Good Morning,

World leaders took the oath of the deficits over the weekend and gave every indication that they intend to cut difficult to sustain budget imbalances in their home countries. Although the Toronto G-20 communiqué faces the scrutiny of the markets this morning and appears to have been met with less than a convinced attitude, its substance points to significant changes on the horizon for the nations that have signed on its dotted lines.

The group of nations gathered in Toronto agreed to cut deficits as it ushers in an era of rising taxes and shrinking official expenditures. In terms of dramatic gravitas, the announcement certainly did not suffer from a shortage; the G-20 expressed that their goal is to cut deficits by 50% within 36 months. Protest that.

Canada acquired some serious egg on its peaceful face over the weekend despite the fact that the ninja outfit-clad Black Bloc 'protester' succeeded at little more than causing some serious damage downtown. Nearly six hundred of them will have spent the weekend behind bars. Not exactly a revolution.

The Bank if International Settlements confirmed the wisdom of that which has been agreed upon in Toronto by advising in its annual report today that global central banks withdraw the extraordinary liquidity that has been summoned up over recent years. The side-effects of the massive injections could be perhaps more deleterious than the very crisis they have fairly successfully averted. Without mincing words, the BIS suggested that maintenance of ultra-low interest rate conditions gives rise to 'altered investment decisions.'

That's as good an alternative definition of carry trade-induced commodity (and other asset bubbles) as we have ever heard. It also indicates that the official sector is fast running out of wiggle space in the event a relapse was to occur among certain global economies. Both of these weekend statements have implications as we go forward. For the moment the trade will greet them with the (by now usual dose of) skepticism and bravado it has exhibited since 2007. We say, you've been warned.

Precious metals markets opened the final days' worth of June trading sessions with mixed signals. Gold was off marginally, while silver showed not change and noble metals continued to rise. Spot prices were down 30 cents in gold, quoted at $1255.40 per ounce and they were steady at $19.10 in silver. Gold appears to be targeting the $1265-1270 area and might well fulfill the higher end $1280 target we assigned it in an early January price range projection.

Platinum gained $13 to open at $1582.00 while palladium rose $4 to start at $481.00 the ounce. Rhodium was unchanged at $2440.00 per troy ounce. In the background, the US dollar advanced 0.11 on the index, being quoted at 85.46 while the euro remained just above 1.23 and crude oil slipped about fifty cents per barrel (last seen near $78.40).

US consumer spending rose more than anticipated in the month of May, according to statistics provided by the Commerce Department in Washington. Wages gained 0.5% for a second consecutive month. The US savings rate also gained - rising to 4% last month. Paying down debt and the rebuilding of savings appear as the priority on the 'to do' list of many an American household these days, despite the lift being demonstrated in spending for 'stuff.' The recession had taken a heavy toll on the vital component of the US economy that consumer spending represents.

Meanwhile, record and near-record high gold prices took a heavy toll of their own on India's gold demand for yet another month in June. A third consecutive month of gold import declines was on tap for the largest gold consumer on the planet according to the head of the Bombay Bullion Association, Mr. Suresh Hundia. Indian imports may fall as much as 75% when the June 2010 tally becomes final and results are weighed against the 2099 figures.

Who cares? will be the oft-chanted slogan once again. Who cares when the gold ETFs grabbed the headlines during the same period with gains in balances that brought them to new peaks? The markets should care. Last time anyone checked, fundamentals can only take a back seat to other factors only for so long. In this case, nearly three years...and counting....

Well, someone else is also counting, according to the Sydney Morning Herald. Namely, Macquarie Bank interest rate strategist Rory Robertson, who says forget Australian house prices and US Treasuries, it's gold that looks due for a pop. A pop to $5,000 or just simply a pop(ping)?

Mr. Robertson opines that most people now betting on gold going up are doing so just because gold has gone up - the very stuff of bubbles. While allowing for further potential gains in price as such bubbles expand Mr. Robertson cautions that market pundits should be wary of gold as it has almost quintupled since its $260 nadir in 2001.

The Herald also notes that when a bubble is on the rise, the number of reasons given to try to justify that rise multiply. Aside from inflation and civilisation's collapse, ''peak'' gold also gets a good run, the idea that the world is running out of gold. It's not. At present prices, marginal deposits become viable mines and supply increases markedly.

A final observation from the same article: There's also an element of taking the recent price rise as confirmation of whatever theory was being extolled before the rise, an unfortunate leap in logic. Something like: ''Buy gold because the financial system might collapse. Gold has gone up in price, so the financial system must be in danger of collapsing because people buy gold when the financial system might collapse.''

The bets on the probability of the latter will continue for some time to come as the reverberations of the G-20 communiqué fade and bettors keep calling the bluff of governments and central banks (mainly with the practically free money that such institutions have made available to them of late). So will the nay-saying about anything to do with the words gold and bubble being allowed to appear in the same sentence.

Happy Trading.

Jon Nadler Senior Analyst, Kitco Metals Inc.North America US & Canada Toll Free: 1 (877) 839-8036 Websites: www.kitco.com and www.kitco.cn

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