Good Morning,

Following a day of thin trading during which they exhibited a bit of firmness, gold prices declined mildly in advance on Tuesday's US session as the dollar gained ground and despite fresh advances in crude oil. The metal remains within the $915-$935 band although US economic data due later in the week might push it to a test of the $950 area and satisfy the longs in the trading crowd. Volatility will not be lacking however, as markets feel the effects of the dollar/oil turmoil and the seasonal lack of core demand from fabrication. In the background, recent gold buyers in India were seen at gold shops once again, this time aggressively selling their acquisitions in the wake of rising gold values as the rupee fell. The country was in fact surpassed by VietNam during the first quarter of '08 as the largest consumer of the metal.

New York spot trading opened the post-holiday session with only a marginal drop of $1.40 per ounce, quoted at $922.80 as participants keep the dollar-euro-oil tango centered in the periscope. Prices took a turn lower within the first half hour of trading and gold approached $917 per ounce. The greenback traded .12 higher on the index, at 72.10 while crude oil rose $1.10 to $133.29 following a fresh Nigerian pipeline explosion caused by rebels. For an abbreviated trading week, the economic calendar is packed with potentially dollar-moving data, thus a careful watch needs to be kept on the numbers practically every day. First out of the gate, consumer confidence and new home sales (neither expected to offer pleasant surprises just yet). Silver was up one cent, quoted at $18.20 per ounce, while platinum dropped $13 to $2157 and palladium fell $8 to $447 per ounce.

The Fed, as well as the ECB, continue to have their hands full with the dilemma of growth versus inflation and what to do about maintaining the former while trying to avoid the latter. Thus far, we have witnessed the Fed doing its utmost to keep the economy going as the US headed into an election year. Ironically, the lack of focus on inflation up to now has seriously undermined the likelihood of a Republican administration keeping the Oval Office as Americans appear to have shifted somewhat as well - from a preoccupation with the endless war to one on the endless drain on their wallets at the gas pump and the grocery store. Only over the past month has the Fed given indications of a shift in strategy and a leaning towards a pause in rates as the first step it is willing to take to tackle inflation. It might even become inclined to sacrifice some measure of economic growth (meager as it has been) in order to keep rising prices at bay.

Marketwatch's chief economist, Irwin Kellner, is of the opinion that:

The next step, of course, would be for the central bank to actually raise rates. Coming at a time when the economy is still weak and housing is falling, this would shock the markets - especially oil and other commodities where prices have jumped sky-high. Higher interest rates and fewer dollars in circulation could very well pop these bubbles. More important, they would also get inflation expectations back to their mooring.

Meanwhile, across the ocean, Mr. Trichet will celebrate the ECB's 10th anniversary on Sunday with the dubious distinction of having failed to meet its 2% inflation target for the past eight years. If the insistence remains on inflation combat, the outcome might be to tip fragile economies such as that in Italy into full contraction mode. On the other hand, if the inflation target is allowed a gain closer to the actual numbers, the sacrifices might have to come at the expense of the stronger economies in Europe (read: Germany).

Germany doesn't want inflation, and the weak countries don't want deflation,'' says Bernard Connolly, chief global strategist at American International Group's Banque AIG unit in London. ``The choice between the two alternatives is likely to prove contentious.''

Inflation is eroding confidence among French executives and German consumers, reports today showed. A government index of sentiment among 4,000 French manufacturers dropped to the lowest in more than two years, while Gfk AG's measure of optimism among 2,000 German shoppers declined. writes Bloomberg reporter Simon Kennedy.

The behavior of the Fed and the ECB going into the second half of the year and into next year will now become significantly more important than the jawboning that has been offered thus far by either body. Having seen markets voting in a divergent manner as well as having seen opinion polls and confidence numbers at odds with the official language they have been putting forth, both central banks have the onus on them to convince everyone they mean what they say.

Watch for support/maintenance near $915 as there as still risks to the downside in place - and they could be exacerbated if oil slips in any meaningful way or if the dollar exhibits additional resilience. Long positions have been added to in recent days but that does not mean that complacency is in order.

Happy Trading.