Good Morning,

Gold prices spent the overnight hours confined to a narrow range of from $902 to $910 although good buying was seen in VietNam ahead of the imposition of doubled import taxes on the metal. The move goes into effect today and is sure to engender more smuggling of bullion into the country. In the early morning hours bullion was following a fresh decline in the dollar (seen at 72.52 on the index) and a marginal drop in crude oil (to $126.75) albeit it retained only small gains. Please see below why VietNam is important to this market.

New York spot gold trading opened a bit higher, recording a $2.50 gain per ounce at $907.00 as participants were seen positioning themselves ahead of producer price index data and retail sales figures due this morning. Conditions remain subdued but maintaining above $900 has encouraged the bulls somewhat. Downside risk remains in place, however its coming to fruition largely depends on what course the dollar takes in coming days.

German consumer confidence took an unexpected hit in May but the euro headed to a three-week high vis a vis the greenback on speculation that the ECB will actually hike interest rates in the not too distant future in order to combat inflation. Silver rose 8 cents to $17.02 however platinum fell $11 to $2141 and palladium lost $8 to $442 per ounce. Mild profit-taking emerged in the noble metals complex but the consensus is that higher prices are to be expected as the year progresses.

We have as - best we could - attempted to bring the underlying tone in the gold market to our audience over the past four months. Our findings (as well as those from CPM and GFMS) were met with vocal skepticism as the perma-bulls continued to bang away on the investment drum and how that sector was going to single-handedly keep this market aloft and head even higher. It turns out that even investment demand wasn't that hot (dropping 35%). Even as prices were making historic highs, the core structure of the marketplace was seeing distortions and trends that were anything but comforting. This morning, the World Gold Council released its First Quarter Demand Trends for 2008 and the picture of a very different gold market has emerged. Effectively, a market in disarray.

Save for demand from the gold ETFs, (and a bit of investment offtake from China and VietNam) the offtake for gold fell, and fell sharply, across all measurable areas. So much for the argument that high gold prices do not matter and that users will get used to them. The WGC in fact singles out the record gold price as the critical impact factor on the demand slump.

Highlights from the WGC's Executive Summary:

The sharp rise and unusually high volatility in the gold price, which briefly touched record levels above $1,000/oz in mid-March, was a key determinant of movements in gold demand in the first quarter. It resulted in total identifiable demand falling by 16% in tonnage terms from year-earlier levels to 701.3 tonnes (the lowest for five years) but rising 20% in value terms to $20.9bn, more than double the level of four years earlier.

Jewellery demand declined 21% year-on-year to 445.4 tonnes, the lowest quarterly level on record since 1993. In dollar terms this equated to a rise of 12%, reaching $13.2bn.

The financial crisis and other economic concerns helped new investment in Exchange Traded Funds and similar products to double to 72.9 tonnes during the quarter, equivalent to $2.2bn in value terms. However, net retail investment dropped by 35% to 72.7 tonnes. (!)

The impact on overall identifiable investment was therefore broadly neutral in tonnage terms, although the dollar value rose 41% to $4.3bn. Meanwhile inferred investment demand (which cannot be directly measured and is proxied by the statistical residual) posted its second consecutive strong quarter reaching 138.6 tonnes.

This brought estimated total investment to 284.3 tonnes or $8.5bn, more than doubling and tripling, respectively, year-earlier levels.

Industrial and dental demand declined by 5% to 110.3 tonnes, primarily in response to the slowing US economy. In value terms, this was equivalent to $3.3bn, a rise of 35%.

Gold supply was less constrained than a year ago, rising 6% in tonnage terms. This was primarily due to higher scrap levels (up 30%) as a result of the rising price.

The market most severely affected by the movement in the gold price was India, where consumer demand fell 50% to 102.1 tonnes. Jewellery and investment demand, at 71.1 tonnes and 31.0 tonnes respectively, were half the levels of Q1 2007 as the high and volatile gold price deterred purchasing.

In marked contrast to this, demand in China grew by 15% to 101.7 tonnes. Both elements of Chinese demand increased during the first quarter as continued economic strength allowed consumers to increase their purchases regardless of the rising price. Jewellery demand rose 9% to 86.6 tonnes and investment demand surged 63% to 15.1 tonnes.

In Japan, sales of existing gold holdings by investors seeking a profit outweighed purchases

to the tune of 37.0 tonnes. Jewellery consumption also declined, falling 4% to 7.4 tonnes. It was a similar story in Indonesia, where net sales of investment products reached 2.2 tonnes and jewellery demand slipped 27% to 11.3 tonnes.

In Vietnam, meanwhile, investment demand more than doubled to 31.5 tonnes, making it the largest investment market during the first quarter. Jewellery demand fell in reaction to the higher price, however, down 19% to 5.3 tonnes.

Demand declined in all countries across the Middle East, with the notable exception of Egypt, where it increased 15% to 18.0 tonnes.

The story was negative across the rest of the region with considerable declines in Saudi Arabia (-25%), UAE (-19%) and in the other Gulf countries (-30%).

Gold demand in Turkey suffered a marked slowdown (-25%) as a sharp fall in the value of the local currency served to magnify the impact of the rise in the US dollar price. Demand declined to 37.1 tonnes.

US demand declined again as the economic slowdown continued to bite. While overall demand declined 15% to 48.3 tonnes, this was fully attributable to a 25% fall in jewellery demand which more than outweighed a 4.2 tonne (91%) rise in investment offtake.

In Europe, jewellery demand continued to decline in Italy (-13%) and the UK (-25%), while Russian consumers again increased their demand (+9%) as economic prosperity underpinned their spending levels.

Overall jewellery demand of 445.4 tonnes was the lowest quarterly number recorded since the third quarter of 1993.

The feeling that the worst of the financial crisis is over, if sustained, may encourage investors with a short-term outlook to turn their attention to other assets.

Today's take-home lesson? Price Elasticity in Action -101

Developments in the investment market since the end of the quarter are worth mentioning here as a bout of redemptions during the last three weeks of April cut total holdings in gold ETFs. -said the Council. Indeed, if we take the 73 tonnes of gold that were added to ETFs in Q1 and take away the 60 or so tons that came out in the ensuing period, even that component of demand starts to look a bit wobbly. It is also worth pointing out that the demand for the gold proxy vehicle was not really fresh incremental demand, but came at the expense of coin and bar sales, which they cannibalized.

We will analyze the data further as the week wears on, but the nutshell conclusion becomes pretty clear even before further dissection of the figures. The market will not be able to sustain this value zone except in the event the financial sky looks as if it is about to fall. Even then, the maintenance of such lofty values will be predicated upon the appetite of speculative funds to buy ETFs and dependent on their predilection NOT to leave the market when profits beckon. Fat chance.

The structure of the demand situation reveals a market in need of adjustment and realignment. Despite all of this, the chorus of Armageddon singers will continue to try to manipulate public opinion and declare that all is well in the gold market.

Let's just say that we are in favor of a healthy market, one in which producers as well as users are satisfied with the price and one in which investors do not have to be apprehensive about imminent corrections to levels deemed sustainable. Behold the influence of speculative funds at play. Godsend, or curse? You be the judge.

Happy Trading.