When the U.S. Sneezes...

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Good Afternoon,

As trading resumed for the week, bullion prices slid sharply lower, first aiming towards the $915 level following a more than four dollar drop in crude oil to near $141.00 a barrel. A buying-induced recovery before futures closing brought the metal back very nicely to near $930 but those gains did not prove to be long-lasting. The US dollar first progressed towards 73.10 on the index, but later retreated to near 72.70 . This is shaping up as a busy week, complete with G-8 meeting results, as well as two appearances by Dr. Bernanke. Before we hear anything from Dr. B, we have already heard from his colleague, Janet Yellen who said today in a speech in San Diego that: " U.S. economic growth will ``pick up'' next year, and the central bank ``will not allow a wage-price spiral to develop.'' Guess we might know how that could be accomplished...

New York spot gold was trading on the downside at last check, quoted at $923.60 per ounce, off by $10 on the day, as the speculative 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. Today's comeback could at least partially be attributed to the still visible undercurrent of credit worries out in the marketplace. Prices appear to be reasonably well bid in the mid $910's but resistance also looms overhead, at $936 as a first level. 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 48 cents to $17.78 while platinum lost $52 to break down to a one-month low of $1957 and palladium dropped $17 to $444 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 the San Francisco Chronicle's Kathleen Pender. 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:

Q: Are you still worried about inflation?

A: I am concerned that we have a very accommodative policy that will end up yielding an uncomfortable increase in inflation. I do not believe we are going back to the (hyperinflation of the) 1970s.

(Monetary) policy is very responsive to credit market turmoil. The credit market is directly related to the housing problem. That is going to continue unless we have an increase in the inflation rate.

Inflation shows up first in the prices of goods such as food and energy, which have long supply lags. That's exactly what we're seeing. We also have depreciation of the dollar, which is also consistent with leading-edge inflation.

Q: Should the Fed be doing more to fight inflation?

A: The Fed is in a very difficult situation. It would have been easier if rates hadn't been taken down to 2 percent (from 4.75 percent since September). I'd argue that we should reverse some of those cuts (perhaps 1.5 percentage points) on the grounds that those were emergency cuts to deal with credit market disturbances. With the credit market stabilizing, it's time to take that back.

Q: Will the Fed's next rate move be up or down?