A further 3% overnight drop in the Shanghai market helped the dollar-yen duo regain some lost ground as investors chose the two currencies a bit of a safe-haven nod. The action was not very aggressive, and this morning's dollar index was still showing a bit of red, quoted at 78.30 (off by 0.14). Crude oil rose only marginally, gaining 35 cents to $70.87 per barrel. Gold traded from $955 to $960 against this lackluster background, and was seen awaiting US economic data on inflation and industrial output.

Friday morning's gold trading started off with a $2.80 gain for the metal, which was quoted at $957.70 on the bid side. Participants were eyeing the state of intensity of risk appetite as the week winds down. Book-squaring activity may dominate late-day trading patterns, and gold remains in a position to have to recapture the value zone that lies above $965 in order to erase the memory of its worst price slide since March among players. A close under $955 might still be in the cards, and present potential problems for next week, although Friday guessing has its risks, historically speaking...

The weekly ETF monitoring report from our friends at GoldEssential.com reveals that: Monitored investor holdings in our ten monitored gold-backed exchange-traded funds were seen dropping 7.695 tonnes (247,412 ounces) or 0.50 pct in the week from August 7th to August 14th , in-house calculations based on official data showed on Friday. Two of the ten ETF's announced an inflow, three announced an outflow.

The largest movement in absolute numbers and percentages was seen in the world's largest gold-backed exchange traded fund, the SPDR Gold Trust, where 237,057 ounces or 7.37 tonnes of bullion were removed from its holdings. The by ETF Securities marketed and in London listed Gold Bullion Securities saw a drop of 66,648 ounces or 2.07 tonnes over the reported period, whereas the ETFS Physical Gold trust announced a decline of 15,016 ounces or 0.47 tonnes in its holdings.

We continue to witness a worrisome lack of interest or balance growth in these hitherto extremely beneficial (to the price) rich relatives in the gold market. Reports from some US bullion dealers indicate a flat first half of the year in terms of client enquiries and actual purchases. Perhaps trend-followers wish to remain true to their colours and will jump aboard when/if the $1K mark is reached.

Silver added 2 cents on the open, to start at $15.03 per ounce. Platinum continued higher as well, gaining $8 to open at $1275, while palladium rose $1 to $276 per ounce. The dollar slipped a tad against the yen ahead of the release of this morning's US economic numbers. Those numbers read as follows: unchanged for July, but down 2.1% year-on-year. Make that, the steepest annual decline since 1950. Food and energy led the downward price parade. But, hey, cigarettes went up. There is a word for this type of disinflation. We just cannot mention it here. Too many inflationists read these posts.

Over in Europe, however, the economic data continues to also be mixed -at best. Following yesterday's bold 'we are out of recession' feelings, Friday's statistical harvest shows that the region's consumer price index also fell, and it did so at the rate of 0.7% last month - a brand-new record low rate since the euro was born. So much for the 2% inflation target -practically anywhere a central bank aims for it. Finally, Spanish GDP fell 1% in Q2 and was 4.1% lower than last year's Q2 number. Hablamos de una contraccion, no?

Meanwhile, the awareness that willingness to take on risk has been apparently ignoring line items such as poor retail sales and unemployment numbers that have not tipped towards a better total, continues to nag some strategists. Those at City Index, for example, see a handful of markets as now living on borrowed time. Stock index futures weakened following the release of the CPI figures.

This just in: Led by a resurgent auto sector, U.S. industrial output rose in July for the first time since October, the Federal Reserve reported Friday. The seasonally adjusted output of the nation's factories, mines and utilities increased 0.5% in July after a 0.4% decline in June. Output is down 13.1% in the past year. It was only the second increase in industrial production since the recession began in December 2007. Capacity utilization increased to 68.5% from a record-low 68.1% in June. The gain in industrial output in July was entirely due to increased motor vehicle production, which jumped 20.1%.

In so many words, where would we be without the autos? Somewhere not worth sending a postcard from, likely.

We have a couple of JP Morgan observations to offer this morning. The first one regards the literal shape of the US recovery. Instead of a U for uneven or unhurried JPM sees a V for growth with a vengeance - and goes against the grain of analyst opinion:

Instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery. The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

Whenever we have plunged off a cliff and fallen into a deep hole in the past, for a while the economy has a tendency to bounce back very quickly, said Glassman, a senior economist at JPMorgan in New York. Glassman and his colleagues this month said forecasts of 3 percent to 4 percent growth in coming quarters may be too low given pent-up consumer demand.

