If Monday's action was led by the Shanghai sell-off, Tuesday's early market developments had all the markings of the Berlin bounce. German investor confidence rose to its highest level in three years this month, following readings of an expanding economy during Q2. No V-shaped recovery, this. Good enough for a pop in the DAX and other markets, that's for sure. And, of late, any time the equity markets either swoon or jump back to life, so does gold; in a cheek-to-cheek-close tango. This morning was no different.

The number of nations appearing to be finally making an exit out of the dark woods of 2007-2009 is growing, and along with them, the levels of confidence among global investors. France and Japan posted 'almost all-clear' economic flags last week. Prayers for no more macro-level surprises accompany every investment decision that is even slightly more than a pure speculative toss of the dice. Read: this is still recently cooled lava and treading lightly is beyond well-advised.

Gold prices rebounded by about 0.36% early on Tuesday, motivated primarily (again) by a dollar whose three-day long wind in the sails was diverted by a rise in the euro after the aforementioned German confidence level readings. A 75-cent gain in crude oil added support to today's bounce as well. However, just like the big picture recovery is still fuzzy around the edges, gold's comeback following its worst slide since spring looks somewhat like a toddler's first steps. There is much strengthening still required, and balance still to be gained. And, yes, there will be a few sit-downs in the interim. For the moment, gold investors appear to be rooting for the same thing that stock buyers are hoping for: banishing the threat of deflation and opting for the (market) 'benefits' of inflation.

New York spot dealings opened with a $3.70 per ounce gain in gold. The yellow metal was quoted at $936.90 on the bid side, while players eyed he next delicate steps in the dollar-oil-stocks-gold dance, one that -as we said- normally does not include stocks in the picture. Silver was grappling with the task of maintaining the $14 level at the open, adding one penny to start at $13.99 an ounce. Platinum lost another $2 and opened at $1219 - that's nearly $100 lower than what the noble metal traded at, as recently as the 5th of the month. Palladium rose $1 to the $267 per ounce level.

The lack of growth in the gold ETFs continues to remain a concern for participants. It simply cannot be that every would-be pension firm or spec fund is gone fishing since early June. Confidence (or lack of same) in further and/or significant price gains beyond the mid $960s has to be part of the picture here. So does the utter disaster that Indian gold buying is turning out to be for the current year. There is no lipstick possibly thick enough to apply to this one, and even then it could not cover the cracks that have formed. Reuters paints the following picture, you draw your own conclusions:

India's July gold imports slumped by two-thirds to 7.8 tonnes from a year earlier as high prices dented demand in the world's biggest market for the metal and a drought in some parts of the country could keep buying low, the head of a trade body said on Tuesday. Monsoon rains, crucial for India's economy, have been 29 percent below average since the start of the season on June 1 and could hurt farm incomes in the hinterland and drive prices of food items higher.
People don't have money enough for essentials, why would they buy gold, said Suresh Hundia, president of the Bombay Bullion Association, who had earlier estimated imports at 8-10 tonnes. Demand for gold usually rises during the festival months from August to November, when annual bonuses and weddings spur purchases. Sales have picked up in August but they are not very robust because of firm prices, Hundia said.
High prices are also affecting demand. Gold on the Multi Commodity Exchange of India Ltd was at 14,879 rupees ($305) per 10 grams at around 0800 GMT, up 29 percent on year. India, the world's biggest consumer of gold, had imported 24 tonnes in July last year and a total of 396 tonnes in 2008, the Bombay Bullion Association data showed. Imports from January to July have plummeted 56 percent to 71.6 tonnes, compared with the same period last year, it showed. Prices were too high, said Hundia, explaining why imports fell last month against his estimates of 8-10 tonnes.
Mr. Hundia is not only impeccably honest, he goes right to the heart of the matter. His network of merchants tells a story that begins at the level of individual households, their financial condition, and perception of value.
Speaking of perceptions based on facts, this morning's stats out of the US were as follows: Housing starts fell 1% in July. Producer prices fell 0.9% in July. Let the jockeying for market plays based upon these figures begin. Is deflation a non-threat? We will revisit the topic in the afternoon comment.

Have a great Tuesday. If you are not on vacation. In you are, you are having one already.