Baltimore – (TFN): All eyes and ears are on the Fed this week. With Bernanke in New York discussing potential new bubbles and the New York Fed getting heat for overpaying AIG’s many creditors, investors are having a tough time knowing exactly who to follow.

For those of you who hold up the “Fire the Fed” signs, move over. I am thinking about joining your camp.

First, the real bad stuff. According to Neil Barofsky, TARP’s special inspector general, New York’s Fed (under the leadership of Tim Geithner) failed to use its leverage as the top-banking regulator to tell AIG’s lenders to take less than they were owed.

Instead of taking an across-the-board “haircut” as Obama and Pelosi told us we all should, finance giants like Goldman Sachs, Merrill Lynch and Societe Generale said they want 100% of what they were owed.

The only holdout, UBS, said it would be willing to take 98%. But after tough looks from the guys from across the table, that offer was quickly rescinded.

According to Barofsky, the move cost the country billions of dollars and much, much more in confidence for the nation’s banking cops.

Thanks, Tim!

With that bit of news in today’s headlines, it is tough to find the confidence in some of the Fed’s latest plans to help pull the country from financial failure.

As the nation slowly recovers from last fall’s economic collapse, Bernanke and his troops at the Fed are now facing the difficult task of unwinding massive expansionary policies.

One trick discussed today is shortening the length of emergency loans from 90 days to just 24 days starting in January. It’s a pretty mundane move that will have little tangible effect on the markets.

But what could have a much larger impact, with much less transparency, is Bernanke’s recent discussion of paying interest on the reserves banks place with the Fed.

A popular move with many overseas central banks, the interest rates paid on reserves helps to establish a rate floor that regulators can gradually increase without raising overall interest rates.

Essentially, the move is a way of mopping up excessive liquidity without draining or lowering the water in a much larger pool of lending capital.

Like many things, the idea sounds great on paper, but so did letting the Fed negotiate with AIG’s trading partners and we now know how much that cost us.

Let’s face it. The markets like transparency and predictability. Anything less gives us what Friedrich Hayek called “malinvestment.”

As the Fed gets more and more creative in its efforts to boost the economy without creating deadly bubbles, transparency will go out the window.

Toss in growing political pressure from the folks from Washington and one thing is certain.

Anything the Fed does will cost you and I more money.

Platinum moved progressively lower in the overseas markets, but really hit the wall just after New York opened, falling $20 in an hour before going flat for the rest of the day and ending at $1115, down $32. Overnight, platinum has edged higher.

Silver suffered a precipitous drop, from $14.03 in the far East to $13.67 at the New York open, but amazingly it nearly clawed its way back into the green by day’s end, closing at $13.94, down 5 cents. Overnight, silver is sharply higher. (Click here for charts)

Though platinum got slammed, gold and silver both eased only mildly yesterday, which would probably have been expected as oil backed off and, more importantly, the dollar rebounded against the euro.

“Gold prices eased as risk appetite made a comeback and was seen as a hunger for stocks and certain currencies,” wrote Kitco’s Jon Nadler. He noted that, “Demand from exchange-traded funds “has gone into drought mode since reaching a record high last month.”

True enough. Holdings of the SPDR Gold Trust (NYSE:GLD), the biggest exchange-traded fund backed by bullion, went gangbusters through last month, reaching a record of almost 1,128 metric tons (36.27 million ounces) last month.

Since then the vaults have been lightened, so that now 1104 metric tons (35.5 million ounces) remain.

“The safe-haven play is becoming less relevant at the moment, largely because we are beginning to see more positive economic signals,” said David Wilson, an analyst at Société Générale in London.

But perceived positive economic signals, coupled with the precariousness of world politics, has many analysts thinking as gold bulls.

This week’s trade in gold is expected to progress in a generally higher direction, with prices potentially reaching $935.80 an ounce,” wrote Tom Pawlicki, of MF Global (NYSE:MF). “Support will come from worries that inflationary pressures are growing, from increased tensions in northwestern Pakistan, and from Venezuela’s seizure of oil assets.”

Source: Gold, Silver Modestly Lower

Nickel crashed from the late pre-dawn hours to late morning, but then moved up sharply to regain positive territory and close at $5.3093/lb., up 5½ cents. Zinc was up steadily all day, ending at $0.6705/lb., up 4½ cents. Aluminum had a good day, adding a penny and a third, to $0.6762/lb., while lead was strong as well, tacking on just under 3 cents, to $0.6271/lb.

Copper led the industrial metals higher, prolonging its recent strong run to a 2-week high as the somewhat upbeat economic numbers combined with continually dwindling supplies to give the metal a shot in the arm.