JPMorgan's outlook contradicts the view popularized by Mohamed El-Erian at Pacific Investment Management Co. that elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. The divergence highlights the dilemma for policy makers, who must decide whether to maintain record fiscal and monetary stimulus or begin to pull back and prevent a surge in inflation should growth accelerate. El-Erian, chief executive officer of Newport Beach, California-based Pimco, said the indicators we follow continue to point to sluggish medium-term growth in the U.S., when asked to respond to arguments for a so-called v-shaped recovery.

The second opinion concerns gold versus TIPS. Although inflation appears to be contained within a jar with a tightly sealed lid at the moment, JPM sees something else down the road. Coming from an allegedly 'sinister suppressor' of the gold market, the TIPS of the hat -so to speak- that JPM offers gold should warm the hearts of the ultra bugs:

Gold will outperform Treasury Inflation Protected Securities as the U.S. economy swings to growth and the cost of living rises, JPMorgan Chase & Co. said. Returns on both investments were about the same until December 2005 when gold began outpacing bonds as inflation expectations increased. Gold returned 249 percent in the past nine years, more than double the 108 percent for the TIPS gauge.

The metal outperformed TIPS every year except two after 2000, data compiled by Bloomberg News show. Gold gives a bigger bang per buck, reacts more to fear, and is more liquid, Jan Loeys, JPMorgan's market strategy head in London, said in an e-mail Aug. 12. We are long gold because we see good demand, partly because of those inflation fears.

Speaking of demand, let's see what Mineweb's Geoff Candy has to say about the one in commodities in the place that is supposed to be the ultimate black hole for raw materials. China. One hears the name used to death at every single investment conference on the planet. Is it, indeed, the perfect solution to these markets, or does it look more like a thin, round film full or the colours of the rainbow?

Much has been made about the effect of Chinese demand on commodity prices in recent months. But, if equity analysts at investment bank, Dahlman, Rose and Co, are to be believed, speculators could be in for a shock. In a recent report on the Iron ore, steel and bulk goods sectors, the group makes the point that, China has been where the great majority of the action has been as far as commodities are concerned, in 2009. We think that just as the Chinese stock market may have run ahead of fundamentals and investors' expectations for economic recovery, we think so too have commodity markets.

It adds that the Chinese government has indicated it plans to slow economic growth, in order to ward off economic bubbles. A process Dahlman, Rose and Co, thinks, applies to speculative bubbles that may be in the process of forming in commodities markets where there has been an acceleration of non-commercial inventory accumulation, according to our industry sources.

In order to do this China has been, according to the report, encouraging banks to slowdown lending as a way of lowering the level of fixed investment activity. We have witnessed a decrease in loan activity to construction sites, since the metric reached its highest level in March, 2009. While China Construction Bank indicates that loans may decrease by 70% in the 2H09, relative to the 1H09, we anticipate that loans for construction activity will likely remain at a high level, on a historical basis.

Now, if your really want a hot tip and want to make some real money, consider...sugar. Bloomberg's commodity story roundup this morning offers a sweetener for those who seek to play in this niche:

Sugar may climb 80 percent to as high as 40 cents a pound on global supply shortages, said Singapore-based commodity hedge fund manager Michael Coleman. Sugar is caught in a perfect storm,'' he said in a Bloomberg Television interview. There is a big hole'' in world supply and no obvious solution in the next six to nine months, said Coleman, 49, managing director of Aisling Analytics, which runs a $1.4 billion fund invested in energy and agriculture.

The sweetener has surged 88 percent this year, reaching a 28-year high, as India, the biggest consumer, had its driest June in 83 years and parts of Brazil, the largest grower, were drenched by rainfall four times more than normal, too wet to harvest. World demand will exceed output by as much as 5 million metric tons in the year ending September 2010, according to the International Sugar Organization.

Is there a possibility of reaching 40 cents a pound? Certainly, said Coleman, whose fund returned 24 percent in 2008. From this point on, it depends how price affects demand. Sugar reached a peak of 23.33 cents a pound in New York on Aug. 12 and ended at 22.21 cents yesterday.

So, will it be gold at $1728, silver at $27, or sugar at 40-cents? Where will the next 80% (!!!) be made? We will continue to pay close attention to rhodium than you, while consuming some nice candy. Quien sabe?

Please note, this will be the final update for today - let's call it an early weekend. After all, it's August, right?

Pleasant Weekend to All!