Good Morning,

The third quarter started on a positive note for the precious metals complex as geopolitical tensions continue to support safe-haven purchases by previously sidelined investors. Crude oil prices remain in the driver's seat in the markets, and are still seen as the primary factors impacting the US dollar, gold, stocks, and the readings on (current and future) inflation. Tensions between Israel and Iran are the latest premium-inducing factor in the oil price equation, although for now, Israel is content to let perceptions rather than reality do the work in keeping Iran in check, and although the US military has placed odds at 'nil' as regards Iran's ability to close the Straits of Hormuz and disrupt shipments of black gold. If attacked, Iran may have to resort to the one solution it could definitely put into motion: suspension of oil sales and hope that other countries join in in a mini-embargo.

New York spot trading opened the first day of July with a near 1% gain, quoted at $933 per ounce amid rising oil values ($142.26 up $2.26) and a declining dollar (down .18 to 72.28 on the index). Stock futures pointed to a weak opening today, as analysts ponder whether last Friday was a bottom or the beginning of a hairy bear market. Auto sales will likely look very poor and will once again put GM and Chrysler under scrutiny as their retail dealers' engines sputter. Silver added 40 cents to $17.80 while platinum gained $13 to $2064 and palladium rose $3 to $463 per ounce. Also helping gold this morning were reports that the ECB completed sales of 30 tonnes of bullion as of yesterday and that it does not intend to sell any more ahead of September's conclusion of the current sales year window. The ECB's imminent rate hike decision is playing into the euro's hand today, as the currency rose to 1.5789 against the greenback.

Indicators (open interest, oil, dollar, stocks) remain favourable for this abbreviated week, but gold still needs to overcome $945 (which may well happen this day) as well as stand up to potential oil market profit-taking if sentiment in that niche changes (which remains an open question in terms of timing). However, OPEC's president is already eyeing weakening demand in the wake of the recent paper oil mania. In the background, UBS shares fell to the lowest level in almost a decade in Swiss trading after U.S. prosecutors sought the authority to force the bank to reveal names of American clients with secret accounts by issuing a John Doe summons. This investigation could not only hurt the bank in its core and most profitable business, but could open a major can of worms when and if it becomes known who among America's wealthy tried to conceal assets from Uncle Sam.

One commentator who is not so firmly convinced that you should rush out to buy a truckload of gold or oil in order to inflation-proof your portfolio is Mark Hulbert. Mark usually tracks the contrarian view indicators for Marketwatch but has just posted a piece on what investors might do in the face of rising prices everywhere they look. His colleague, Kevin Kerr, by-the-way, would have you buy silver to accomplish the feat. We believe that the core 10-15% gold holding in your basket of assets remains very well warranted and that it serves as the perennial life insurance policy for your wealth. In that regard, price is always irrelevant, but the percentage of ownership is not. But, on to Mark's take on these things:

So let's say you believe, along with most of the investment newsletters I monitor, that inflation is going to become even more of a problem in the future. How do you profit from that belief?

Many investors' knee-jerk answer is gold, of course, or if not gold, other commodities such as oil. But I'm not so sure.

That's because commodity prices have already been bid up over the past few years in anticipation of sharply worsening inflation. Their prices could still retreat in the face of higher future inflation if the inflation rate turns out not to be quite as high as commodity investors currently are betting.

Yet another complicating factor in betting on higher inflation with commodity prices is the fate of the dollar. If inflation in other countries turns out to be worse than in the U.S., for example, the dollar theoretically could rise in the face of higher domestic inflation and thereby cause commodity prices to fall in the U.S.

In other words, gold and commodities are not as sure a bet as you might think on worsening inflation. But don't despair: There's an easier way. In reviewing newsletters' comments about inflation, I came across what appears to be a surer way of profiting from higher inflation.

The strategy exploits the difference in yields between regular, or nominal, Treasuries and those that prevail for the Treasury's Inflation Protected Securities, or TIPS. The primary difference between these two kinds of Treasuries is that TIPS' yields are protected against changes in the inflation rate. So TIPS yields will stay more or less constant in the face of changes in expected inflation, while nominal yields will rise and fall.

Theoretically, at least, this means that the difference in the yields of these two kinds of Treasuries should give us straightforward insight into how bad bond traders expect inflation to become in the future. But that's theory. In practice today, that difference is skewed, and that is what gives traders an opportunity to turn a fairly assured profit.

And finally, the precious metals price projections for the second half of the year we promised you yesterday. We caution up-front that as we are not a commodity trading firm, we do not issue such opinion with any underlying buy or sell signal intent, and that a projection is not a soothsaying undertaking designed to prove anyone right or wrong or to motivate investors to act one way or another. So, if the numbers trouble you or not, save the analysis (and related e-mails) of their validity until the last trading day of the year is over, and all the results are in. In the interim, our expectations -as do yours- remain in the realm of opinions (to which, everyone is entitled).

As we all know, gold recorded a 4.39 gain on the month, a 10.8% gain year to date in 2008, and up to now, a 42.86% year/on/year to end of June. The average price in H1 2008 has been $910. The metal spent about half of the period averaging 890 (Jan, May, June) and the other three rising to 920 (Feb) 968 (Mar) and then falling back to 910 (Apr). A possible top has been put into place back in March.

Second half 2008 projections:

We believe that the widening trading range and added volatility will remain the principal features of the market, as we turn the corner into the second half. We raise our initial 2008 trading range projections only by a small margin (form a range of 640-940) to 730-1030 but see average price on a slow decline from the 910 area to the mid 800's or lower, as we approach the year's end. Barring surprise geopolitical developments (Iran, terror attack) or significant financial implosions (Citi, GM, US banks as a group) which could catapult the metal to new pinnacles for a brief shining moment, the outlook is still for USD recovery in the second half (possibly to 1.30 against the euro) and for a retreat in gold towards the $730 area it initially touched back in May 2006.

Other commodities (notably oil) may follow similar corrective paths as well, and may well take the lead in the commodity correction phase. The center of the turn will consist of USD policy (possible intervention) and a gradual abatement of the credit crisis and related growth issues for various economies. Inflation continues to present a challenge but central banks appear quite determined not to let the price spiral spring out of the containment bag. Election season volatility and markets jockeying for revised positions thereafter will be the standout features in Q4. We continue to see the sky as remaining in place, despite dire predictions from doomsday quarters.

Silver is at the mercy of individual investors at this time. The market has gone from deficit to surplus, and any significant exit by investors could only serve to augment the gap. Our projected trading range is 14.25 to 19.75 and for an average of $16.25 to become the convergence line in H2 2008. March has also probably seen a top in short-term silver prices. Photography usage is on the decline, mine production is on the rise, and the bright spots have been batteries and electronics and the aforementioned investment offtake. No shortage plagues the market, that is for certain.

Stay tuned for platinum group metals projections tomorrow.

Happy Trading.