Good Morning,

Bullion prices fell to three-week lows overnight, touching $867.50 in the wake of fresh gains in the US dollar and an additional slippage in oil prices. The dollar rose to 73.75 on the index as expectations that the ECB will stand pat once again emboldened currency traders to favor the greenback now that it has received explicit support from Dr. Bernanke. The BOE stood firm on its rates at 5% so there was nothing new there.

A number of overseas analysts do not see the ECB moving away from its current rate policy until perhaps a year from now. We are not so sure on that one. Crude oil prices fell to near $122 overnight after OPEC President Chakib Khelil was quoted as seeing oil prices declining as demand eases and as the dollar gains additional strength. After dropping more than 13% last year, the greenback has picked up about 4% since late April. We believe there is another 5% in the cards for the dollar's upside potential before the year draws to a close.

Thursday's New York trading session opened with gold on the defensive once again, showing a loss of $13.00 per ounce at $866.00 as participants got wind of the ECB rate (non-) decision (while the dollar was just above $1.54 against the euro) and as they awaited the initial jobless claims numbers. The latter dropped both in the initial as well as the continuing front, and added fuel to gold's decline this morning. Silver dropped 30 cents to $16.50 while platinum fell $24 to $1967 and palladium slipped $7 to $417 per ounce.

It appears that yesterday's prognostications by both Mr. Gartman and Mr. Schmidt were (thus far) well-timed. Mr. Gartman got a bit more specific this morning, when he issued the following call (picked up by Bloomberg):

``The time has come to sell gold short,'' Gartman wrote in his U.S.-based daily Gartman Letter today. ``We'll sell a bit of a gold short upon receipt of this comment.''

Indeed, a convincing breach of values near $856 could open up possibilities for a further $10 to $20 decline in gold, bringing the metal back to its previous all-time high level, where it could either put in a double-bottom or from where it could stage a fall to the high $700's. Our crystal ball is still out on loan until the end of June.

My son (a Cabot House Junior) sent me the commencement speech given by alumnus Ben Bernanke at yesterday's Harvard graduation ceremony. He thought I would be interested in what Dr. Ben had to say to the class of '08. Indeed, I found a number of interesting passages in his remarks, but if you wish to read the entire address, you will find in at the Washington Post's website. Here are a few topics that caught my eye:

Although 1975 was a pretty good year for the Red Sox, it was not a good one for the U.S. economy. Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities. Today's situation differs from that of 33 years ago in large part because our economy and society have become much more flexible and able to adapt to difficult situations and new challenges. Economic policymaking has improved as well, I believe, partly because we have learned well some of the hard lessons of the past. Of course, I do not want to minimize the challenges we currently face, and I will come back to a few of these. But I do think that our demonstrated ability to respond constructively and effectively to past economic problems provides a basis for optimism about the future.

Several years passed before the Federal Reserve gained a new leadership that better understood the central bank's role in the inflation process and that sustained anti- inflationary monetary policies would actually work. Beginning in 1979, such policies were implemented successfully--although not without significant cost in terms of lost output and employment--under Fed Chairman Paul Volcker. For the Federal Reserve, two crucial lessons from this experience were, first, that high inflation can seriously destabilize the economy and, second, that the central bank must take responsibility for achieving price stability over the medium term.

For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980. Moreover, the increase in inflation has been milder this time--on the order of 1 percentage point over the past year as compared with the 6 percentage point jump that followed the 1973 oil price shock.

Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely. However, changes in long-term inflation expectations have been measured in tenths of a percentage point this time around rather than in whole percentage points, as appeared to be the case in the mid-1970s. Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward.

The Federal Reserve and other central banks have learned the lessons of the 1970s. Because monetary policy works with a lag, the short-term inflationary effects of a sharp increase in oil prices can generally not be fully offset. However, since Paul Volcker's time, the Federal Reserve has been firmly committed to maintaining a low and stable rate of inflation over the longer term. And we recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains a top priority as the central bank navigates the current complex situation.

As a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control, a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills, research, and physical capital needed to support continuing gains in productivity.

In the long term, however, the best way by far to improve economic opportunity and to reduce inequality is to increase the educational attainment and skills of American workers. The productivity surge in the decades after World War II corresponded to a period in which educational attainment was increasing rapidly; in recent decades, progress on that front has been far slower. The use of a wide range of methods to address the pressing problems of inadequate skills and economic inequality would be entirely consistent with the themes of economic adaptability and flexibility that I have emphasized in my remarks.

The poor forecasting record of economists is legendary, but I will make a forecast in which I am very confident: Whatever you expect your life and work to be like 10, 20, or 30 years from now, the reality will be quite different.

Food for thought not only for the young men and women who now set out to start their careers today, but also for those who still apply antiquated notions of how the central bank acts and reacts to the situations such as we are currently experiencing. Clinging to the idea that the largest economy on the planet is about to head into some kind of German-style hyperinflationary spiral while its currency acts like that of Zimbabwe may make for sensational newsletter content, but it really is out of touch with actual conditions.

Watch for the dollar's ascent towards the 74 mark while oil is losing value. Watch for closing levels as well amid fast-changing conditions. Copper is at a two-month low. Just FYI.

Happy Trading.