BANKS FAILING STRESS TEST

Gold rose as high as $916.70 in the futures contracts while silver was up to $13.56. Some profit-taking settled in and in the first half-hour of trading, gold was up $9.30 and silver up $.38. The dollar is down 6 basis points at 83.63. Oil had been as high as $54.83 overnight, but has pulled back to $53.92 a barrel, down $.56.

The metals are being supported by the expectation that the banks are going to have to raise additional money as a result of the stress test. The Wall Street Journal reported that as many as 10 banks may have failed the stress test and need to raise additional capital. There is also a great deal of talk among Fed Governors about whether any bank is too big to fail. They seem inclined to allow at least one of the big banks to go into a bankruptcy reorganization or receivership. We will have the decision on that by Thursday, as those results are released.

We are currently seeing some additional safe haven demand for gold. John Nadler said, "For now the story has legs and is fueling renewed safe haven purchases." As gold moved up again, technical buying came into the market, triggering buy stops, which helped to push gold higher. I think there is also a growing recognization that inflation is likely to be severe over the next several years. Inflation will clearly be beneficial for the markets.

Fed Chairman Bernanke spoke to Congress this morning and told them that business investment is extremely weak. He also said that conditions in the commercial real estate market are poor. However, on a positive note, he said the recession appears to be losing steam with a bottom likely at the end of the year. But he said that recovery will probably be slower than usual and warned that the unemployment rate may stay high for a time, as businesses remain cautious about new hiring. He also pointed out that financial conditions and markets remain under considerable stress.

As I stated yesterday, it would appear likely that the bottom will be prolonged and that inflation will be rising while the economy remains weak. Therefore, many analysts believe the Fed will not be able to tighten monetary conditions enough to hold back the forces of inflation. It is impossible to create as much debt and print as much money as our government and the Fed have been doing, without producing rising inflation pressures. Warren Buffet said this weekend that inflation will be the real problem ahead.

As a consequence, some of the smartest players in the world are accumulating gold at these levels. For example, Jeffrey Rhodes of International Assets Holding Corp., said gold prices may surpass $1,200 an ounce this year. Philip Manduca, who has been one of the most successful forecasters and money managers in the business said he sees gold at $1,000 an ounce in the near future and he sees gold at $2,000 by the end of next year. Other forecasters from Fortis Bank to Merrill Lynch to Citibank and others likewise hold high expectations for the gold price over the coming twelve to eighteen months.

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