Good Morning,

Bullion values snapped three days of an erosion pattern and turned higher as crude oil prices headed for $113 amid supply apprehensions driven by (likely temporary) delivery problems in Nigeria and Mexico. Gold thus found itself trading in a $10 higher band overnight and trying for a test of resistance up near $937 per ounce. The US dollar fell in the overnight hours as reports of French inflation depressed euro rate cuts hopes in the near-term. French and UK inflation are showing some quite worrisome signs. Currency and commodities markets remain on the nervous side.

On the other hand, Germany's ZEW confidence index level sank abruptly this month, raising domestic growth rate apprehensions. The proximate cause for such a sharp decline in sentiment? Surging euro and crude oil values. Black gold's recent price explosion is being blamed for many of the troubles currently unfolding around the globe. Airlines remain in a crisis, the threat of food riots has risen in the wake of surging energy costs and the commodity speculation frenzy.

Spot gold trading opened with a $10.00 gain this morning, at $933.60 bid as participants awaited the release of March PPI figures with the built-in expectation that they will reveal an unpleasant combination of rising prices accompanied by anemic growth (if any) in the economy. The 57% jump in March foreclosures in the US certainly did not benefit dollar longs, even as former Treasury Secretary Rubin blasted the Bush administration for its fiscal policies. Rubin was known as a staunch strong-dollar partisan. Silver gained 13 cents to $17.84 while the noble metals rose nicely on the day as well. Platinum added $37 to $2010 and palladium was up $8 at $463 per ounce.

Our own Montreal Gazette reports today that Big price hikes for gasoline and food products are causing alarm all over the world, for example, but they've been much smaller in Canada than right across the border in the U.S. This is not because Canada is a producer of both, since we get no special price break from domestic producers. Instead, it's because the skyrocketing price of most Canadian commodities has swelled our trade surplus, helping to boost the value of the Canadian dollar. Thus, oil and many fresh foods, priced in U.S. dollars, have had their dollar increases offset by the greenback's decline. Will the commodities sector manage to keep TGWN out of recession? Hopes are alive for that to happen. For the near-term however, let's look at what two domestic firms have to say aboot all this (with quotes courtesy of Mineweb):

RBC Capital Markets Tuesday urged investors to crystallize profits now and take advantage of gold at lower levels within the June-July period. Combining our view that a seasonal slowdown for gold demand is around the corner in the summer months, and the possibility that the U.S. fed rate cutting cycle may come to an end shortly, we believe the timing is right for investors to take profits in the short term in gold and gold equities.

Investors, and speculators in particular, may need to brace themselves for what could develop into savage changes in commodities prices, according to the latest advice from the Bank Credit Analyst. The changing behavior of commodity investors and speculators increases our conviction, states BCA Research, that the asset class is on an eventual path toward a mania-like overshoot.

Gold bullion may just turn out to be the litmus test [for such an overshoot in commodities] report the BCA.

In recent research, analysts at Royal Bank of Canada Capital Markets note that a record increase in the net speculative long gold bullion futures position on COMEX coincided with the run in the price of gold, to a record $1,030/oz early last month. On February 22 2008, the net long position in gold bullion futures reached an all-time high of 25.3moz before pulling back to the current 19.3moz level.

RBC CM analysts anticipate that the high positive correlation between gold bullion and the speculative futures position will continue, and are looking for the long position to decline possibly as low as the 8-10moz level, before gold consolidates and makes another run at $1,000/oz in August-September 2008. Based on the ongoing positive supply-demand fundamentals for gold, the analysts believe it's unlikely the speculative gold futures will decline to a net short position in the foreseeable future.

BCA Research notes that the growing interest in the overall commodities asset class was evident during the run-up to the current pullback, which was very different compared to the past ten years. First, commodity prices peaked at a time of near record speculative long positions (net speculative long buyers were only higher in early 2004). Second, there is anecdotal evidence of record inflows into commodities as an asset class in the first two months of this year.

Third, so-called open (mainly speculative) interest accelerated higher at an unprecedented pace (that is, the supply of futures contracts was forced to increase to meet overwhelming demand). For BCA Research, the bottom line is that it's impossible to know how the current correction will play out. What is clear to the analysts is that commodity investors and speculators are gradually getting conditioned to buy the dips, even if value is no longer attractive.

We need not dwell on the dangers of such conditioning and complacency, eh?

Happy Trading.