A long-feared trade war appeared to be shaping up between the US and China following Friday's tit-for-tat protectionist actions and words by each country. The US imposed a 35% import tariff on Chinese-made tires, a move that prompted China to warn that US cars and chickens would suffer a similar fate if this trend were to continue. As a result of the spat, the US dollar picked up value during the late part of the weekend and it -along with the yen- became sought after not only by safe-haven seekers and short-coverers alike.

Gold prices turned away from their 18-month high recorded last Friday and fund selling pushed the yellow metal to the low $990s prior to Monday's NY session start. The prime mover of the retreat was indeed the dollar's advance back to the 77 level on the trade-weighted index in the wake of the blossoming trade friction mentioned above. Also at play in gold's overnight decline was the usual mix of fading Indian demand and lack of growth in ETF holding balances. Buy orders in India appear to be concentrated at levels under $990 an ounce.

Although the greenback slipped a bit against the yen in early going this morning, it remained but one digit away from the 77 level on the index and its bounce -coupled with crude oil's drop to under $69 per barrel kept fund selling pressure on gold as it nearedits NY opening time.Nevertheless, the 'correction' seen over the weekend remained as shallow a one as we observed last week, and gold started the week offvery near thepsychological level that the $1K figure represents.

Spot bullion dealings opened with a $5.20 per ounce loss on Monday, quoted at $999.90 as the background conditions of the charts versus thelongs versus the physical buyers and sellers continued on the nervous, standoff-ish side. Silverfell 23 cents to start at $16.50 per ounce, while platinum and palladiumalso recorded mild losses. The former dropped $7 to$1310.00 and the latter declined $2 to $289.00per ounce.

Aside from anemic physical demand, there were of course other factors that contributed togold's pullback from the four-digit zone it had once again entered on Friday. Chiefly among them, the very situation that UBS alluded to over the weekend. Allude is a bit of a euphemism as you can see by the following snippet from the Telegraph, titled: Gold investors warned to liquidate after 'buying frenzy'

London's leading gold forecaster has advised clients to liquidate holdings of gold and silver until the latest speculative fever abates, warning that futures contracts on New York's Comex exchange are flashing warning signals.

John Reade, an analyst at UBS, said the number of net long positions held by speculators reached 29.02m an ounce last week, a record high. Investors watch Comex contracts as an indicator of froth in the market. Last week saw a jump of 6.4m ounces in net long contracts, a rare occurrence. When such sudden moves have occurred in the past, gold has fallen 5 percent over the subsequent month on average. Mr. Reade, a repeat winner of the London Bullion Market Association's forecasting prize, said speculation in silver futures is even more extreme by some measures.

Demand for physical gold – as opposed to paper contracts – has been flagging, with Indian jewellery demand well down on the levels a year ago and poor volumes reported in Turkey and Switzerland. The metal is trading at a discount on Istanbul's exchange. We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction, said Mr. Reade. His price target is $950 over the next month, with fresh rallies in 2010.

The last time net long contracts on Comex reached levels close to last week's high was in February 2008 as gold screamed to its historic peak. Prices crashed by $150 an ounce shortly afterwards. However, chartists say the technical signals are entirely different this time. Gold appears to be breaking through a triple top,

which could push prices much higher.

Folks, we are talking here about a nearly 700-tone sized net speculative long position in gold. Nearly a quarter of a million contracts are betting on this golden horse at the moment. Whilst our colleagues over at GoldEssential.com allow for the possibility that the market could still put it a short-lived blow-off top should current sentiment have more energy, they also reiterate that the ratio of net spec longs to open interest levels is stretched beyond rubber chicken tolerances and that a potential correction to levels beyond the $100 or so alluded to by UBS would make for healthier positioning in this market, going forward.

Today marks the first of 'many unhappy returns' of the epic Lehman collapse. A birthday that many on Wall Street would rather not be reminded of. At any rate, today's stock futures appeared focused on rubber and chickens, and the developing US-Chinese trade brawl. As for the dollar, it too appeared to be undergoing an internal battle between the 'can't lose' sellers of the currency and the daring buyers who see it receiving a boost from the nascent protectionism and oversold chart patterns it exhibits. Orderly as the decline has been to date, potential triggers such as the 1.46 mark against the euro remain squarelyat the centre of speculative consciousness.

A volatile day is expected amid this kind of tug-of-war.