Dr. Hoenig to the ICU, STAT!

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Good Afternoon,

Gold prices turned lower during the mid-week session, as the US dollar took another fairly sizeable forward step on the index, bolstered by inflation combat comments from K.C. Fed Pres. Thomas Hoenig and by credit crisis related observations from the Treasury's Henry Paulson. The greenback was approaching 60-day highs on the index (@ 73.60) and tomorrow's ECB meeting is expected to yield no change in interest rates across the Pond (which could lift the greenback a bit further). Oil prices climbed over $123 per barrel, but did not manage to stimulate higher gold values today.

India ushered in the festival of Akshaya Tritiya and hopes were high that the next day or two will prove that locals are more interested in gold at current levels than they have been during Q1 of this year. The very latest from Reuters indicates that sales are off to only a moderate start (though we will have to wait a day for a full tally): "There is not much buying in the wholesale segment, but the retail side is good," said a dealer in a large private bank in Mumbai."

New York spot bullion traded as low as $862.70 in the morning hours, and subsequently rebounded to near $870 per ounce, showing a $6.00 loss while participants digested the Q1 productivity (better than expected), unit labor costs (rising much less than expected) and mortgage applications (up 15.6% week-to-week) data. Given a just a few of the most recent background developments (esp. the dollar) the tilt in the market once again points to a retest of the $845 area as the more likely occurrence. Silver fell 21 cents to $16.63 while platinum managed to eke out a $1 gain to $1961 and palladium shed $8 to $424 per ounce.

What's behind the latest show of resilience by the dollar? Forbes indicates that:

"Kansas City Fed President Thomas Hoenig said late on Tuesday that [U.S. interest] rates will need to be raised in a timely way as the central bank grapples with a serious threat of inflation, prodding the euro towards a five-week low versus the dollar. Analysts said that Hoenig's statement, along with a string of surprisingly strong U.S. economic data, was fuelling the view that U.S. rates may have bottomed out at 2 percent, following a series of aggressive rate cuts over the past few months.

"Though he's not a voting member, Hoenig's comments suggest that the Fed might need to tighten rates because of inflation pressures," said Adam Myers, market strategist at Credit Suisse, adding that this was supporting the dollar. Also helping the dollar were comments from U.S. Treasury Secretary Henry Paulson, who told the Wall Street Journal in an interview that "the worst is likely to be behind us" from the crisis spawned by surging defaults on U.S. home mortgages."

Such shifts in attitude and louder jawboning by U.S. as well as European officials do not appear to perturb the perma-bulls as they continue to see a one-way street for the dollar, interest rates, as well as for Fed policy. We would remind them of previously successful mop-up operations by the central bank, once the economic engine was fired up. What comes down, can also go up, for obvious reasons. The dollar is has not yet secured its release papers, but it has been placed into the recovery room of the rehab wing.

Other background factors making their way onto the front of the stage these days are giving rise to worries of a different kind. The kind that spells: intervention. The complex but clearly distorted situation in oil and agriculturals has analysts and policy makers (not to mention election candidates) studying the current reality and coming up with explanations and/or solutions. The implications of what they say, in many cases, point to some possible type of active intervention in one or more of these markets. It could be only a question of time. While there is no realistic chance that Mrs. Clinton will be able to dismantle OPEC (or Mr. McCain bomb it), the rhetoric has been turned up quite a bit since the daily oil headlines have been printed with extra large-sized fonts. Here is a sampling of recent findings, as relayed by Marketwatch and UPI Asia:

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"The Federal Reserve's seven interest rate cuts in as many months, which helped protect the U.S. economy from the full effects of the housing crisis and the resulting credit crunch, also contributed to the spike in raw material costs that has been felt across the globe, experts said. In short, the integration of world markets means that subprime mortgage fraud in Las Vegas is linked to food riots in emerging economies.