From Ed Steer:

The gold market was obviously open in the U.S. on Martin Luther King Day. But not much happened except a continuation of the decline that began at 11:00 a.m. in London on Monday...which lasted until 3:00 a.m. New York time yesterday...shortly before London opened on Tuesday morning. This decline managed to shave about $18 off the gold price during that period of time.

But starting at that 3:00 a.m. time, gold went on a nice little tear...through the London open, and lasted until shortly after London closed for the day...11:00 a.m. Eastern. Three attempts were made to corral the price...the first at 7:00 a.m., the second at around 8:45...and success came shortly before 11:30 in New York. Physical selling was reported to be the cause...this tidbit from the usual NY commentator. By the time that Globex trading was through at 5:15 Eastern time yesterday, the gold price was back under control...for the moment.

Silver's ride on Tuesday was very similar to gold's. It was obvious that the boyz weren't going to allow it to rise much either...although it certainly gave it the old college try. By the end of the day all the lovely gains in the gold and silver shares had pretty much evaporated, with the HUI even being down on the day. Globex gold volume was extremely heavy yesterday...almost a record...with volume (net of switches) around 180,000 contracts.

Despite the 'wonderful' day on Tuesday (to go along with Friday's), the gold price still isn't out of the woods yet. It should be obvious to you that there is a gargantuan 'gold war' going on out there with the Fed (acting through select bullion banks...primarily JPMorgan) going short against all longs. And it's been a success as far as the Fed is concerned. Back in 1981, the gold price hit $850. That's where it is at this writing...28 years later. The Point and Figure chart looks promising, but we need a substantial breakout from here to turn this chart around...$895 looks like the magic number. Here's the chart...updated from Friday.

click to enlarge

Gold open interest on Friday was only up 3,937 contracts to 317,735...which is not a lot considering the $30+ move that gold had. A rising gold price with a small open interest increase means one thing...only a handful of players were prepared to go short against these longs...something that did not happen on Tuesday, unfortunately. In silver, o.i. was up a more substantial 1,543 to 87,023 contracts. I would expect both Monday's and Tuesday's o.i. numbers will be combined when reported later this morning. Considering the volume...gold in particular should be a rather large number.

In gold news, here's a story posted at expressindia.com...Mumbai..."(gold) demand has fallen to 50-100 kgs per day from 1-2 tonnes per day in August 2008 due to a lack of buying interest and higher prices, Bombay Bullion Association (BBA)'s President Suresh Hundia told PTI here." Reuters..."On Friday, JPMorgan downgraded Goldcorp, Kinross and Agnico-Eagle to neutral from overweight, and Pan American Silver to underweight from neutral." [One should expect nothing less from JPMorgan – Ed] And the Bank of Russia reported on their website yesterday that they had increased their gold bullion reserves by another 300,000 ounces in December...and now sit on 16.7 million fine troy ounces of the stuff. Despite all their currency problems, they're still smart enough to know that they should turn worthless paper into precious metals at every opportunity. So should you!

In 'other news'...where does one begin! It should be obvious to anyone with a pulse that the entire world's financial system is imploding right before their eyes. The Royal Bank of Scotland and the Halifax Bank of Scotland...as well as Barclays...are at the centre of a U.K. banking and monetary implosion...which followed through in New York yesterday, with JPM, BAC, C, GS and WFC getting absolutely blown out of the water. The Guardian (Brussels) “Europe's car industry faces collapse without rapid intervention from EU governments." [Note the photos of acres of unsold cars from all over the world. Click here. – Ed]. Bloomberg (Singapore)..."Asian central banks will cut interest rates and pursue competitive devaluations of their currencies in the first half of the year." Bloomberg (Singapore)... “ 'Time to Sell' Treasuries, Biggest Korean Fund Says"...A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said." Bloomberg (Madrid)...Spain's Credit Rating Dowgraded by S&P as Slump Swells Budget Gap." Bloomberg (Moscow) "Ruble Drops to Pre-1998 Crisis Low on 6th Devaluation This Year."

Because of the long weekend and the international banking crisis, I've got four stories today. The first is the usual weekly essay from silver analyst, Ted Butler. He reflects on silver's supply, which may be a lot less than is generally thought, less even than Butler himself has thought. His commentary is headlined "Real Silver Availability" and the link is here.

The next story is from last week, but it came out too late for Saturday's commentary. Hank Paulson did not leave his post without a final shot at China. In this Bloomberg story, "a Chinese central bank official attacked reported comments by U.S. Treasury Secretary Henry Paulson that China’s high savings rate helped trigger the global credit crisis." Paulson's logic is similar to that of a teenager pleading to a judge for clemency because he is an orphan after he killed both of his parents. The story, entitled "China Central Bank Attacks Paulson's 'Gangster Logic'...and the link is here.

From The Telegraph in London comes this story entitled "Help Ireland or it will exit euro, economist warns"..."If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece," said Mr. McWilliams, a former UBS director and now prominent broadcaster. McWilliams has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone's southern belt." The link is here.

In a story reprinted from the Economic Times in London, the heading reads "U.S. and U.K. on Brink of Debt Disaster"..."The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population." The story is linked here.

The markets have more power than all the tin-horn politicians on the planet earth. The markets have more power than the Fed and all the central banks of the world taken together. Remember, the Fed's inflation and interest rate manipulations will work only as long as the markets go along with the Fed. The minute the markets see that the Fed's machinations aren't working, then we'll get our first taste of true deflation, and the Fed's power will have evaporated. - Richard Russell

Two other stories that didn't make the cut today were separate stories out of England and the USA about how both country's central banks were about to turn on the printing presses and monetize their respective debts. It's their only way out now...unless they want to revalue the gold price ..and it doesn't look like that's in the cards at the moment. John Exeter's inverse liquidity pyramid is posted above. We've gone from "Small Business" to "Paper Money" in an unbelievably short 18 months...and now the Fed is trying its best to prevent the final resolution to gold. They're fighting a losing battle. Now it's only a matter of when...and how high. Buy physical gold and silver and take possession, as I get the distinct feeling that we're nearly out of time. And it might be worth considering taking a few months’ worth of living expenses out of the bank while you're at it.

See you on Thursday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.