With the dollar consolidative as well, more short-term lackluster activity seems likely. However, decent physical buying in Asia and the Middle East continues to be seen on dips, suggesting the downside remains limited.

Oil remains well bid as the market awaits EIA data this morning. While both crude and distillates are expected to show builds again, the general perception of tighter distillate supplies, particularly diesel, seems to be driving the market.

Oil remains extremely sensitive to any news or rumor that might imply a supply disruption. The persistent rumor that Iran may cut production and the report that Nigerian gunmen hijacked a US ship contracted by Chevron are just the latest headlines underpinning crude.

Gold is the classic hedge against energy-based inflation and the two markets are generally closely correlated. However, in recent months the gold/oil spread has dropped to 7 (7 barrels of oil buys one ounce of gold). The spread historically trades around 10-15.

We continue to expect the gold/oil spread to return to the normal range. This too is a pretty good indication that the downside for gold is limited from here and in fact suggests that these levels are a good buying opportunity.

Even if the spread rebounds halfway back to the low end of the normal range, and assuming that oil holds steady, that still projects gold back above $1,000 ($123 Brent spot x 8.5 ratio = $1,045.50 gold).

The dollar rebounded within its range on Tuesday, spurred by a better than expected ex-auto retail sales number. However, the dollar is lower again today on US Mar CPI that was below expectations.

The modest relief on the inflation front makes any tighter monetary policy by the Fed less likely. In reality, even if inflation continues to worsen, the Fed is going to remain focused on growth risks. The soonest we might expect a rate hike is probably December and even that is very dependent on how the economy fairs for the remainder of the year.

With inflation running pretty hot elsewhere in the world, one might expect interest rate differentials to continue to draw FX flows elsewhere, to the detriment of the dollar. The Eurozone refi rate is currently 4% and the BoE's base rate is 5%. With Fed funds at 2%, yields here in the US are considerably less attractive.

If the long-term and well-defined downtrend in the dollar starts to re-exert itself, we would anticipate that gold would make a more serious attempt to regain the $900 level. If EUR-USD climbs back above 1.5600, or the DX pushes convincingly back below 73.00, we would view that as a sign of renewed dollar weakness.

Gold Market Movers:

US CPI for Apr +0.2%, core +0.1%, both lower than market expectations.

US MBA mortgage applications +2.9%; purchases -0.7%, refis +6.5%.

BoE Q2 inflation report notes heightened upside risks to prices.

Eurozone industrial production for Mar -0.2 m/m, better than market expectations.

Fed ready to boost size of credit auctions

Fed looks at ways to fight asset bubbles

Oil ship hijacked in Niger Delta

MBIA, Ambac capital level risk rising, Moody's says

JPMorgan faces higher charge of $9bn to cover Bear clean-up

Libor set for overhaul as credibility is doubted