Both oil and gold were boosted on Tuesday when the Jerusalem Post ran a story citing an Army Radio report that the US intended to attack Iran before the end of the Bush administration. The Jerusalem Post headline was picked up globally and I initially saw it on Drudge Report.

The original Army Radio report quoted a top Israeli official, who claimed that a senior member of President Bush's entourage had said in a closed-door meeting that Mr. Bush and Vice President Dick Cheney believed that military action against Iran was called for.

While the White House denied the report, they stated that the military option was not off the table.

I did find it interesting that the Jerusalem Post has a tab (a section of their website) dedicated exclusively to 'The Iranian Threat'.

President Bush recently said that, "Iran is an incredibly negative influence" and "the biggest long-term threat to peace in the Middle East." Of particular concern is Iran's alleged ambition to develop nuclear weapons, their ongoing threats to Israel, as well as their support of Hamas, Hezbullah and insurgent forces in Iraq.

President Bush visited Israel last week, to participate in the celebration of the 60th anniversary of the Jewish State. In a speech before the Israeli Knesset, Mr. Bush said, "America stands with you in firmly opposing Iran's nuclear weapons ambitions." He added that, "Permitting the world's leading sponsor of terror to possess the world's deadliest weapons would be an unforgivable betrayal of future generations. For the sake of peace, the world must not allow Iran to have a nuclear weapon."

In the wake of Mr. Bush's visit, Israeli Prime Minister Olmert said that the US President had agreed that "tangible action" was needed to prevent Iran from developing a nuclear weapon.

Recent Iranian threats to cut oil production, with crude prices already well above $120 brl, were viewed by some as a direct threat to the US economy.

The USS Ronald Reagan carrier strike group deployed from San Diego yesterday. While their destination was not announced, it is widely believed the newest Nimitz-class carrier and the six ships in her strike group are headed to the Persian Gulf.

The USS Abraham Lincoln carrier strike group cycled into the Persian Gulf just three weeks ago, replacing the USS Harry Truman. However, both ships were in the Gulf for several days and this was seen as a show of force by the US.

The Truman group remains within striking distance of Iran and was off the coast of Israel as recently as last week. If the Reagan is indeed headed to the region as well, it could mean a considerable escalation of tensions.

In addition, the USS Mount Whitney, the flagship of the 6th Fleet is reportedly deployed off the coast of Lebanon. The Whitney is the Navy's most sophisticated command, control and intelligence ship, capable of coordinating a major attack.

There seems to be growing evidence that the Middle East may be on the verge of further conflict. Both gold and oil have been able to sustain the recent gains, suggesting the story has some traction with the markets.

The Bush administration had been engaged in a build-up of the strategic oil reserves until Congress passed a bill last week to suspend shipments. The SOR is at about 97% of capacity as of last Friday, enough to ensure a 58-day supply of crude in the event of a supply disruption.

Look for tensions to remain elevated over the next several weeks as the likely destination of the Reagan becomes clearer. If the Reagan does pass through the Straits of Hormuz into the Persian Gulf, that could prompt oil to move above $150 brl.

An actual attack on Iran would likely drive crude to the much discussed $200 level. If that happens, even if the gold/oil ratio remains near the historic lows, that would translate to a gold price of approximately $1,400 per ounce.

We've been tracking the gold/oil ratio rather closely for several weeks now. The ratio found support just below the 7 level and has been recovering somewhat, but gold gains against oil have been limited by the relentless rise in crude prices.

Nonetheless, we continue to anticipate that the ratio will return to more normal levels. The ratio has been as high as 38 and as low as 7 over the past forty years. The midpoint of that range is 22.5, although 'normal' is closer to 15.

If oil continues to rise and gold starts to play catch-up, bringing the ratio back to 10, it's pretty easy to do the math and play out different scenarios based on oil prices.

The dollar index has probed below the 72.00 level, putting the all-time low at 70.70 back in play.

Meanwhile, the EUR-USD rate has pushed decisively above 1.5700, returning considerable confidence to the bullish euro outlook. A strong German Ifo reading has increased the likelihood that the ECB rate hike is in the offing.

USD-JPY is threatening to retreat below 103.00. Such a move would constitute a breach of the 50-day moving average and would shift focus to more important chart support at 102.58/57. Below the latter, the 101.89 Fibonacci level (38.2% of the rally from 95.74 to 105.70) would be highlighted.

Renewed dollar weakness ads further credence to the rallies in both gold and oil, making the commodities relatively less expensive for holders of foreign currencies.

Fundamentals and technicals seem to be aligning in favor of a resumption of the dominant uptrend in gold.

In addition, our recently posted research piece Bargain-Hunting for Gold: Seasonal Price Trends Look Favorably on Summer Purchases, highlights a season buying opportunity in gold.

Gold Market Movers:

US MBA mortgage applications -7.8%, purchases -6.9%, refis -8.7%.

Canadian leading indicators for Apr +0.1%, slightly better than expectations.

Canadian CPI for Apr increased to 1.7% y/y, above expectations.

German Ifo for May came in at 103.5, better than the market was expecting.

U.S. bank shares sink after Oppenheimer cuts outlook

US economy in 'uncharted waters'

U.S. mortgage rescue plan is faulted as risky

US corporate property prices take hit

Oil futures top $130 a barrel ahead of supply data

UK debt 'to break' official rule