Inventories monitored by the LME were off sharply again yesterday, falling by 7,075 metric tons, to drop below the 400,000 mark for the first time since January 21 and end at 398,700 tons. Since late February, stocks have shed some 140,000 tons, about 25%.

In addition, inventories held in Singapore and South Korea were the lowest since 2005, showing that “Chinese buying has been particularly strong this first quarter,” said Leon Westgate, of Standard Bank Group in London.

“To me, it all suggests that the stars are starting to align for a global recovery,” said Bart Melek, of BMO Nesbitt Burns in Toronto. “We certainly look like we are bottoming,” he added, projecting the U.S. economy to experience positive growth by as early as the third quarter.

Jesper Dannesboe, senior commodities strategist Société Générale, noted particularly that, “The ISM data that came out was much better than expected, especially the new orders component, strongest since August 2008 … The manufacturing data gave the market a real boost in the afternoon.”

Amid the euphoria, a damp towel was thrown by Daniel Brebner, head of commodity research at UBS AG (NYSE:USB) in London, who said that, “China has been the only buyer really in the copper market.”

Brebner predicted that, “You are going to see less demand from China in the second quarter,” and said that copper is likely to fall 20% over the next three to four months.

Source: Base Metals Surge

The euro got a boost after the Markit euro-zone purchasing managers indexes, which are among the most closely-followed leading indicators, rose to six-month highs.

Economists noted that the readings still indicate a sharp contraction in activity. But they offered hope that the second-quarter GDP may contract at a significantly slower pace than that seen in 4Q08 and 1Q09.

Domestically, the day’s numbers were uniformly ugly, beginning with unemployment. The Labor Department reported that first-time jobless claims rose to 640,000 for the week ending April 18. That’s yet another record high.

Then the National Association of Realtors reported that sales of existing homes and condominiums fell 3% in March to a seasonally adjusted annual rate of 4.57 million units, with distressed sales now accounting for half of all sales.

Trying to put the best face on, Stephen Gallagher, chief U.S. economist for Société Générale, wrote that, “The report was slightly weaker than anticipated, but the data remain consistent with tentative stabilization in housing demand on the back of rising affordability.”

Source: Dollar Drops Against Euro

“Let Rome in Tiber melt…”Rome did melt into the Tiber. The place was invaded by barbarians…the
population sank from over a million to under 100,000. And when the city
was “rediscovered” by tourists with a sense of history in the 17th
century…there were goats grazing amid the ruins of the ancient city.

There are people who believe that power, progress, and wealth are always
on a rising slope. Let them come to Rome!

Roman property was a sell for a period of probably a thousand years…from
the peak of Roman power, around 100 AD, down to its nadir, sometime after
the Renaissance.

We have come to Rome on your behalf, dear reader. We poke through its
dusty ruins looking for the future. There are more ruins to come, we
think…

(Oh, the labors we undertake for your sake, dear reader. Last night,
trying to get in the spirit of the place, we drank nearly a whole bottle
of wine from Abruzzo. Today, we will go with a Tuscan variety…)

But let us first look at the news:

“Does the US matter any more?” The question comes to us from the head of
research at Societe Generale. Looking at the data from the International
Energy Agency in Paris, reported in this space yesterday, he noticed that
now China, Russia, India and the Mideast use more oil than the USA. What’s
more, energy use in America is going down…while it is skyrocketing in
those other countries. Thanks largely to growing demand in the emerging
markets…and the falling value of the U.S. currency…the price of oil
hit a new record yesterday – at $118.

The United States matters less and less to the oil market – but is still
very important, of course.

We have guessed that the United States of America is a sell. Its money,
its paper, its property, its labor, its stocks, its industries, its debt –
sell them all.

We don’t mind saying so…still, we don’t like to hear the foreigners say
it. A man may have noticed the swelling with his own eyes; still he
doesn’t like to hear a stranger say his wife is getting fat. So when the
Financial Times comes out with an article saying the same thing, it sticks
in our craw.

At least the FT is nice enough to use a euphemism. Instead of seeing the
United States on its knees, it sees the “end of unipolarity.” As we all
know, when the Soviet Union threw in the towel in 1989, the US was the
world’s undisputed hegemon. America was on top of the world – with no real
competition. It was a “unipolar” world, as the FT would put it. The stock
market boomed. The dollar rose. America’s chest swelled with homegrown
pride and the entire world’s credit. And by the late ’90s, President
Clinton summed it up: “things couldn’t get better,” he said.

He was right. They couldn’t. So, they got worse.

No nation can stay on top of the world forever. But when you have no
competition, you can’t rely on others to bring you down; you have to find
ways to destroy yourself. For that job, America found just the men it
needed just when it needed them most – Alan Greenspan and George W. Bush.
What these two men accomplished is probably one of the greatest feats in
human history. They took the richest, most powerful country the world has
ever seen and, in the space of only five years, practically ruined it.

