Hiking Boots Recommended

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Good Afternoon,

Wednesday's gains in gold were easily undone overnight, and prices fell sharply for most of Thursday's session as the market's roller-coaster pattern continued amid the high-noon standoff developing between the Fed and the US dollar's morticians. Depressed by a surging (up .64 to 73.87 on the index) US dollar and an initial $3-$4 slide in crude oil the precious metal gave back all of yesterday's gains and fell to a low of $856.50 in active trading this morning.

Strong anti-inflation rhetoric from the Fed's Mr. Plosser (he said "interest rates will have to rise) augmented expectations of US interest rate hikes and pushed their possible date of enactment closer to the present. Adding to the dollar's rise were reports expecting retail sales in the US to show a decent gain in the wake of stimulus cheques which were mailed to US taxpayers finding their way into store cash registers in lieu of bank savings accounts, as some had expected.

New York spot trading was last quoted at $870 bid per ounce, as players took cues from a recovering crude oil price in the hour after lunch. The futures session ended with a near $11 loss on the day. The gain in retail sales (up 1% to the strongest level in six months) adds to the case being made for a hike in interest rates. Initial jobless claims moved higher, adding 25,000 individuals to those filing for benefits and import prices rose 2.3% due largely to oil values. Two heads rolled at Lehman today, but the news barely moved the tilt meter in the markets (ex. Lehman shares which continued under pressure after a brief rise).

The US dollar broke through the 74 level shortly after the retail numbers hit the wires, but spent the rest of the session near 73.90 on the index. Silver was off 34 cents to $16.50 while platinum lost $17 to $2026 and palladium rose $11 to $436 per ounce. Bond and treasury markets are now pricing in a 125 basis point rate hike by this time next year, and a 50 basis point increase by Q3/Q4.

We had cautioned that this was going to be an especially intensive Fedspeak week, and it appears as though its spokesmen have hit every mike at every podium with an "Is this on?" test before talking very emphatically about inflation combat. Such jawboning has been the subject of several tests by now (such as we saw last Friday and yesterday) but looks like it is gaining traction with investors, at least as evidenced by the latest price metrics in commodities and currencies.

Speaking of jawboning, we bring you relevant statements from and address by Federal Reserve Bank of St. Louis President James Bullard (as quoted on Bloomberg):

"Policy makers should act later this year to prevent a jump in the inflation rate anticipated by the public that would threaten the central bank's credibility."

"The Fed's current low target interest rate ``might generate inflationary problems,''

``If we don't take action and stay on top of the situation,'' the rise in prices will probably accelerate."

``After a 10-month period in which the dominant policy concern has rightly been the state of financial markets, policy can begin to address pressing inflationary concerns during the remainder of the year.''