Sailing Tips from Mr. Poole

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Good Morning,

As trading resumed in Asia overnight, bullion prices slid sharply lower, pointing towards the $915 level following a more than a two and a half dollar drop in crude oil to $142.75 a barrel, and amid still sluggish local demand from physical buyers in India despite the drop in values. The US dollar progressed towards 73.10 on the index, and was hovering near 1.566 against the euro as the new week got started. A busy week it will be, indeed. Complete with G-8 meeting results, as well as two appearances by Dr. Bernanke. On the geopolitical front, the weekend has already yielded Iranian counter-proposals to the latest package of incentives it has received from the West, and they were as oblique as ever, while their phrasing was loaded with peaceful rhetoric.

The West basically concluded that, based on its latest intelligence reports, Iran has now resumed work on projects that can only lead to the development of warheads as opposed to power generation. The deadlock continues. Stalling appears to be the name of the current game. Worrying about what might happen in the region remains as intense as it has been of late. In the latest wrinkle on the matter, Russia has sided with the US to block Iran's quest to enrich uranium up to weapons-grade quality.

The G-8 are scheduled to commence their summit today over in Japan, while the BoE has its own rate decision to make in an economy that resembles that of the US more and more, in many respects (UK manufacturing unexpectedly contracted 1/2% in May, then there is housing, inflation, etc.). As usual, the economic calendar will offer more excitement in the way of potentially market-moving data from Wednesday onward. Finally, aside from some vacationing players, the markets will be feeling the effects of full participation from speculators trying to make another buck ( whether on the long or short side) as the third quarter gets underway in earnest.

New York spot trading opened on the downside, with gold losing $14.00 at $919.70 per ounce as the focus shifted back to the oil market and dollar values and as the trade looked for additional new drivers in geopolitics and the US economy. Prices appear to be gravitating back towards the mid $910's as dollar vigor following the ECB rate hike appears to be more than a passing phenomenon. British and German drops in manufacturing indicate contagion from the US possibly spreading over to Euroland one year later, and could thus keep the euro in check for the second half.

"While the dollar may remain somewhat vulnerable against the euro in the near term, we continue to believe that the dollar is grossly under-valued and should perform better over the longer term against the majors,'' London-based Morgan Stanley currency strategist Stephen Jen said on Friday. ``It is the oil price issue that will likely cause the emerging- market dominos to topple over. Euroland will likely follow.'' Silver fell 40 cents to $17.85 while platinum lost $50 to break down to a one-month low of $1958 and palladium dropped $14 to $452 per ounce as apprehensions about the automotive sector's health and its effects on demand continue to swirl in the noble metals complex.

Apprehension of a related nature have also resurfaced in the gold market, as reports from India once again indicate that demand remains extremely price-sensitive. According to Bloomberg, " Gold imports by the world's biggest buyer of bullion, slumped 68 percent from a year earlier in June, as high prices eroded demand from jewelers and investors."

"Purchases declined to 24 metric tons from 74 tons, according to provisional data compiled by the Bombay Bullion Association Ltd., which represents 230 trading companies. Gold advanced 41 percent in the past year, touching a record $1,030.70 an ounce in March. The metal traded at $933.25 at close of trade yesterday. Prices for immediate delivery averaged $697.09 an ounce last year. India imported 722 tons of bullion in 2007, less than the 1,000 tons estimated by the World Gold Council at the beginning of the year."

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Today's focus story is an interview granted by former St. Louis Fed President William Poole to Axel Merk, president of Merk Investments. At the end of the day, the interview reveals quite a level-headed individual who shares more than a few concerns with some of his remaining Fed colleagues, as well as with economic scholars studying the current high-wire act being performed by the Fed. A few highlights of the recent Q & A follow, courtesy of The Chronicle from my former hometown - Herb Caen's "Baghdad by the Bay":