Good Morning,

Gold prices traded between $877 and $889 overnight buoyed by a spike of historic proportions in crude oil on Thursday and by continuing strength bringing black gold to very near $130 early this morning. The US dollar rose only marginally to 73.12 on the index but was trading at 1.56 against the euro after a new series of hawkish ECB statements hit the market floors (see below).

Oil traders at least, appear to be calling Mr. Bernanke's bluff as far as his resolve to curb inflation by raising rates. Although many are aware that all kinds of hell could break loose if oil breaks under $115, the talk of the day (once again) is focusing on how soon $150 will be achieved. Someone may be talking their book, it seems.

New York spot prices opened with a near 1% gain on Friday, but looked set to rally back to $900 in the wake of a still poor jobs report for May. Shortly after the loss of 49,000 jobs on the month was reported (albeit less than the 60,000 expected loss) the greenback caved to well under 73 on the index and gold took off to a high of $892.50 in a classic knee-jerk reaction. The unemployment rate rose to 5.5% a .5% increase that represents the largest such spike in 33 years. Let's see how oil prices fare going forward as the 8.5 million jobless may not make it their first priority to fill up on a nice tankful or premium, or buy a brand-new gas hog either.

Gold spot was trading at $889 at last check, while silver rose 18 cents to $17.33 and platinum rallied $44 to $2050 per ounce. Palladium gained $6 on the day, quoted at $431 per ounce. Crude oil was ahead by $2.50 at $130.25 per barrel. A close near these levels could well erase the week's losses for gold, but the structural shift in the focus of central banks away from growth stimulation to inflation combat means downside risk remains in the picture, short-term rallies notwithstanding. This is a sea-change, not some passing fad for jawboning about 'concern.'

News tickers flashed headlines of a second month of declining industrial production in Germany (the EU's largest economy) for April. Signs of cooling do not appear to play a role in the current mindset of the ECB however. In fact, the rate increase rhetoric was ratcheted up a further notch this morning in Euroland. This may not go over without a bruising internal fight at the ECB however. London's Telegraph reports that:

Less than a year after the credit crisis erupted, the European Central Bank has shocked financial markets by making it clear it is prepared to risk a potential recession in Europe as it steps up the fight against inflation.

There could be a bloody fight at the ECB over rates

ECB President Jean-Claude Trichet spelt out to markets that it was in a state of heightened alert as the global spike in oil and food prices threatened to trigger a wider inflation spiral across Europe. The comments, made yesterday as the ECB kept interest rates at 4pc, sent European bond prices tumbling and the euro soaring.

Prices for European government bonds continued to fall today as traders rapidly unwound the earlier consensus that the ECB would eventually be forced to cut rates as the Eurozone slowed.

Charles Diebel, European bond strategist at Nomura, said: They're sending a message that they will throw the economy into a brick wall and risk renewed credit turmoil if it means controlling inflation.

The ECB steadfastly refused to cut interest rates as the credit crisis flared, and its signal yesterday comes as the world's top central banks turn their collective attention to rising prices.

Federal Reserve chairman Ben Bernanke, who has slashed US interest rates by more than 300 basis points since September, this week left little doubt that battling inflation, rather than further easing in monetary policy, was now at the top of his agenda.

In the UK, Bank of England Governor Mervyn King has warned against the dangers of an inflation spiral and signalled rates are unlikely to be cut from 5pc anytime soon. Inflation is rising in all three economies - with it hitting 3.6pc in the Eurozone in May - and economists reckon that the central banks are mindful of the mistakes made in the 1970s when inflation was rampant.

Jim O'Neill, chief economist at Goldman Sachs, said: The comparison with the 1970s has aspects of reality. That is at the forefront of central banks' thinking.

However, it's unlikely that the ECB will be able to raise rates this year without an internal battle on its ruling council that pits the faster-growing economy of Germany against Spain and Italy, where growth is anemic, according to Mr Diebel.

It's going to be bare-knuckle fight.

The latest economic data out of the Eurozone suggests that even the German economy - the region's standout performer this year - is now buckling under the weight of the rising oil price. Industrial production fell 0.8pc in April, figures showed today.

Mr. Bernanke may have an internal fight on his hands as well, should he proceed with his stated attack plan. However, he would ultimately be regarded in a much better light if he chooses to stick to his guns and not let the inflation hydra go on a rampage. Several Fed members have already warned that the non-stop rate slashing campaign should have been halted a while back, so in that sense the Fed fight might not be as animated as the one over at the ECB. There are those however, (politicians mostly) who keep preaching for any accommodation that is possible, to be given to the almighty consumer and to the institutions that have made some bad calls in their investments. For them, rates at zero are not good enough. Thus far, Mr. BB has emulated Mr. Trichet only verbally. Rate action from either side of the Pond may now be a matter of weeks. It could even turn into a contest as to which side hikes first.

Stocks will not like today's data very much at all. But the street is getting used to the idea that such news is no longer a catalyst for a surprise Friday afternoon discount rate cut. That era has come and gone.

Watch for closing levels and (more importantly) for any words from any central bank on inflation, oil, interest rates.

Happy Trading,