Good Afternoon,

A third day of gains in values, albeit much more moderate than those seen on Monday, was in store for gold market participants today. New York spot trading reached a high near $884 while crude oil was making fresh headlines by touching $122.73 per barrel. Once oil started to surge, the US dollar broke under 73 on the index, (also aided by the wider than expected loss of $2.19 billion at Fannie Mae and an $11 billion loss at UBS) and a little more buoyancy was seen in bullion.

Most of the early gains were given up by mid-afternoon however, as crude prices pulled back about one dollar from their highs and as the greenback once again aimed back towards the 73 mark. Oil remained at the front line of today's action in commodities, thus it bears close watching as it is once again becoming vulnerable to a serious correction amid this speculative binge.

Buyers squared off with profit-takers and appeared to have the winning hand early in the day. More fresh buyers will be needed to overcome the current uncertainties in the metal. That part remains less than certain however, as CFTC records show that speculative long positions on the exchange registered their lowest level since last September (at a time when bullion was near $732) as of last week, after another 4%+ drop in bets on higher gold prices and amid a 9.6% decline in balances held by the gold ETF. Silver added 16 cents, trading at $16.95 and the noble metals rose quite nicely, with platinum gaining $31 at $1960 and palladium rising $5 to $427 per ounce.

Commodity prices surges have definitely made it onto the radar of central banks and present a fresh challenge to policymakers who are still trying to avert a global economic slump of the type that the IMF recently envisioned. Much depends on the one commodity that everyone has to have in order to (literally) keep the engines of growth going. While Goldman Sachs pundits see crude reaching $150 to $200 within two years, hedge fund manager Barton Biggs believes that if oil can just stabilize near $100 instead of heading towards those levels, the effect would be that the U.S. economy will grow in the second half of 2008, the Standard & Poor's 500 Index may climb to a record this summer and commodity prices will retreat as much as 30 percent.

While oil continues to be at the center of the action over the recent period, it appears we ought not to be ignoring what gold as a possible leading indicator may be telling us about...the euro (and of course, the dollar). From London, Reuters' Veronica Brown reports that:

It's been quite some rally for the euro, scorching its way to $1.60 against a beleaguered dollar last month, but if recent moves in gold are anything to go by it might just be time to sell.

Bullion has broken ranks with its commodity stable-mates to plumb four-month lows last week, shedding almost $200 after hitting a record $1,030.80 an ounce in mid-March . Traditionally the greenback's inverse relationship with the precious metal goes thus: if the dollar falls, gold rises as the weaker U.S. currency makes bullion cheaper for non-U.S. investors and vice versa.

Gold's role as a safe store in troubled times shone out, with a 60 percent spike to the March high in just seven months as markets endured shocks stemming from the global credit crunch that started in August last year. Trade between the euro and dollar accounts for some 27 percent of $3.2 trillion-a-day global foreign exchange turnover and the euro/dollar-gold absolute correlation is among the strongest -- averaging 94 percent since the start of 2007.

So it's hardly surprising that bullion's record high was attributed in part to a then record high in euro/dollar the same day.

But, fast forward to April 22, when the euro rose above $1.60 for the first time ever and the relationship falters. Gold failed to show a strong reaction to the currency move, staying some 10 percent below its high and as oil ran towards $120 . If the link between gold and the dollar remains as strong as it has been, then currency traders could be well advised to lighten their euro positions.

If you look at the gold rally from the latter part of December through until March 17 -- that took off a good month before the euro/dollar move came, said Simon Derrick, head of FX strategy at Bank of New York Mellon.

You then have the turnaround in gold on March 17 coming almost a full month before euro/dollar hit its peak -- it's almost as though you have moved to a situation where gold is acting as a leading indicator, he added.

Gold bugs and bears are split over whether the recent falls are just a temporary blip in an overall seven-year uptrend. But some of the factors behind the drop have a particular resonance for euro/dollar. Commodities, including precious metals, have prospered in a fear-charged atmosphere during the credit crunch where volatility spiked and the rug was pulled out from under other asset classes. The MSCI main world equity index tumbled just under 20 percent between November and January.

Despite further fall-out from the credit crunch as banks unveil the extent of their losses, stocks are now challenging four-month highs. Indeed April was the best month for global equities since December 2003. Meanwhile, the dollar has tentatively recovered from its lows, hitting a one-month high versus the euro and 2-month peak against the yen last week. Measures of market volatility are also easing.

If volatility remains at moderately low levels and there's scant market demand for safe havens, then gold may tend to lead euro lower, UBS strategist Geoffrey Yu said. Gold is the riskier asset. Out of the two it's less liquid, it's more volatile. Once markets receive new information and they want to adjust their positioning, the knee-jerk reaction would be to get out of gold first, he added.

Another key support of the euro and gold is also looking wobbly, as fledging signs of easing inflation pressures emerge in the euro area.

The gold correction reflects a diminution in inflationary concerns. It's not obvious in the euro zone yet but certainly the break even inflation rates in the U.S. are quite stable, said Steve Pearson, chief currency strategist at Bank of Scotland Treasury services.

He also noted a sizeable rise in Treasury yields, partly due to the idea that U.S. interest rates might bottom at 2 percent. The ECB's inflation busting rhetoric may well be on the verge of being tweaked this week after a recent run of poor data that could see bets for an eventual rate cut increased. A weaker than expected reading of the German Ifo Index, slowed German consumer price inflation, a fall in French consumer confidence and Spanish retail sales were seen a sign that the euro zone was not immune to troubles faced by the U.S.

We see euro/dollar going lower as people have been going into euro as a hedge against dollar weakness. If the euro zone is going to start offering lower yields then people are going to reassess their positions, UBS' Yu said.

A poll of 50 traders and analysts conducted by Reuters in January sees the gold price averaging at $840 per ounce in the fourth quarter of this year. The lowest forecast came in at $687.50 per ounce.

As yesterday, while the rallies are welcome and much needed, a lot will depend on their strength and longevity. A couple of days henceforth Indian seasonal buying will have passed and gold supplies will need to find new takers. Keep a lookout for corrections in oil. Be mindful that a concept that had long been absent from the gold market scene has been brought out of deep-storage overnight: mines might begin hedging once again, after the lengthy period of de-hedging they went through.

Happy Trading.