Good Morning,

The overnight hours offered little in the way of fresh news to move the precious metals markets more than a few dollars or cents within their newly achieved ranges. Last week was a dismal one for the particular species of gold bugs whose promises of an end-game for the world continue to fail to materialize. For other, more level-headed and simply value-conscious varieties of same, it was a time to pile a few more ounces up for the long-term -especially if they had the misfortune of having listened to the former, and had rushed out to chase four-digit bullion in Q1.

The US dollar continued to climb on a slow but steady trajectory, reaching 86.50 on the index. Crude oil did not enjoy the same good fortune -in part because of the aforementioned greenback climb- and piled on to its really poor performance seen last week, with a further $2.66 drop to $47.70 early this morning. BofA reported first quarter results that outshone what it was able to accomplish during the entire year in 2008. Bank stress test findingsmay finally make the light of day in acouple of weeks.A phenomenon rarely seen of late -M&A- made a reappearance: Oracle was after Sun Micro, Glaxo was courting Stiefel Labs, and PepsiCo was seen fishing for some bottlers.

New York bullion trading opened with a nice $8.00 gain in gold (brining the metal up to $876.50 per ounce) and an equally bouncy start for silver (up 24 cents to $12.13). However, platinum and palladium went into the opposite direction, correcting some of the irrational froth we have seen being added over the past couple of weeks. This, despite a Shanghai auto show that felt as if there was no global crunch going on. Platinum fell $24 to $1181 while palladium dropped $3 to $229 per ounce.

Gold may rise on the week, and, indeed, it really needs to do so, as the next week or so offers one of the year's two best shots at Indian buyers going to their stockists to...stock up on dowry goodies. The so-called 'summer doldrums' are lurking ahead, otherwise. We'll see. One problem that has refused to go away for gold continues to be scrap sales. The first quarter of this year saw 500 tonnes of bullion make its way into induction furnaces around the world.

Let's put this into perspective, folks. Normally, it takes an entire year to record that amount of secondary supply sales. Or, viewed from another angle, about half or more of what investment demand took away from the market last year, was given back over the last three months by existing holders, in the face of four-digit gold values. This isas epic a tug-of-war as we have ever witnessed in the market. It is absolutely fair to call this market as one in disarray.

The next step in price patterns is thus, as obscure as a shadow behind a Shoji screen. If nothing else, the massive flows of scrap gold raise the question of sellers viewing four-digit gold as unsustainable, and that of the 'rainy day' (financially speaking) having arrived for many - they now absolutely need to raise cash. The very purpose they bought the metal, to begin with. For the time being (if micro-gyrations are your focus) it looks like a 'sell' into the $885/$895 area (and more so into the $900-$920 zone, IF achieved again) and a 'modest buy' should values sag towards $860 and to $845 beyond that.

And now, back to the big I - a phenomenon that has already been shoved to a burner located a bit farther back than the daily headlines in the hard money newsletter marketing machines. Oh, it's still coming. And a Weimar-flavored one, to boot. It's just that there is a...rain delay in progress, so to speak. Let's see what Marketwatch found when going to Opryland for an 'ear-to-the-ground' session starring Fed celebrities. You are free to digest the following with your own dose of healthy incredulity. However, said it they did. AndUncle Paul was watching. Hard. Here's the tune they sang:

Two of the Federal Reserve's top policy makers defended the Fed's emergency lending, saying the programs won't cause an inflationary surge or create “significant” risk for taxpayers .

Vice Chairman Donald Kohn, speaking yesterday in Nashville, Tennessee, said the Fed has loaned to “sound” borrowers and plans to disclose more about such credit. New York Fed Bank President William Dudley, speaking at the same conference, said he's “not worried at all that” a doubling in the central bank's balance sheet to $2.19 trillion will spur inflation.

Policy makers are pursing an unprecedented strategy to revive the economy by providing credit to companies other than banks and cutting the main interest rate to as low as zero. The Fed plans to buy as much as $1.25 trillion in agency mortgage- backed securities this year and is providing financing for securities backed by loans to consumers and small businesses.

The increased credit has provoked concerns prices will surge. Central bank officials are “dramatically underplaying the risks and liability side of the balance sheet,” former St. Louis Fed President William Poole said in an interview at the conference. “We are very vulnerable to an inflation explosion ,” said Poole, a senior economic adviser to Merk Investments LLC in Palo Alto, California.

Former Fed Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following the expansion in its assets.

“I don't think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken,” Volcker, head of President Barack Obama's Economic Recovery Advisory Board, said in remarks to the conference at Vanderbilt University.

U.S. lawmakers from both political parties, including House Financial Services Committee Chairman Barney Frank, have expressed concern in recent months that the central bank has overstepped its authority by providing emergency credit. “I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed,” Volcker said.

Central bank officials are “underestimating the political forces they're going to face once the recovery starts,” said Poole, a contributor to Bloomberg News. Fed Vice Chairman Kohn said in his speech “intense scrutiny” of the central bank's emergency programs is “natural and appropriate.”

Still, such attention “should not lead to a fundamental change in our place within our democracy,” he said. “And I believe it will not.” While the central bank may be channeling credit to some markets more than others, “ we are not taking significant credit risk that might end up being absorbed by the taxpayer ,” Kohn said. “For almost all the loans made by the Federal Reserve, we look first to sound borrowers for repayment and then to underlying collateral .”

“My own view is that these fears are misplaced,” Dudley said. He said TALF is “completely a Federal Reserve program and operation,” and that government funds would only be used to protect the Fed against a credit risk such as a default. Treasuries fell for a fourth week as better-than-expected earnings at banks including Goldman Sachs Group Inc. and JP Morgan Chase & Co. bolstered speculation the longest recession in the postwar era may be easing. The yield on the 10-year note rose two basis points this week, or 0.02 percentage point, to 2.95 percent.

In an unusual public exchange between a current and former U.S. central banker, Volcker asked Kohn to explain the merits of a 2 percent inflation goal, instead of a 1 percent or 3 percent objective. “By aiming at 2, you have a little more room on nominal interest rates, a little more room to react to an adverse shock to the economy or better odds of stabilizing the economy,” Kohn said.

“By being clearer about our objective about what we consider price stability, we will have armed ourselves to lean against tendencies for inflation to rise,” Kohn said. The vice chairman also said that he doesn't expect deflation, or a consistent decline in consumer prices, over the next five years, while not ruling out the possibility. The Fed's credit programs “have helped ease financial conditions, though they can't address all the problems in financial markets,” Kohn said. “The situation in financial markets and the economy would have been far worse if the Federal Reserve hadn't taken the actions.”

Let's say theleague of extraordinary gentlemenis completely wrong. Let's assume they get hit with a nasty surprise and that following a deflationary cave-in, the rate of inflation surges to twice or thrice the 2% target. Is 4% or 6% inflation the same as 50% per month (as required for the definition of the 'hyper' variety)? Is it even remotely the same as 1980's 13% average? Or Zimbabwe's 2200000% current annualized rate?

We submit that if a headline inflation report that shows even 4% makes its way into the public arena, we are looking at Mr. V donning his flight gear and shooting down every single Blackhawk previously in use by Mr. B to distribute the mountains of cash (or so the story goes). His bullets? Higher interest rates. Worked once, will work again. And, remember, these are all transitory phenomena.