oil before we ever see $80 oil again.”

Really, in the past six months or so, it has been roof after roof after roof. We had better find a good roofer and put him on retainer.

Political Correctness, the Declining Dollar and the Price of Oil

After all, how many roofs are there? Maybe we should change the way we talk about the rising price of oil. How about using the famous old expression of the late comedian Jackie Gleason? He would clench his fist and say to his wife, “You’re going to the moon, Alice.” On reflection, that might be politically incorrect. Let’s not joke about a guy smacking his wife into lunar orbit. Not funny these days.

Battered-Dollar Syndrome

Then again, is it politically correct for the Fed and U.S. Treasury to follow a “weak dollar” policy? A declining dollar hurts all Americans, and every dollar holder in the world. Call it “Battered-Dollar Syndrome.” A declining dollar works against long-term investment. The late economist Kurt Richebacher used to say, “A declining currency destroys capital.” Still, somebody must think it is OK to devalue the dollar, because that is one of the key drivers behind the rising price for oil.

Here is a chart (right) that has been making its way around the halls of Agora Financial, courtesy of my colleague Chris Mayer. The chart tracks the price of oil against the ever-increasing money supply since 2001. In other words, as the amount of “money” has been growing (M3 on the chart), the price of oil has been rising. According to this chart, about 87% of the move in the price of oil can be explained by the increase in money supply.

A long time ago (in statistics class), I learned that correlation is not the same thing as causation. This chart helps explain what is going on. But there is more to the tale of rising oil prices. The U.S. money supply is growing, along with two other major developments. First, the demand for oil is skyrocketing around the world. Second, the world’s oil industry has reached a plateau in overall output. New output cannot keep up with depletion from older oil fields.

“Plateau, Stagnation”

Just the other day, for example, Leonid Fedun, a vice president at the Russian oil company Lukoil, held an interview with the Financial Times. Fedun said that last year’s Russian oil production of about 10 million barrels per day was the highest he would see in his lifetime (he is 52). Fedun compared Russia to the North Sea and Mexico, where oil production is declining dramatically. Fedun said that “the period of intense oil production [growth] is over” in the oil-rich region of western Siberia, the location of much Russian output. As if to confirm Fedun’s comment, Russian energy minister Viktor Khristenko said last week, “The output level we have today is a plateau, stagnation.”

Yet every time you look at oil consumption figures from places like China and India, the numbers are rising. Demand is up. Output is flat. And as Houston oil investment banker Matt Simmons likes to say, “Supply does not know demand.”

Prices Don’t Lie

So here is what is happening. The world oil supply has become very tight. Demand is rising. The price for oil would ordinarily be going up to clear the market. But with all the “extra” money creation coming out of the U.S. Fed, oil prices are going up even faster (this is what the chart above shows). And I should add that just the expectation of loose money is also inflating the price of oil. There is probably $15-20 worth of “speculation premium” built into every barrel.

When it comes to oil, prices don’t lie. We just don’t always like what they say.

Until we meet again,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Bank of America announced a nearly $2 billion write-down and a 77% decline in year-over-year profits this morning. The names and numbers in this crisis are becoming a blur, aren’t they? For armchair analysts like us, it’s getting a little annoying.

Still, net income for BoA rang in at 23 cents per share — barely half of what the Street expected. The company said it has ramped up “loan loss provisions” nearly sixfold, to about $6 billion.

“These results clearly did not meet our expectations,” Chairman and CEO Kenneth Lewis said in a statement. “The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance.”

Yeah, that’s right, it had nothing to do with your bad investment decisions…

But never fear, the S&P 500 and Dow each rallied in the face of a multibillion-dollar write-down from Citigroup on Friday . In fact, financials of all toxic investments led the way to nearly 2% gains in both indexes.

On the tech side, the uber-bloated Google surged some 20% on good earnings and took the Nasdaq with it, up 2.6%.

For the week, major indexes were up well over 4%, their most uppity week since February.

Earnings for Dow components American Express, Merck, McDonald’s, AT&T, DuPont, Boeing, 3M and Microsoft all come this week. Also, Yahoo, Apple, Hasbro. Mattel, Pulte Homes and UPS. Could be a doozy. But if the pattern holds, these stocks will all rally unless one or more of them declare bankruptcy… or worse. Losses in the billions are greeted as good news these days.

We’ll let you know if there are any entertaining surprises.

The Shanghai Composite fell another 4% on Friday.

The Chinese index is down about 50% from its October high. All of 2007’s magical gains? Poof! Gone. Sorry.

This is what $2.5 trillion in paper gains looks like… on the way up… and the way down.

“The correction in Chinese stocks was bound to happen,” says our Christopher Hancock , keeping his eyes peeled on the exchange there. “Every asset has an intrinsic value. What someone is willing to pay for an asset is another story. The price-to-earnings ratio has fallen on the Shanghai market to 35 times announced income, from a peak of about 70 times last year. But 35 times current earnings is still expensive.

“A fund manager in Asia I know says the risk stigma surrounding Asian investments still looms large — despite the fact that the world’s most risky assets at the moment are Western banks.

“Our Hong Kong recommendations offer much less risk than many U.S. blue chips. They maintain rock-solid balance sheets. They operate in one of the world’s most capital-friendly environments. Government policies that inhibit growth aren’t much of a concern, if any. They have bank accounts rife with money to spend in Asia… not America. And their diversity ensures that income streams aren’t tied to any one business in particular.

“We like our chances…”

Light sweet crude rose to new highs this morning. Three events helped:

*OPEC minister Chakib Khelil denied rumors that OPEC would soon increase production — assuming they could if they wanted to

*Nigerian rebels sabotaged a Royal Dutch Shell pipeline, reducing its capacity by about half a million barrels a day

*Then, a 150,000-ton Japanese oil tanker was attacked off the coast of Yemen.

Et voila… crude oil pops to $117 a barrel. If you’re keeping score at home, oil is up about 23% year to date.

As luck would have it, gasoline followed suit. AAA says gas hit a dizzying $3.50 this morning nationwide. That’s 63 cents higher than a year ago. You may want to subscribe to Outstanding Investments to help recoup some of the dollars you’re hemorrhaging at the pump.

“The new VeraSun Janesville facility is huge,” reports Kevin Kerr from his “Farm Tour 2008.”

The Maniac Trader in farm country… checking on his crops

This VeraSun facility will pump 110 million gallons of ethanol a year when it’s complete. The beast will devour 39 million bushels (over 2.1 billion pounds) of corn — doing its part to cause food riots in Egypt and across the Middle East.