Good Morning,

Bullion values eroded swiftly as the market commenced trading on Monday morning. Precipitated by a sharp decline in crude oil and a notable rise in the US dollar, gold fell back to near the $920 level with relative ease, despite thefluid situation that has blossomed in Iran over the past couple of days. The World Bank issued statements alluding to the duration and depth of the global recession, and it had nothing very optimistimic to note about the same. Today's bright spot comes from Germany, where business confidence appears to show continuing signs of being positive in the face of current daily headlines.

In fact, the World Bank predicts a more intense as well as more prolonged contraction than previously expected. The institution now paints a picture of global contraction that could come in at a 2.9% rate this year, and it comes on the heels of previous forecasts of an 'only' 1.7% rate of shrinkage. It is, as numbers go anyway, far from growth of any kind. As a result of such prognostications as well as due to the Iranian internal issues, the dollar recaptured more than a modicum of safe-haven flows (as did the yen) and we thus saw corresponding declines in gold as well as black gold. The latter appears to have broken is 54 day-long run-up; one based more on spec funds at play than anything tangible (as the WB confirms) out there in the global demand picture at this time.

The New York trading day opened with an $11.50 loss for the yellow metal. It was quoted at $922.20 per ounce in early going, and was seen heeding the 0.50 rise in the dollar index (currently at 80.83) and the $1.25 slump in crude oil (now trading at $68.30 after last week's lofty $72+ bid). Participants continue to look for support levels near $915 to possibly undergo a test in the near-term. Absent that support plank and related possible bargain hunting, the market might walk off into the sub $900 value zone before this dip is over. At any rate, for the time being, the Bloomberg price survey taken late last week appears to have been validated by market action.

The $935 area was previously thought to be able to offer the floor that gold has been seeking since it backed away from the $1K level at the beginning of the month for a third time now. Scattered trader talk of a triple top has made its way into informal reports circulating in the trade, but it is still drowned out by incessant perma-bull calls (make that demands) for a moonshot trajectory that should take the metal to $1200 based on little more than the views of that camp. The battle of the words continues.

Silver fell 44 cents in early trading, and was quoted at $13.75per ounce - likely the result of having paid attention to the WB recessionary alarm bell this morning, Platinum dropped $16 to $1189 and palladium lost $6 at $239.00 per ounce,likely on the same news. Bad news in the transport sector is not limited to automakers these days.

British Airways' fate hangs in the balance as of this writing, and at least one diagnosis - that offered by Sir Richard Branson - is that the airline should not/may not survive the economic slump. This, at a time when his own airline just booked an order for 10 Airbus A330 winged aluminium sausages. The great dinosaur die-off continues to unfold in various global industries as the worldwide slump nears its second full year of pain and chaos. The subprime asteroid was a lot larger than it appeared on anyone's telescopes initially.

While various reassessment are being made as to what was, how it came about, and as to the real size of the on-going problem, the analyses of why markets are behaving so unpredictably pretty much all point their collective finger at the Fed. Everyone's favorite scapegoat appears to be lacking the clarity that markets so often demand before taking on a definitive trend and giving investors the 'all-clear' signal. Nothing is in fact very clear these days, and the Fed has its job cut out for it as it navigates through the summer months ahead.

This week's FOMC policy statement could go a long way towards giving markets a degree of the aforementioned clarity they seek. Much of the markets' recent fits and starts have in fact been due to the unwelcome spike in mortgage rates and the implications of a choking off of the 'green shoots' by rising rates. Even though rates have to rise, and will eventually rise.

Mortgage News Daily reports that: The FOMC Policy Announcement could be the biggest release of the week if the Fed decides to shift policy, release updated forecasts, or hint at future tightening. The key interest rate is widely expected to remain in the zero to 0.25% band, so attention will be placed on the central bank's purchasing of longer-term bonds and mortgage-backed securities.

Analysts at IHS Global Insight expect the central bank to keep growth forecasts unchanged even as they lift forecasts for the unemployment rate.

“However, the Fed may have to come to terms with the likely stalling effect of higher mortgage rates and gasoline prices on the timing and strength of the long-awaited recovery,” they added. “In this regard, the FOMC will likely see downside risks to the core inflation rate, and may rebalance the focus of its quantitative programs in favor of term mortgage, treasury and TALF assets and away from increasingly redundant short-term bank credit.”

Bloomberg, on the other hand, lays out the Fed's conundrum as follows:

Chairman Ben S. Bernanke has to convince investors the Federal Reserve can take back more than $1 trillion it pumped into the U.S. banking system to pull the economy out of the longest decline in more than six decades. Bernanke and his colleagues, who meet June 23 and 24 to map monetary strategy, have said they need to continue buying assets and keep interest rates low for a long time to help revive growth. Rising Treasury bond yields show Wall Street is concerned their policy may lead to an inflationary bubble: Ten- year notes reached an eight-month high of 3.95 percent June 10.

“The markets don't understand the Fed's exit strategy; they're confused,” said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and former central- bank governor. “That's contributed to the rise in long-term rates.” The risk is that higher rates will hold back the budding economic recovery by lifting borrowing costs for homeowners and buyers. Economists surveyed by Bloomberg forecast growth of 0.5 percent in the third quarter after gross domestic product shrank for four consecutive quarters -- the first time that's happened since 1947.

