A fresh wave of overnight buying lifted gold, silver, and oil once again amid continuing jitters regarding the state of the US financial system and the state of the Iranian nuke impasse. Four month highs were achieved in gold overnight (near $987) as the dollar touched the 1.60 mark against the euro for the first time and sank to 71.40 on the index. Oil continued very firm at just above $146 per barrel. The dollar lost ground against the euro despite the sizeable slump in German investor confidence to an all-time low. British inflation rose to nearly double the government's target.

Nearly one year after it became visible, the mortgage-induced credit crisis shows signs that bad news remains in various parts of the pipeline and it is keeping investors in all kinds of assets taking shelter under the commodity umbrella. As Marketwatch's Steve Goldstein aptly puts it this morning:

"As always, it comes back to housing, and the lack of a bottom for the American housing market creating global-shattering gyrations. It's a bizarre world where the fortunes of an aircraft maker in Toulouse [France] are largely determined by condo prices in Florida."

New York spot gold opened the Tuesday session with a further gain, rising $9.80 to $981.90 as participants awaited testimony from Mr. Bernanke. In one of the most difficult appearances he might ever face on Capitol Hill, the Fed chief would need to avail himself of some kind of Jedi mind trick in order to convince lawmakers that he is at once focused on fighting inflation and on damage control to the economy from the imploding real estate sector.

The gold market opened just as the dollar rose a tiny fraction to 1.5999 against the euro. Oil, however, continued to pile on gains, rising to $146.62 per barrel. Silver was up 28 cents to $19.37 while platinum shed %5 to $1996 and palladium gained only $2 to $451 per ounce. The noble metals appear to first want to hear from GM in the worst way. Large-scale, 11th-hour restructuring moves are expected from the automaker. Talk about being behind the curve. No wonder the bond market was (up to today) pricing in a 70% probability (however exaggerated that expectation really is) of GM's demise within a year.

Whatever Dr. B is likely to say, will be prime material for subsequent attacks from one camp or another. Should he ignore the more than 9.2% PPI figure that was revealed this morning, and say nothing about eventual rate hikes, the dollar could look back at 1.60 on the euro as a nice place to have traded at. Should he focus only on the current obsession with liquidity/confidence/growth/ he stands the same risk. If, on the other hand, he sounds another warning bell on prices rising and the need to combat them, then he will be accused of not doing his job of doing his best to maintain systemic stability. Master Yoda would be welcome in Mr. B's shoulder today. Stock futures were indicating a sizeable drop in the making for the day, as financial stocks continue to be bloodied by sellers. Some of them, naked short-seller. Naughty, naughty says WSJ blogger Heidi Moore:

"Short-sellers and rumors. In the popular imagination, you rarely have one without the other.

Short-sellers, who borrow money to make bets that a stock will drop, appear to be the agreed-upon villains of the current markets. If you put the problem into the context of law-enforcement forensics, it is time to suss out the short-sellers’ motive, means and opportunity. Of course, you can’t argue with their (profit) motive. (Unless you are against capitalism). But, since many people seem to agree that too many rumors are flooding the markets because of short-sellers, can or should you take away their means and opportunity?

Our question was prompted by a research report from David Trone, brokerage analyst at Fox-Pitt Kelton Cochran Caronia Walker, who suggested today that Lehman Brothers Holdings’ best hope of survival is to avoid the public markets completely. Trone endorses blocking short-sellers from brokerage sales completely: "We still believe that an emergency prohibition of short-selling in brokerage shares is imperative."

Trone made his case thusly: Until the current crisis passes, short-sellers wouldn’t be allowed to borrow and sell stock in the brokerage sector, including Lehman Brothers, Merrill Lynch and Morgan Stanley. These companies, unlike regular banks, have "the unique vulnerability of a type of company that doesn’t have hard assets–it's built on confidence," he said to Deal Journal in an interview. Rumors "create an artificial impairment of the business" because the same people and firms that react to the rumors are the ones that are doing business with Lehman. Trone envisions the restriction lasting as long as, say, the Federal Reserve discount window is open to the investment banks. When the crisis passes, the window closes and short-sellers can roam free once more.

"Desperate times call for desperate measures," Trone said. "When London was bombed, they had to turn the lights off."

Trone says the borrowing of the stock is a mechanical process that is tracked and is recorded and can be monitored. He reasons that, if you bar short-sellers from the brokerage sector, you would have a more balanced free market: "You’re free to sell the stock if you already own it. The true purpose is to have balance in the marketplace. Around 90% of the time the short-seller is taking that step based on the fundamentals of the company." That isn’t true in this case, Trone says.

Trone isn’t arguing for a general prohibition of the short-selling practice. There once were limits, contained in the so-called uptick rule that banned shorts from selling their shares while a stock was falling. That rule was in place from 1929 through 2007.

Still, his proposal is just one of several in discussion designed to tackle the apparent influence of short-selling rumors. For some, the ideal solution would be the enforcement of laws already in place concerning rumor mongering; technically, it is illegal to talk down a stock while profiting on its demise."

All eyes (ears) on the Bernanke testimony. Any additional shock news would clear the path to the $1000 / $20 targets for gold and silver. On the other hand, much still depends on oil and on the degree of cloudiness on the global crystal ball. May the Force be with you.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal