Good Morning,

Gold prices headed for a near 2% loss on the week by early this morning, as selling intensified and brought values all the way down to $905 per ounce. Pressured by free-falling oil - itself posting the worst drop in prices since January (to under $59 per barrel) - and by another little pop in the US dollar (to around $80.40 on the index), the yellow metal succumbed to the perception that inflation  -if it happens- is still a distant prospect, and that what investors may need to worry about more at this time, is the poor character of the recovery that is supposedly underway in the global economy.

That, and the fact that commodities may once again have gotten more than just a tad ahead of themselves during the spring spec fund festival of buying. Those who assured us that this summer's 'doldrums' will not only not materialize but would be replaced by major rallies towards the lunar surface are now booking vacation tickets that will enable them not to have to write and explain themselves to their (likely) fuming readers.

New York spot bullion opened with a $5.00 loss in gold, which was quoted at $907.30 an ounce. Participants basically went through the motions of trying to square books before the weekend, but light selling was still being seen following the overnight dip to just a couple of dollars lower. Dollar and oil watch was still the day's mantra. At least one technical analyst (whose letter we held in our hands last night), is projecting an eventual decline in gold prices back to the $680 area to which it fell last fall.

For the moment, the task and question du jour centers around gold's ability to close (or nor) above the broken $915 support. Next week might tell more, in terms of a more defined market tilt. In the interim, let's see what weekend bargain hunting -if any- emerges from this current price equation. Consumer sentiment readings did not sit well with stocks, despite the brighter news this morning that GM has emerged from bankruptcy in under 40 days and 40 nights.

Silver fell 29 cents on the open, and was quoted at $12.53 per ounce. It may outperform gold in a price-positive environment if Citi and Scotia Mocatta forecasts prove correct. However, for the time being, the less than rally-supportive conditions in precious metals are making for a different kind of outperformance in the white metal. Platinum lost $20 to trade at $1086.00 at the start of the Friday session, and palladium dropped $2 to open at $232.00 per ounce.

The mid-year period being what it is - a time to revisit projections and make new ones for the remainder of the year and beyond - a number of crystal ball flavoured articles are starting to hit the wires. The latest such reading of the tea leaves comes courtesy of Mineweb as it relays the sentiment of our friends over at ScotiaMocatta. Interestingly, the conclusion is that the firm is bullish on gold beyond the near-term. However, no upside targets of timeframes are being offered in this bullish scenario. In fact, the piece reads more like Citi's analysis we quoted the other day, based upon which one might first consider buying some silver in the quest to make a relatively quick buck. Plenty of downside risks and gold price-negative impact factors are on offer, on the other hand:

Gold is consolidating and prices may decline further, before heading higher. Nevertheless, ScotiaMocatta remain bullish on the gold price over the medium term. In their recently published Metals Matters, ScotiaMocatta also noted, Silver continues to outperform gold both on the upside and now on the downside.

IMF gold sales are now all but inevitable, ScotiaMocatta said, as a result of a recently enacted bill that will allow the IMF to sell 403 tonnes of gold to increase its finances. The market expects the sales to be conducted under the umbrella of a Central Bank Gold Agreement (CBGA). Although some of the IMF gold might be sold off market to the likes of China, the majority is likely to be sold in the market, Scotia's analysts predicted. If for some reason another CBGA does not come about then the market may get a bit more nervous about the IMF's selling; but it is difficult to envisage the gold being sold in anything other than a controlled manner.

Meanwhile, the analysts suggested ETF investment in gold seems to be tiring, as gold ETF holdings slipped to 1,610 tonnes.Although by no means a stampede, lack of fresh buying might be enough to make upside progress difficult. As well as ETF investor buying slowing, demand for small bars and coins also seems to be slowing judging by comments from refineries.

Nevertheless, ScotiaMocatta insists the big picture remains supportive for gold. Although gold is facing some headwinds, the overall financial environment remains bullish for gold. ScotiaMocatta's main reason to remain long term bullish for gold is the prospect that competitive devaluation amongst numerous hard currencies will lead to further trouble for the financial markets. This is likely to keep interest in gold running at a high level. As such, we would see any sell-off in gold as a medium term buying opportunity.

Meanwhile, ScotiaMocatta noted that silver continues to outperform gold, although buying into silver ETFs has slowed. The pullback in silver prices is looking a bit more than just a correction and the break of the uptrend line bodes ill and may well prompt further liquidation, the analysts cautioned.

However, our medium and long term view for silver are bullish and we would view this sell-off as providing a better medium term buying opportunity, they advised. If, as we suspect, the bear market rally in industrial metals and equities peters out then after a period of across the board selling (which may initially weaken silver further), we would look for silver to attract safe-haven buying. In addition, after the strong prices of late, there is likely to be considerable pent-up physical demand, which lower prices are likely to uncover, the analysts concluded.

Absent from the above analysis are issues relating to scrap flows (known to have amounted to a full year's worth in the first quarter of this year alone) and the patterns under development in the Indian market - normally the tractor-pull engine of the precious metal. We noted in earlier commentaries that the late and weak monsoons pose a threat to fall festival buying, and then we noted that import duties being doubled may become the final camel back-breaking implement in this equation. Reuters reports that:

India's doubling of import duty on gold and silver is likely to encourage recycling of the metals locally in what could continue to keep imports subdued for the rest of this year, traders and analysts said on Monday. The full year (2009) imports could be down by 45 to 50 percent, said Nayan Pansare, an independent analyst who works for jewellery exporting companies.

Pansare said recycled gold could increase to 250 tonnes this year against 200 tonnes in normal years as more people could be selling gold at rallies. A section of the people believe prices will fall, that is why there has been scrap sales, he said. Finance Minister Pranab Mukherjee announced in the budget for 2009/10, import duty on gold bars is being raised to 200 rupees ($4.1) per 10 grams from 100 rupees earlier.
   

The minister said import duty on silver is being raised to 1,000 rupees ($20.7) per kg from 500 rupees earlier.
As it is business was bad. This will make it worse, Suresh Hundia, president of Bombay Bullion Association reacted. Domestic demand could drop by up ton 25 percent in the remaining six months of calendar 2009 if prices stayed around current levels, Hundia said.

Gold imports during January to June were about 59.8 tonnes, down 57 from 139 tonnes a year earlier, data from the BBA showed. The metal was trading at 14,528 rupees per 10 grams by 1130 GMT, up 0.45 percent from the previous close. It had hit a domestic record high of 16,040 in February as a weaker rupee added to the rise in dollar-denominated world prices.

 Pansare, the head of a local spot exchange said the higher import duty would increase demand for locally recycled gold. Since imported gold would now become more costly, it would enhance the viability of business to recycle scrap gold, said Anjani Sinha, chief executive officer of National Spot Exchange Ltd, which recently launched spot contracts of recycled gold.

However, if gold prices suddenly fall overseas imports will rise, Hundia said. If the rally of gold snaps, consumers could come back to it, he said. An analyst and some traders said the hike in duty may open up smuggling of gold from countries where the duty is lower than India's. The old smugglers paradise may open, said Madhusudan Daga, an independent analyst on gold. Passengers may walk in from overseas with more gold on them and organized smuggling may also start. A large silver trader Haresh Kewalramani in Mumbai said silver imports, already down owing to higher prices, may be as badly hurt as gold.

Can gold buying parties that are all the rage in North America now, be far behind in Bharat? The surplus that is mounting in the gold market puts the onus squarley on the back of investment demand. This market needs a global financal crisis instant-replay, and it needs it now. Judging by the extremely aggressive gold dealer radio ads and their frequency of late, the end of the world cannot come too soon. We say, it came last year. And went.

Freedom Fest is on the agenda. Duty calls.

Happy Trading.