“It's not good for the economy,” said Michael Feroli, a former Fed official who's now an economist at JPMorgan Chase & Co. in New York. “It pushes back the housing rebound.” The yield on the 10-year Treasury note ended trading at 3.78 percent June 19, up from 2.21 percent at the end 2008. The average 30-year mortgage rate rose to 5.59 percent earlier this month, the highest since November, before slipping to 5.38 percent in the week ended June 18, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company.

Mortgage applications dropped 16 percent in the week ended June 12 to the lowest in seven months, according to Mortgage Bankers Association data, as the jump in rates discouraged refinancing. Confidence among homebuilders fell unexpectedly in June, based on the National Association of Home Builders/Wells Fargo index, after U.S. foreclosure filings compiled by RealtyTrac Inc. surpassed 300,000 for the third straight month in May.

Yields on AAA-rated, 10-year general-obligation municipal bonds rose to 3.49 percent on June 12, the highest since March, before falling to 3.45 percent on June 19, according to Municipal Market Advisors in Concord, Massachusetts. While investor optimism about the economy may be contributing to higher yields, there are still worries about the record $1.8 trillion budget deficit, along with the concern about the Fed's plans, Gramley said. In an effort to contain borrowing costs, Fed officials are considering using the policy statement issued after this week's meeting to try to suppress any speculation they're prepared to boost interest rates as soon as this year.

If policy makers are going to restrain rates, investors and analysts say they should explain how they will cut the central bank's balance sheet and prevent inflation from accelerating. “Exit strategy is on everyone's mind,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “People are worried about the future.” European Central Bank officials have also begun talking about how to reverse their stimulus. The ECB, which cut its benchmark interest rate to a record low 1 percent, is buying only 60 billion euros ($83.6 billion) in securities and said it will lend banks money for up to 12 months.

The loans will expire or banks will borrow less as the economy recovers, making it easier for the ECB to exit, said Nick Kounis, chief European economist at Fortis Bank Nederland Holding NV in Amsterdam. In the U.S., concern is growing that consumer-price inflation will accelerate, based on trading in Treasury Inflation Protected Securities. Expectations for 2015 to 2019 -- the so-called five-year, five-year-forward rate calculated by the Fed -- increased June 2 to 3.18 percent, the highest since November, before sliding to 2.68 percent on June 16. The average since 2005 is 2.66 percent.

Behind investor unease is a $1.2 trillion jump to $2.07 trillion during the past year in the portfolio of mortgage, Treasury and other securities the Fed owns, as it flooded the banking system with reserves. The balance sheet rose to a record $2.31 trillion in December and has fallen since as the financial crisis eased and banks' demand for short-term credit ebbed. Meanwhile, the Fed is adding to its holdings of long-term securities, pledging to buy this year as much as $1.25 trillion of mortgage securities, $200 billion of agency debt and $300 billion of long-term Treasuries.

The purchases have come as the government embarked on a $787 billion stimulus program to boost the economy. Bernanke, 55, denied on June 3 that the Fed was helping to fund the deficit by buying Treasuries. Anxiety over the Fed's pump-priming program is twofold, according to Robert Eisenbeis, chief monetary economist at Cumberland Advisors in Vineland, New Jersey. The first worry is the central bank lacks the tools to unwind its monetary stimulus quickly enough. The second is that even if it can act in time, it won't because of political opposition to tightening credit when unemployment is 9.4 percent, a 25-year peak.

“At some point they've got to start talking realistically about what the exit strategy is going to be,” said Eisenbeis, a former director of research for the Federal Reserve Bank of Atlanta. “All we've seen is a list of what they might do and no discussion of the practicalities and the politics.” Bernanke has argued that a substantial portion of the Fed's assets are short-term and thus can easily be allowed to expire. Only a “small portion” of its longer-dated assets, such as mortgage bonds, might be sold at first, he said in a Jan. 13 speech. Instead, the Fed is counting on a new tool -- the power to pay interest on the money banks deposit with it -- to soak up liquidity left in the system.

“Interest on reserves is an important part of the exit strategy,” Fed Vice Chairman Donald Kohn said on May 23. The Fed would raise that rate, now at 0.25 percent, to induce banks to leave money with it rather than lend to consumers and companies. That move, coupled with an increase in the federal funds rate on overnight loans between banks, would cause borrowing costs to rise, capping inflation, according to Marvin Goodfriend, a professor of economics at Carnegie Mellon University in Pittsburgh and a former director of research at the Richmond Fed, who has studied the use of interest on reserves. The current target for the federal funds rate is 0 percent to 0.25 percent.

So far, the power to pay interest, which Congress gave the central bank in October, hasn't worked as well as policy makers planned. Financial institutions that can't deposit money with the Fed, including Freddie Mac and Washington-based mortgage- finance company Fannie Mae, have ended up with excess cash they've used for loans, pushing rates down. “It hasn't been a totally effective floor” for interest rates, Kohn said in May, while arguing that it will work better in the future as strains in the banking system ease.

Allan Meltzer, a Carnegie Mellon professor who has written a history of the Fed, said it won't be able to raise the rate enough to contain inflation because Congress will oppose tighter credit while unemployment is high. Fed forecasts, which will be updated at this week's meeting, show the jobless rate at 9 percent to 9.5 percent in the fourth quarter of next year. “Without some more clarity on the Fed's exit strategy, some people think this back-up in interest rates is going to create problems for housing and refinancing of mortgages,” said Richard Berner, co-head of global economics for Morgan Stanley in New York. “And, it could.”

Until later,

Happy Trading.