First, says the FT article, the soaring price of oil had the effect of
transferring trillions of dollars from the biggest oil user – the United
States – to the oil producers, notably the Arab states and its former
enemy, Russia.

Second, the federal government went from a budget surplus over $100
billion in 2000 to some of the largest government deficits ever recorded.
Those, along with huge current account deficits equal to 6% of GDP,
changed the United States from a chooser into a beggar – heavily reliant
on foreign money.

The FT doesn’t mention it, but America’s spending spree had another
important effect – it lit a fire under its new commercial rivals.
Americans spent absurdly – which caused the Chinese to build factories,
learn skills, and pile up a mountain of U.S. dollars.

Professor Paul Kennedy practically foretold all this when he noted that
super-powers tended to “over-reach.” But even he couldn’t imagine how much
of this over-reach would be caused by so few people in such a short period
of time. Alan Greenspan reached for the stars in the early 2000s. His
emergency-level Fed rates triggered an explosion of spending, borrowing
and leveraging…which has now blown up in our faces.

And the Bush Administration took on a war that has proved to be costly
beyond anyone’s imagination. The total price of the war may come to $1
trillion or more – at a time when the United States already needs to
borrow $2 billion per day.

Obviously, more prudent, more cautious leaders would have prevented these
catastrophes. They would have read history…reduced expenses…raised
interest rates…pulled back the troops…and saved money. But sensible
leaders do not make history. Fools do. People reach for glory. Then, they
over-reach.

Société Générale has said that the global gold miner hedge book had shrunk to its lowest level in 16 years. This means that most miners are not hedging their positions to protect against price falls.

The hedge book stands at just 835 tonnes, which is the lowest level since 1992, and is equivalent to 34% of 2007 production levels. De-hedging in the fourth quarter was 72 tonnes. For the whole of 2007, dehedging came in at a record 446 tonnes.

It was revealed this morning that investors bought 72 tonnes of bullion through gold exchange-traded funds in the first quarter of 2008, bringing the total to 943 tonnes.

The gold price averaged $924.83 an ounce in the first quarter, around about where it is now

Gold remains a buy

Tell the truth, Mr Naimi

The oil price continues to hit highs this week on supply concerns.

WTI futures hit a new all-time high overnight of $119.90, before retreating to nearer $119. It looks like I may soon have to upgrade my view to come in line with legendary oil investor T. Boone Pickens’ prediction of $125.

Opec has said that there is no shortage of oil in the world market – but they would say that, wouldn’t they. It is becoming obvious that Opec are at the limit of their pumping ability.

Comments over the weekend for Saudi oil minister Ali Naimi were manna from heaven for the Peak Oil crowd. Apparently, Saudi Arabia has put on hold plans to increase long-term production capacity from its oil fields because there isn’t the demand.

This is patently a bunch of utter nonsense. With the oil price at a record high, surely they would want to cash in?

I reckon the main reason that they are not going to expand production from 12.5m barrels a day to 15m barrels a day is because they can’t. They don’t have the infrastructure and they don’t have the oil. Yet again we have more Opec smoke and mirrors.

You can, however, see the real situation if you looks at the futures strip price. It has now hit $114.675.

Oil is still a buy as well.

Regards,

Garry White

PS: should you know anyone else that you believe will find my musing of interest please forward this link so that they can sign up for the service.

PPS: I also write a newsletter each month called Smart Commodities UK which expands on the views expressed in Garry Writes and makes specific recommendations in the resource, infrastructure and biotech sectors. To discover more click here.

The euro is now poised to test $1.60, a technically and psychologically critical level.

A slew of numbers was released yesterday. The Labor Department reported that the consumer price index rose 0.3% in March, in line with economists’ expectations. The closely-examined core CPI, which excludes energy and food, rose by 0.2%, also matching estimates.

That inflation wasn’t higher is significant, says Stephen Gallagher, economist for Societe Generale. “Concerns of rising inflation remain high, but recent core gains remain moderate,” Gallagher said. “The evidence of significant pass-through from food and energy prices is still low. If inflation expectations are kept under control by such evidence, then the Fed has a freer hand to cut rates.”

Separately, the Commerce Department said housing starts plunged 11.9% in March to a seasonally adjusted annual rate of 947,000, the lowest level in 17 years. Building permits also fell to a 17-year low.

In the one bright note, the Fed said output at the nation’s factories, mines and utilities rose by 0.3% in March, the fastest pace in four months. That was far better than economists’ expectations that production would fall by 0.1%.